Depomed: Another License Deal, Another Buying Opportunity

| About: Depomed Inc. (DEPO)

With Depomed's (NASDAQ:DEPO) recent PPS drop to the low $5 dollar price-point, many long-term investors have found themselves questioning their investment thesis. Although this past quarter has seen some interesting news releases, none have been able to move the stock price. Furthermore, the endless staring and tracking of weekly Gralise data has left investors, who lack patience, without a reason to hold the stock.

Another patent-for-royalty deal, now with JNJ unit

Depomed recently announced that it has licensed its Acuform technology to Johnson and Johnson (NYSE:JNJ) unit, Janssen. Depomed received $10 million upfront, along with a low-single digit royalty and sales milestone in exchange for its technology.

Reaffirming BUY

While typical biotech investors are looking for the next catalyst, frequently overlooked are the deep-value/fundamental plays like Depomed. Depomed has recently launched Gralise with solid growth over the last 10 months of its launch. The current run-rate for Gralise pegs annual sales at around $25 million with some anticipatory signs that scripts will accelerate moving forward.

Depomed expanding its commitment to Gralise

We have been closely tracking Gralise scripts over the last quarter and we are happy with the steady progress with regards to ramp-up in sales. Over the last month, Depomed was able to sell over 10,000 scripts. To further help with sales, Depomed has hired an additional 75 flex reps. Along those lines, Depomed has now internalizing all sales functions by hiring its full-time sales staff. We believe that Depomed's strategy to increasing total dollars sales will be to a dual approach of increasing the price as well as continued detailing.

Thought leaders adopting Gralise without looking back

We note several trends that are occurring that we view as particularly favorable. Firstly, we note that pain specialists have adopted Gralise. According to management, over 40% of scripts are written by pain specialists. This number has grown from about 30% just 6 months prior from a smaller script base. This equates to roughly 500 pain specialists prescribing, to now over 2000. Clearly, pain specialists, the critical thought leaders and the most response-oriented physicians, are adopting Gralise. Given that specialists have adopted Gralise, we feel that Depomed's expansion into primary care will be met without resistance.

Off-label scripts will be a growth driver

More notably, we notice that increasingly Gralise is stealing a larger share of scripts from Cymbalta. We remind investors that Cymbalta is indicated for depression, fibromyalgia, chronic musculoskeletal pain and diabetic peripheral neuropathy. Roughly 30% of Gralise scripts are coming from Cymbalta, when the two drugs share no indications. What this means is that Gralise is being used by clinicians off-label, and we expect this off-label use to be a continued growth driver especially in the PCP market, as PCP's are the largest prescriber group of off-label medications.

$100 million run-rate in 12-18 months

We expect that Depomed will continue to make incremental gains in total scripts as it begins to detail to the PCP market. Concurrently we expect to see Depomed impose modest quarter-over-quarter price increases. This dual approach of persistence sales effort and incremental price increases, is a successful strategy employed by many specialty pharmaceutical companies. Thus, we expect to see a $75 to $100 million dollar run-rate, at the end of year 2013. We expect $100 million in annual sales in 2014.


Briefly, Glumetza will pull in a total of $40 million in revenue for Depomed in 2012. With continued price increases and steady increases in percent share paid to Depomed from Santarus (NASDAQ:SNTS), we feel that even Glumetza is being undervalued. We expect $55 million in revenue in 2013, and $70 million in 2014, and $80 million in revenue in 2015. We expect to see generic Glumetza enter the market in mid-2016.


We believe that the acquisition of Zipsor to be significantly undervalued. This product, which was previously marketed by Xanodyne, had not been marketed for about one year. Furthermore, the company had not taken a price increase in about 2 years. At its peak, Zipsor was a $25 million dollar product. Thus, we view the current $20 million run-rate as significantly depressed and ripe for re-launch. We view $30 million dollars in revenue as realistic for 2013, with peak sales of $90 million in 2018.

Janumet XR, Vicodin XR, Percocet XR

With the recent launch of Janumet XR, Depomed will now be receiving royalties. We expect this royalty stream to be nominal but another incremental positive. We also expect two upcoming product launches to be incremental upsides for Depomed. Covidien (COV) has two products which were co-developed by Depomed. And judging by Depomed's patent portfolio, these products appear to be extended-release versions of Vicodin and Percocet. We view, the potential launches of Vicoden XR and Percocet XR as two unfactored, incremental positives for Depomed.

Serada NDA

As discussed in our prior reports, we view the chances of approval at under 50%. We don't give any value to Serada, although we admit that it will create several binary events that can be exploited by keen traders.

Summative Thoughts

Depomed is a BUY here, not because of Serada, but moreso because of deep-value. We expect Gralise revenues to total $60 million in 2013, $100 million in 2014, and $140 million in 2015. We expect Glumetza revenues to total $55 million in 2013, $70 million in 2014, and $80 million in 2015. We expect Zipsor revenues to total $30 million in 2013, $40 million in 2014, and $50 million in 2015. Thus, we view total revenue in 2013, 2014, and 2015 to approach $145, $210, and $270 million respectively. We remind investors that today's market capitalization for Depomed is $280 million, and juxtaposed to estimated revenues, we continue to view Depomed as a BUY. This back-of-the-envelope estimate hasn't even factored the several aforementioned royalty streams from Covidien, Johnson and Johnson, and Merck.

Disclosure: I am long DEPO, PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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