DEPO posts positive earnings with strong 2011 outlook Print E-mail
By Patrick Crutcher   
Saturday, 06 November 2010 15:43

This week Depomed Inc.(NASDAQ: DEPO) posted positive earnings and gave shareholders a corporate update. We wanted to highlight some of the things said during the 3Q conference call. We still continue to believe Depomed has continued upside going forward based on short and long-term catalysts.

There are several points we should highlight that were touched upon in the conference call. First, they said the FDA had approved the manufacturing site change for the 1000mg Glumetza. This should protect the 1000mg supply chain from any potential disruption. The investigation into the 500mg Glumetza recall is nearly complete and they’re currently projecting resupply in December or early 2011. Originally, the 500mg tablets were recalled because of the presence of TBA, which causes a moldy smell but is not harmful. This has been a problem for several pharmaceutical companies, most recently to Pfizer’s Lipitor.

Management commented briefly on DM-1796 and the rest-of-world rights discussions. DM-1796 has a PDUFA date on January 30th, 2011. DM-1796 is an Acuform version of gabapentin, which is an FDA-approved immediate release pharmaceutical for the treatment of partial epilepsy and management of postherpetic neuralgia (PHN). This is licensed to Abbott Labs(ABT) for the US, Canada, and Mexico. With potential sales milestones up to $300M and DEPO could received $35-60M on approval depending on the labeling, DEPO’s financial outlook for 2011 is very promising. They are currently projecting around $45-50M on approval.

There were several questions about the status of negotiations for the rest-of-world(ROW) rights to DM-1796. Management made several points: they would prefer one transaction/partner, all partners interested in South America and Asia since no additional needed trials after US approval, EU/Japan are attractive opportunities, but will require the partner to do extra trials. They provided no guidance for when a deal might be expected.

Both Abbott and Depomed see very significant growth and commercial potential for DM-1796 in a multibillion dollar market, where both immediate release gabapentin and Lyrica have inferior clinical profiles. With fewer side effects and once-daily formulation, they expect a positive response especially from managed care. They noted that Abbot is handling most of the discussions with the FDA. Again, 505(b)(2) route of approval and the very significant results shown by DM-1796, approval seems highly likely with favorable labeling.

They were recently notified that Merck had submitted the NDA for Janumet XR, which resulted in a $2.5M milestone and if approved they expect royalties to start sometime in Q3 2011. Management noted that investors could potentially expect to see more Acuform XR metformin transactions(similar to the Janssen and Merck deals). On the Covidien deal, they project roughly $30M in potential clinical milestones over the next several years. This will be for an acitomenophen-opiod formulation; Covidien expects to launch first 2 products in 2013/2014 and very significant revenue from both products.

The long-term catalyst investors should really keep in mind is Phase 3 results from Serada(Breeze 3), for the treatment of menopausal hot flashes. Enrollment has been moving along, but they only reiterated their guidance for trialcompletion sometime in 3Q 2011 and results in Q4. One important point to recognize: DEPO designed BREEZE 3 under an SPA with the FDA, so statistically significant results will be sufficient to demonstrate efficacy. They also designed it to have a reduced placebo rate(expecting 45-55%), which if happens, they expect to report positive results. They noted response procedures were adjusted the to make things easier. With the apparent correlation between hormone-replacement therapy(HRT) and an increased risk for breast cancer, the market for a hot-flash treatment is wide open. This could be a multibillion dollar drug with no competition.

There are 2 potential catalysts that could and likely will add to their bottom line in 2011. On the DM-1992 front, they still have every intention to out-license after Phase 1 data has been released. There were a number of partners interested after the initial Phase 1 data in August 2009, but decided to tweak the formulation in order to produce better efficacy. They continue to expect very good results in early 2011 and continue discussions for the strong interest in DM1992.  Additionally, they expect to outlicense their night-time acid-reflux treatment(GERD), DM-3458, which is currently in Phase 1.

DEPO is very strong financially. Net income for the three months ended September 30, 2010 was $1.9 million, or $0.04 per share. This was backed by strong sales of 1000mg Glumetza, lower operating expenses and milestone payments. They had cash, cash equivalents equal to $76.4 million as of September 30th, and that isn’t even including milestones payments from Janssen($5.0 million) and Merck($2.5 million) payment from October/November 2010. Investors should take note that they have not raised money via an offering in over 3 years.

We are expecting more analysts to pick up on Depomed over the next few months. They have been doing a number of investor presentations and have remarked about recent meetings with several different analysts. Note, they are meeting with JMP Securities next week. Recently, Roth Capital reiterated their ”Buy” with a $7.00 price target. Obviously, I don’t agree with their price target, since DEPO has multiple catalysts in front of them that I think will add substantial value.

Disclosure: Long DEPO

See initial coverage -

DEPO 3Q 2010 earnings -

DEPO $2.5M Milestone Payment under Merck agreement -

DEPO October 2010 Presentation(PDF) -

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