Depomed Shares Drop on Clear Rejection of Serada by FDA Committee

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By Brian Wilson, Lead Contributor   
Tuesday, 05 March 2013 07:46
Depomed (NASDAQ: DEPO) shareholders who have been patiently waiting for the outcome of the FDA advisory committee meeting regarding the NDA application submitted by Depomed in 2012 for the menopausal hot flash drug Serada (gabapentin GR) were surely disappointed with yesterday’s results. Trading was on the stock until 1:50 PM EST following the press release, which I’ve linked to here.

As you can see, the FDA’s Reproductive Health Drugs Advisory Committee (RHDAC) meeting was a compete bust for shareholders who were hoping that Serada would become a great non-hormonal treatment for its target indication.

The panel voted 2-12 in favor of approval, meaning that 12 were against approval of the drug. This was so one-sided and depressing that Depomed ended up cancelling the conference call that they were going to hold in reaction to the advisory committee vote.

In a rational manner, DEPO shares reacted immediately to the bad news. By the closing bell, selling dropped the company’s valuation by nearly 10%, and DEPO closed at the lowest point it’s seen all year at $5.89 per share. The general consensus amongst DEPO traders is that this adcom outcome virtually guarantees an FDA rejection for Serada on the PDUFA goal date of May 31st, 2013. I agree, and I find it hard for anyone to argue otherwise based on what we know right now.

It seems likely that the advisory committee found issues with Serada’s active ingredient gabapentin rather than the Acuform polymer that Depomed uses as a drug delivery platform. Acuform is an inert material that dissolves slowly and serves just as a slow-release mechanism for active ingredients. Gabapentin, on the other hand, is a hormone that has adverse side effects like fatigue, weight gain, and inflammation. Even worse are potential links between this compound and breast cancer, as well as cardiovascular disease.

In addition to the cancellation of their conference call, Depomed decided to freeze Serada’s development program for the time being as the company determines whether or not the development program should be shut down.

Since Serada was unofficially killed yesterday by the adcom vote, and I think it was a smart move for the company to temporarily suspend its funding. This not only improves the company’s bottom line, but encourages shareholders to consider the other pipeline components that add value to Depomed.

Going back to the Q4 2012 report, we can see that the company does have some noteworthy developments that may ease the pain of this recent drug failure. For one, the company’s top-line and bottom-line growth is quite good.

Revenues of $26.6 million in Q4 2012 were 119% higher versus Q4 2011, and it actually wasn’t driven by one-time sources of revenue. $7.6 million was from Gralise sales, and $4.9 million was from Zipsor sales.

Earnings came in at ($3.7) million for Q4 2012, although I expect a reduction in R&D expenses from the suspension of Serada’s development program and a jump into positive EPS territory – possibly as early as next quarter.

I’m taken aback at the “one-sidedness” the advisory committee vote given the widespread use of gabapentin, although it’s never a smart idea to argue with the FDA or any of its panels. Investors should consider Serada dead, and DEPO should be considered a play on the company’s products (especially Zipsor and GRALISE), as well as the Parkinson’s disease DM-1992 which may generate some interest throughout the next few years.

Going into Q2 2013, I also like the notion that DEPO is about to become EPS positive and has an appropriate market capitalization of ~$330 million. I also think that in the most recent trading session, the market has already discounted Serada’s prior worth, which should protect DEPO from major declines in share price barring any more negative news.

 





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