Depomed May Miss Q3 Revenue Targets

| About: Depomed Inc. (DEPO)

Summary

Depomed's flagship product, NUCYNTA, has shown impressive growth, but Wall Street demands more.

The company is doing what it can to expand the reach of legacy products.

However, suboptimal insurance coverage limits access to the core products, especially Zipsor.

Depomed, Inc.(NASDAQ:DEPO) is a mid-size (market cap: $1.55 billion) specialty pharmaceutical company focused on products to treat pain and other central nervous system (CNS) conditions. The company currently markets five FDA-approved brands: NUCYNTA (tapentadol) for moderate to severe acute pain in adults; Gralise (gabapentin) tablets for postherpetic neuralgia; Cambia (diclofenac oral solution) for migraine with or without aura in adults; Lazanda (fentanyl) CII nasal spray for breakthrough pain in cancer patients; and Zipsor (diclofenac) for mild to moderate acute pain. (Note: Competitive advantages of NUCYNTA were detailed in previous coverage.)

Coupled with a much larger dedicated sales force, Depomed outperformed by 56% (in 10 months) the last 12-month sales mark of $166 million by the drug's previous owner, Janssen. Furthermore, a patent litigation victory last month upheld NUCYNTA's market exclusivity until at least December 2025, so Depomed has time for increasing its flagship brand's pain market share (which stands at 1.95%) to continue to satisfy investors.

There is no doubt that NUCYNTA is in demand, so most of the leading health insurers have made it available to their members (Figure 1). Some payors do require Prior Authorization (justification of medical need) or Step Therapy (failure of preferred agent).

However, management may have been stretching a little when they were "happy to report that Depomed products have retained favorable formulary positions at both Express Scripts (NASDAQ:ESRX) and CVS Caremark (NYSE:CVS)," which are the nation's two major pharmacy benefit managers.

As seen in Table 1, CVS just has Gralise, and only in their Medicare plans. In fact, Lazanda lost its spot in Express Scripts' Medicare formulary this year. Lazanda, Cambia and Zipsor were also excluded this year from TRICARE, which Express Scripts manages.

Figure 1. Insurance Coverage for NUCYNTA

Table 1. Insurance Coverage for Depomed's Legacy Products*

Rank

Health Insurers

Gralise

Cambia

Zipsor

Lazanda

PBM

Express Scripts

$

$

Medicare/Medicaid/Federal

PBM

CVS/Caremark

$

PBM

TRICARE

PA,ST

X

X

X

2

Kaiser Permanente

$

$

$

$ PA

5

Humana

$$$ PA

6

Blue Cross and Blue Shield (BCBS) IL, MT, NM, OK, TX

$$$

6

BCBS Illinois Medicaid

$

6

BCBS Texas Medicaid

$ PA

8

Highmark

$ PA

$$

X

$$$ PA

9

Blue Shield of California

X

$$$ PA

10

Independence Blue Cross

$$

$$

$$

$$

Health Exchanges

1

UnitedHealthcare (CA)

$$ PA

3

Anthem BCBS

$ PA

$$

$$ST

$ PA

4

Aetna (OK)

$$ PA,ST

$$ PA,ST

6

BCBS IL, MT, OK, TX

$$

$$

X

$$

7

Cigna HealthCare (TX)

$$

8

Highmark

$$ PA

$$

$$ PA

10

Independence Blue Cross

$$ PA

$$ PA

$$ PA

Commercial

1

UnitedHealthcare

X

X

X

4PA

3

Anthem BCBS

X

$$

$$

X

4

Aetna

$ ST

5

Humana

X

X

X

$$

7

Cigna HealthCare

X

$$

X

X

8

Highmark

$$ PA

$$

$$ PA

9

Blue Shield of California (PLUS)

$$ PA

$$ PA

$$ ST

$$ PA

10

Independence Blue Cross

$$ PA

X

$$ PA

$$ PA

Legend: Does not include NUCYNTA. Sources are directly from company/subsidiary websites (direct links available on request). Tier levels are from basic plans unless otherwise specified (i.e., Blue Shield CA Standard would be all blank). If a rank is missing, the insurer doesn't cover any products in that area (e.g., non-Medicare CVS).

