Adversity Breeds Opportunity - Expanding Pill, Deflated Share Price Print E-mail
By Holger Berndt, CFA   
Thursday, 19 November 2009 07:35
Consultant & Author

Depomed (NASDAQ:DEPO), the small northern California drug delivery company, recently reported Phase 3 trial results for two separate compounds for the pain associated with shingles (post-herpetic neuralgia or PHN) and menopausal hot flashes.

Both drugs are extended versions of gabapentin, the generic equivalent of Pfizer’s (PFE) popular pain drug Neurontin. Depomed has a drug delivery technology they call Acuform that causes the pill to swell in the stomach and gradually release the active drug into the intestine, thereby substantially reducing the daily dosing and negative side effects while providing the same or greater efficacy.


Results for the two recent clinical trials were a mixed bag. DEPO’s DM-1796 for PHN pain achieved statistically significant results with once daily dosing and much lower side effects than Neurontin or Pfizer’s newer version of that drug, Lyrica. This is an enormous market with 35 million domestic annual prescriptions and sales in the billions of dollars. DEPO partnered its uniquely differentiated drug last year with Belgium’s Solvay (SOLB.BR) for North American distribution following a $25 million payment and future milestones that include $45-$70 million upon FDA acceptance and approval plus royalties of 14-20% on sales. The company plans to submit the New Drug Application to the FDA next quarter, with approval anticipated early in 2011 at the latest and sales beginning shortly thereafter. Foreign distribution rights are currently being discussed and could be extremely lucrative for DEPO—maybe even more so than the domestic partnership now that clinical trials are complete and successful. It’s possible that Abbott Laboratories (ABT), which is in the process of acquiring Solvay’s drug unit, may want to lock up the worldwide rights to the drug.


Disappointing, but not disastrous, were the results for Serada, DEPO’s drug for menopausal hot flashes. Prior trials for Serada had experienced very positive results for reducing the frequency and severity of hot flashes. The recent Phase 3 trial, actually two separate trials, saw an abnormally high placebo response and failed to achieve complete statistical significance. DEPO was further penalized from a statistical standpoint by testing two different doses of the drug. Had they only used the higher dose, seven of eight primary endpoints would have been achieved and the drug likely would have stood a good chance of obtaining FDA approval due to the huge unmet need of this market following the collapse of traditional hormone-replacement therapy. The company is meeting with the FDA in December to discuss how to proceed, and it’s likely that they will need to do another trial with just the one dose, delaying the launch of the drug by four to six quarters. (Ironically, something very similar happened in 2007 for their PHN drug, which now has a very high probability of being approved.) DEPO has chosen to go it alone with Serada and a future partnership, either before or after the next possible clinical trial, could also be a major game changer for shareholders as the first safe and effective non-hormonal, non-antidepressant solution in a multi-billion dollar market.


Following the disappointing news that Serada’s time to market would be pushed out, DEPO’s stock price was more than cut in half. While the company already has two approved drugs on the market, including the number one branded version of metformin for diabetes (Glumetza), it has seen its share of setbacks too over the years, and that has always kept the stock price at conservative levels. This time was no exception, even before the Serada news. However, the just prior good news for DM-1796 attracted a lot of fast money to the stock anticipating that they might bat 2-for-2 on the trials. When that didn’t happen, the flood gates opened and the stock tanked to absurd levels and is likely putting in a bottom now.


With roughly 52 million shares outstanding, Depomed currently sports a market cap of about $170 million. The company ended last quarter with $88 million in cash and debt of only $6 million. CEO Carl Pelzel has stated that they have no need for additional financing. Today’s enterprise value for the entire company is little more than the milestone payments that they will soon receive from Solvay/Abbott alone!


Partnerships negotiations are underway on numerous fronts. Most enticing are the foreign rights for DM-1796. They also recently licensed Glumetza, their extended version of metformin, to Merck (MRK) for a combination extended release version of its popular DPP-4 class diabetes drug, Januvia. It’s likely that many of the numerous other drugs in this class, over a dozen, will do the same. Licensing talks with the others are ongoing—as a benchmark, Merck paid $10 million upfront and will make additional payments upon approval and sales. Serada may be partnered after the upcoming meeting with the FDA. DEPO also has a novel approach for treating the nocturnal acid breakthrough associated with gastroesophageal reflux disease (GERD), another multi-billion dollar market. Partnership discussions are happening for that too at the moment. Additionally, the company has a pipeline that includes a promising drug for Parkinson’s disease, a development agreement for multiple compounds with Covidian (COV) and scores of drugs that could benefit from its Acuform technology.


The glass at Depomed is clearly half full. The numerous potentially positive developments combined with the upcoming approval and launch of DM-1796 make the stock a bargain at these levels for those with an investment horizon exceeding a few months. Expect the share price to swell to two or three times its current size in the next 12 to 18 months.


Disclosure: Long DEPO


Holger Berndt, CFA is a research consultant to the investment industry, author of the recently published novel Hedge Fund and a former hedge fund portfolio manager. He is also a Chartered Financial Analyst. We proudly welcome him as a contributor to the BioMedReports family.

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