News Stories Miss the Point as Depomed Approaches FDA Target Date

Includes: ABT, ASRT, XNPT
by: Chimera Research Group

Depomed (DEPO), a specialty pharmaceutical company, has seen a healthy gain in its stock price due in part to its upcoming PDUFA date for DM-1796, a once-a-day treatment for Post Herpetic Neuralgia.

Depomed is a unique company, not only because it has compelling product candidates in its pipeline, but also because its platform technology can be quickly applied to several drugs reaching patent expiry. The pharmaceutical industry is at a crossroads, as 2013 represents the year with the single most pharmaceutical sales projected to be lost due to generic competition. Depomed’s technology can bolster the bottom line of these fledgling pharmas. The technology allows for convenient dosing and reduced adverse events which produce enough clinical relevance to make a medical impact and of course, generate revenue for Big Pharma. With approval of DM-1796 and subsequent successful clinical trial results for Serada and DM-1992, I cannot imagine that Depomed won't entertain offers from some of its struggling Big Pharma partners, which include the likes of Abbott (NYSE:ABT), Covidien (COV), Merck (NYSE:MRK), Johnson and Johnson (NYSE:JNJ), Teva (NYSE:TEVA), Bristol Myers (NYSE:BMY), Biovail (BVF) and others.

As the PDUFA date for DM-1796 approaches, DEPO has seen more and more attention from the trading community as well as from several websites and news organizations. For example, recently an article was published by OptionsMonster and over the past several months two articles have been published by Sheff Station, one article from Gekkowire, and three articles from BioMedReports.

The goal of my publication will be to present new insights regarding Depomed’s business prospects and to elucidate some of the fallacies presented by other authors covering DEPO,
XenoPort (XNPT) and ABT with regards to DM-1796 and its upcoming FDA target date.

Abbott begins branding & marketing operations for DM-1796

Depomed’s leading product, DM-1796, was licensed to Solvay in 2008. Subsequently, Solvay was purchased by Abbott Laborotories in a multi-billion dollar deal. Since that time, across several conferences and quarterly calls, Abbott’s executives have failed to specifically mention DM-1796. A deafeningly eerie silence from its big pharma partner is no boon to Depomed.

But quietly, Abbott has begun to ramp up the marketing and branding operation. In March, Abbott trademarked “Gralise” through its Solvay subsidiary. In fact, it’s the only recorded trademark from that subsidiary in 10 years. The trademark is for a “Pharmaceutical preparations for the relief, treatment or amelioration of pain.” Since March, Abbott has also hired MarkMonitor to manage its online branding and domain operations for Gralise. MarkMonitor has already snapped up several domain names for “Gralise.”

More importantly, it’s very likely that Depomed and Abbott are currently in negotiations for the ex-US rights for DM-1796. Under the assumption that these two parties are in negotiations, it would make sense that Abbott has kept mum.

The bottom line
is that ABT’s silence can be attributed to assumed, ongoing negotiations for ex-US rights for DM-1796. But a little due diligence demonstrates that Abbott is ramping up the marketing and branding operation.

Depomed is receiving more press but not all of it is accurate

In early December, GekkoWire published an article that sought to analyze DM-1796's NDA prospects. After three pages of discussing Xenoport’s drug candidate Horizant, the author concludes that with regards to Depomed and DM-1796, investors “should … factor in the FDA’s concerns about cancer in gabapentin.” The author from Gekkowire believed that the FDA’s concerns about cancer are related to ONLY the Restless Leg Syndrome indication. Doesn’t that sound funny, the FDA is concerned about cancer risks only if you have RLS but NOT if you have post-herpetic neuralgia or epilepsy? The author from Gekkowire came to that conclusion because he believes the only difference between XNPT’s drug, Horizant, and Depomed’s drug is merely the indication. I don’t blame him, to the layman’s eyes they are both extended release versions of gabapentin.

So what is the difference and what are the real concerns of the FDA?
The reason why the FDA is concerned about Horizant is because it displayed significantly different mitogenic activity in rats than immediate-release ("IR") gabapentin. IR Gabapentin historically demonstrated pancreatic cancer in a small percentage of male wistar rats when given at extremely high doses for 2 years. No drug induced pancreatic changes were seen in the female rats, or any other species, including humans for the last 20 years. The concentration of gabapentin in rat pancreas were much higher than in human subjects at normal doses.

Because of these differences, and the fact that no other species demonstrated pancreatic cancer, it was concluded by the FDA that the male wistar rat is a poor model for human pancreatic cancer. Fast forward about twenty years later and not one case of gabapentin-induced pancreatic cancer has been cited in a human subject.

Horizant’s animal studies demonstrated cancerous properties in BOTH female and male rats.
Basically, this is a 'red flag' to the FDA, that Horizant has different fundamental, cancer-causing properties than traditional gabapentin.

DM-1796, by design, is not a pro-drug like Horizant.
It has not been chemically altered like Horizant. It is merely the same IR gabapentin that has been used for the past twenty years, coated with "GRAS" (generally regarded as safe) polymers. Remember above all, that not one gabapentin-induced pancreatic cancer has been observed in humans during its twenty year lifespan.

The FDA's concerns about XNPT's gabapentin pro-drug have nothing to do with Depomed, DM-1796 or IR gabapentin. The FDA is concerned about the significantly different cancer-causing properties of XNPT's gabapentin formulation.

The proposed issue of cancer for DM-1796 is not a relevant one.

The bottom line is that Gekkowire missed the big picture.
The FDA is concerned solely about Horizant’s significantly different cancer causing properties and not DM-1796, IR gabapentin or the restless leg indication.

OptionsMonster author claims that a $13,000 trade "calls DEPO's top"

In a recent article from OptionMonster, the author postulates that since a bearish option transaction was executed, that this implies that “one investor is calling a top.” First of all, the value of that options trade was a measly $59,000 and $46,000, for a net of roughly $13,000. Does the author really believe that a $13,000 dollar trade is a sell signal?

The author continues his bearish argument by explaining the rise in Depomed’s share price is from “a decision in August by Pfizer (NYSE:PFE) to drop a potential patent-infringement case against the smaller company.” A simple examination of a 6-month chart would tell you that Depomed only popped about 10% on that specific news. Most of DEPO's PPS gains has been in seen in the month of December. Furthermore, the author makes no mention of DM-1796’s upcoming PDUFA date, its blockbuster potential, or that DEPO may announce a ex-US partner in the immediate future.

The author goes on to say that, “There was also a bearish calendar spread on the stock about a month ago.”
Ironically, during that month, Depomed’s stock price has popped another 30%! I guess that demonstrates the worthlessness of the observed “bearish calendar spread.”

The bottom line
is that the OptionMonster author is citing miniscule transactions and defunct trading signals, and missing the billion dollar potential of DM-1796 and the huge volume and accumulation, as of late.

Disclosure: I am long DEPO, ABT, MRK.