Is Depomed (NASDAQ:DEPO) a buy at these levels? Print E-mail
By Nicholas DeCesare   
Monday, 22 February 2010 07:48
During the last two trading days, shares of Menlo Park, California bio-tech company, Depomed, have dropped over 25% and closed Friday’s trading session at $2.37.  The $123 million market cap company’s share price has been hammered since the recent announcement by XenoPort that the FDA rejected approval of their drug Horizant for restless leg syndrome.  This has greatly affected Depomed because Horizant is a version of gabapentin, which is used to treat epilepsy and neuropathic pain. Depomed’s two major drug candidates are Serada and DM-1796, both of which are forms of gabapentin.

Serada is currently undergoing a new Phase III trial which will begin enrolling in April, it is a pill used is for menopausal hot flashes, and CEO Carl Pelzel feels that the FDA believes it will fill a significant unmet need in the women’s health field.  Last October, Depomed reported Phase III results of Serada that did not meet all endpoints; it sent the stock crashing 40%, to under $4.  A price that analysts felt seriously undervalued the company at that time.  This news about the Phase III trial for Serada in October, came just days after the company reported great results from their other major drug candidate, DM-1796, for pain relief, which is being partnered with Abbott Labs.  That news sent the shares over $6, only to come crashing down after investors were informed of the Serada results.  

This past week with the recent announcement of the FDA’s rejection of Horizant, investors became spooked by the fact that Depomed has these two drugs which are versions of gabapentin.  However, this may have been a huge overreaction to news that has not affected one step of the approval process for Serada or DM-1796 (which will have its high quality NDA filed within the next 2-4 weeks).  In fact, Depomed held a conference call this past Friday to ease investor concerns and explain why the recent decision by the FDA in regards to XenoPort’s drug will not cause any harm to Depomed and what they are trying to accomplish.  After doing my own research on Depomed and after listening to this past Friday’s the conference call several times, it has become very clear to me that Depomed is extremely undervalued at this point, in fact, this stock can be an easy double or triple in the next 3-6 months.

Depomed utilizes their own AcuForm technology.  Depomed best sums up this technology by stating:

AcuForm allows for targeted, controlled delivery of pharmaceutical ingredients to the upper gastrointestinal (GI) tract. Unlike immediate release and some extended release formulations that pass through the upper GI tract within approximately three hours following ingestion, AcuForm’s unique swelling polymers allow the tablet to be retained in the stomach (‘gastric retention’) for approximately eight to nine hours. During this time, the tablet’s active ingredient is steadily delivered to the upper GI tract at the desired rate and time, without the potentially irritating ‘burst’ of drug that often occurs with other formulations.  AcuForm is used in the formulation of Depomed’s two FDA-approved drugs, Glumetza® (metformin HCl extended release tablets) and Proquin® XR (ciprofloxacin hydrochloride). It is also currently being evaluated internally and with partner companies for numerous other compounds.

Depomed made it very clear that their NDA for DM-1796 will not be affected by the recent FDA decision, nor will their work on the new Serada Phase III trial.  Depomed explained that DM-1796 has a very favorable side effect profile and using their AcuForm technology, gabapentin is released slowly into the body.  In fact, the toxicology package on file and already accepted by the FDA for Depomed’s DM-1796 and Serada has formed the basis for approval for the drug Neurontin and the generic form of gabapentin.  Pfizer sells this branded version called Neurontin. The concerns over tumors in laboratory rats are not new, and were noted by the FDA when it approved the compound as a treatment for epilepsy. But as Depomed pointed out in their most recent conference call,  XenoPort’s drug has adverse side effects on only male rats, not female, when given in doses at 2000 mg, this is 20 times the amount of drug that Depomed anticipates Serada would release to patients through its extended release tablets.  

The bottom line that Depomed wants investors to understand, is that their technology takes Serada and DM-1796 and slowly releases gabapentin in the system and at much smaller doses and with an already accepted toxicology package by the FDA.  This is a huge difference from XeoPort’s drug Horizant, which was recently rejected.  XenoPort’s toxicology package was generated by them, recently owned by them, and filed to the FDA.  The drug is given in much larger doses and without extended release, thus the problem with male rats.  

Depomed has seen no adverse side effects on the path to Serada approval, they will be relying on the current safety database on file with the FDA for Pfizer’s Neurontin.  Serada will most likely get a priority review from the agency (Depomed feels very confident in the newly designed Phase III trial), and will plunge into a market trying to meet the needs of 32 million women.  DM-1796’s NDA will be filed shortly, is a once a day pill compared to a two to three times a day pill for the generic gabapentin already on the market, had an 11% dizziness side effect, compared to the 20-30% generic.  DM-1796 also has a low incidence of somnolence (dizziness) compared to the generic gabapentin already approved and on the market.

Depomed has only 52 million shares outstanding and over 71 million in cash on hand.  The cash value of each share of Depomed is $1.37, with a stock price currently sitting only $1 above that value and with so much good news possibly coming in the coming weeks and months, there is tremendous value at these prices.  The company has less than $7 million in debt and millions of dollars coming in for milestone payments and future partnership revenue.  It is always possible that the new Serada Phase III trial is unsuccessful or the NDA application for DM-1796 is in need of revision, however, the chance of these incidences seem extremely low given the current information the company is working with.  I believe the new Phase III Serada trial will be a huge success and the NDA for DM-1796 will be accepted in its current form and both drugs will be big blockbusters in the months that follow. With their cash on hand, small market cap, milestone payments, and partnerships,  I  believe the true value of Depomed shares is in the $3.50 - $4 range without Serada approval or the NDA acceptance of DM-1796.  Should any good news be released on these two drugs which is expected shortly (enrollment for Serada in April, acceptance of DM-1796 NDA by the agency in the next 2-4 weeks) the stock price should be in for a steady climb higher than that range.  With such a steep discount and huge sell off in Depomed shares recently for no apparent reason other than panic selling, this is a huge buying opportunity that does not come often with such a quality company.  

Disclosure:  Long Depomed

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