$ = Preferred brand (Lowest copay)

$$ = Non-preferred brand

$$$ = Highest tier / Specialty

BLANK / X (excluded this year) = Not listed / Non-formulary / Not covered

PA = Prior Authorization required

ST = Step Therapy required (patient has to try other treatments first)

The rest of the survey of the top ten health plans in the U.S. found that there is less coverage for Depomed products than last year. Among the Medicare plans, Lazanda was dropped by UnitedHealthcare and Cigna, and Gralise by Blue Shield of California. Medicaid still doesn't cover any of these brands and likely never will. As shown by the number of X's in Table 1, the situation was much worse in commercial plans. The sole inclusion was Zipsor by Anthem. However, there seems to be more access in several states' marketplaces, which is good because patients are not stuck with their employer plans and may shop around to find plans that cover their specific medications. Thus, it is extraordinary that the last 4 quarters have demonstrated year-over-year growth for each product, with the sole exception of Zipsor in Q1 (Figure 2).

Figure 2. Depomed Reported Quarterly Net Product Sales (in $ millions)

On the other hand, Depomed has a history of revenue surprises (8 of 9 before the Q1 miss). Then management reduced its guidance by $10 million to a $480-$505 million range, but probably because of continued record sales, the rest of the Q2 report was well-received by the market. Indeed, analysts' 2016 expectations ($487.19 million) are at the low end, which are the composite of $127.22 million this quarter and $138.35 million in Q4 (8.7% over Q3). Wall Street also forecasts 2017 revenues of $576.07 million (18.2% YOY).

Since its launch, NUCYNTA has comprised at least 60% of total product sales. Management made an issue of maintenance dosing (milligrams per day) decreasing from 270 mg before Depomed's re-launch to 258 mg despite the number of pills per prescription remaining constant. The company had expected mg/day would go up slightly, but observed it "actually come down about 10 milligrams a day, so about 4%." It remains to be seen who eventually wins the tug-of-war between reps touting the optimal mean dose seen in clinical trials (~400 mg) and the pain specialists who pin the dose at the (minimum effective) level their patients stop complaining.

The mg/day decrease itself is not that alarming. Combining the current pricing structure (Table 2. As with most things, there are "discounts" when buying in "bulk" [more mg]) and applying the above conditions to a small sample of patients (Table 3), the dollar loss could be as low as 2%. Yet sales have increased, probably in light of prescribers noting the absence of "dose creep" (tolerance, which necessitates increasing the dose) with NUCYNTA. Since the company doesn't break down figures for extended release (ER) and immediate release (IR) NUCYNTA, an assumption of a 50:50 split and respective YOY growths of 26% and 2% yields 82,500 total prescriptions ((TRx)) and $73.4 million if each averages 60 pills each.

Table 2. NUCYNTA ER Acquisition Costs (in dollars)

NUCYNTA ER

50 mg

100 mg

150 mg

200 mg

250 mg

Price per tablet

6.216

11.496

14.832

18.828

23.556

Price per mg

0.124

0.115

0.099

0.094

0.094

Source: Lexi-Comp (prices as of October 7, 2016)

Table 3. Sample Patient Distribution and NUCYNTA ER Monthly Usage

Maintained at mean 270 mg per day

Maintained at mean 258 mg per day

Patients (n = 100)

Bottles (n = 148)

Patients (n = 100)

Bottles (n = 148)

400

6

4

350

14

12

300

28

32

250

35

49

32

44

200

13

25

12

20

150

4

60

8

72

100

14

12

For the legacy products, Depomed added product training and incentive compensation levels for CNS sales reps that sell Gralise. Management also cited Lazanda's 18% YOY volume growth for the first-half of 2016 in contrast to the 11% volume drop for its competitors (Table 4), which is impressive because of the higher unit cost of devices. The company is complementing the Lazanda sales force to 33.

Historically, total sales have not dipped in Q3 compared to the preceding quarter. With the above changes, it is therefore reasonable to expect a 20% YOY increase to $47.7 million. So unless NUCYNTA performs better, revenues will be short of Q3 expectations by $6 million. For perspective on how much better, if the NUCYNTA distribution were 100% ER (92,000 TRx), sales would then be $81.9 million. Anecdotal evidence suggests otherwise, that IR dominates; therefore sales would be closer to $70 million.

Table 4. Branded Oral Fentanyl Products

Trade Name

Formulation

Company

Price per 400 mcg dose

ABSTRAL

Sublingual tablets

Sentynl Therapeutics

$84.84

ACTIQ

Transmucosal lozenge

Teva (NYSE:TEVA)

$79.60

FENTORA

Buccal tablet

Teva

$94.29

LAZANDA

Nasal spray

Depomed

$116.36

ONSOLIS

Buccal soluble film

BioDelivery Sciences International (NASDAQ:BDSI)

Not available

SUBSYS

Sublingual spray

Insys Therapeutics (NASDAQ:INSY)

$112.34

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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