Q2 Financial Review
On August 5, 2010, Depomed (DEPO) reported financial results for the second quarter ended June 30, 2010. Total revenues for the second quarter were $24.4 million, an increase of 110% over the second quarter in 2009 and $0.9 million higher than our forecast of $23.5 million.
Revenues consisted of $11.7 million in product sales, of which $11.6 million was Glumetza. Depomed also recorded total royalty revenues of $0.1 million and total licensing and milestone revenues of $12.7 million, of which $10 million was attributed to a milestone payment from Abbott Labs for the U.S. FDA acceptance of the DM-1796 new drug application (NDA).
Net income reported during the second quarter was $4.1 million, or 8 cents per diluted share. This was 1 cent higher than our expectations. The company exited June 2010 with approximately $76.9 million in cash and investments.
We view the current cash position as sufficient to fund operations for the foreseeable future, and into profitability should the U.S. FDA approval DM-1796 in January 2011. Approval will trigger an additional milestone payment of $35 to $60 million, along with 14% and 20% royalty on North American sales of DM-1796, and the potential for an additional $300+ million in sales-related milestone from Abbott Labs.
Another Collaboration
Janssen Pharmaceutica N.V., a division of Johnson & Johnson, licensed worldwide rights to Depomed's Acuform gastric retentive drug delivery technology to be used for the non-exclusive development of a fixed-dose combination formulation of canagliflozin, a sodium glucose transport 2 (SGLT2) inhibitor and extended-release metformin (Glumetza). J&J has also been granted a right of reference to the Glumetza NDA and associated data for use in developing the combination product.
Under the terms of the agreement, Depomed will formulate the fixed-dose combination product and J&J will have the commercialization rights. Depomed will receive a $5 million upfront license fee, plus reimbursements for its formulation work on the project and an additional $5 million license fee following completion of Depomed's formulation work -- which we estimate will be completed by the end of the first quarter 2011. Depomed is also eligible for an additional milestones plus a royalty on potential future net sales of the combined product.
The deal is reminiscent of the company’s $10 million agreement with Merck in July 2009, whereby Merck obtained a non-exclusive license to extended release metformin to co-formulate along with its DPP-IV agent, Januvia (sitagliptin). Merck recently stated that they plan to file for approval of its fixed-dose combination sitagliptin + metformin-XR product, Janumet-XR, later this year. Depomed will earn a milestone payment from Merck (not yet disclosed) upon U.S. FDA acceptance of the Janumet-XR NDA.
We note that Depomed is also eligible for royalties on sales of Janumet-XR once approval. Januvia and Janumet posted sales of $1,922 million and $658 million, respectively, in 2009. We expect that once approved, Janumet-XR will quickly cannibalize all of Janumet current sales, thus providing Depomed with a handsome royalty, even if at only a low-single digit rate.
DM-1796 PDUFA Set for Late January 2011
On March 30, 2010, Abbott Labs submitted the new drug application (NDA) on DM-1796 for the management of post-herpetic neuralgia (PHN), or pain after shingles. Assuming a 10-month review cycle, approval of the NDA in late January 2011 will trigger a $35 million milestone payment from Abbott to Depomed, as well as an additional milestone of up to $25 million depending upon how the side effects are reflected in the eventual product label.
Plus, Depomed will collect between 14% and 20% royalty on North American sales of DM-1796 at Abbott Labs, and is eligible to receive another $300+ million in sales or future development milestones on DM-1796.
We believe Abbott is an ideal partner for Depomed. The company is a major force in the pharmaceutical industry and has significant experience in the neurology / pain market. Gabapentin and Lyrica are producing roughly 3 million prescriptions monthly (~35 million yearly). Lyrica has stalled at around 800k prescriptions monthly (~10 million yearly) while generic gabapentin has steadily increased.
Lyrica seems to offer no real advantages over generic gabapentin in terms of efficacy or tolerability profile. Still, the drug posted worldwide sales of $2.8 billion in 2009 thanks to the marketing muscle of Pfizer.
Therefore, given a similar efficacy profile of DM-1796 with Lyrica, with vastly improved safety and tolerability, as well as improved compliance and dosing, we think DM-1796 has the potential to be a sizable share gainer in the PHN market. And, with the marketing muscle of Abbott Labs in North America, DM-1796 has at least $500 million peak sales -- potentially more with an expanded label to include additional indications such as fibromyalgia syndrome or peripheral neuropathy.
BREEZE-3 Ready to Begin Shortly
Over the past several months Depomed management has been in discussion with the U.S. FDA on a special protocol assessment for the phase III BREEZE-3 program with Serada. Management and the FDA last met in late June 2010.
We expect Depomed to receive a final assessment for the BREEZE-3 protocol shortly, and begin enrolling patients here in the third quarter 2010. In the meantime, Depomed has been active in screening patients for the program. In fact, over 200 have been screened already, so we expect a quick enrollment once the program has been initiated.
Management has made a number of significant changes to the design of BREEZE-3 to help mitigate the placebo response seen in BREEZE-1 and -2. We discuss these in detail in our research report.
We expect BREEZE-3 will complete in the third quarter of 2011. We expect data in the fourth quarter 2011. We estimate the total cost will be around $15 million. If all goes well, the company should be able to file for approval with the entire data set from BREEZE-1, -2 and -3, either late 2011 or early 2012. This puts potential U.S. FDA action towards the end of 2012.
Hormone replacement therapy (HRT) is currently the only FDA-approved single-agent therapy for the treatment of menopausal hot flashes. Results from these Women’s Health Initiative (WHI) trials in 2003 caused HRT prescriptions to decline by 60% from 2001 levels. Primary-care physicians and Ob/Gyns have dramatically reduced their use of HRT products during the last decade, and as a result there is a significant void in the market.
Several pharmaceutical and biotechnology companies are working on treatments, but as of yet there are no non-HRT approved single-agent therapy option for the treatment of hot flash in the U.S. Many physicians have been prescribing off-label anti-depressants or herbal / botanical remedies. We believe an FDA approved small molecule, such as Serada, would be a first-line therapy for hot flash.
According to Breastcancer.org, 80% of the women in the U.S. (~35 million) experience hot flashes of some kind as they approach menopause, and for the first year or two after their periods stop. Between 25% and 50% of women continue to have them for many more years. About 40% (14 million) seek medical treatment.
Serada would reach $2 billion in sales if only 20% of these women were to use the drug, assuming pricing consistent with anti-depressants and 7 months of use. Therefore, a significant opportunity exists with Depomed’s drug.
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Revenues consisted of $11.7 million in product sales, of which $11.6 million was Glumetza. Depomed also recorded total royalty revenues of $0.1 million and total licensing and milestone revenues of $12.7 million, of which $10 million was attributed to a milestone payment from Abbott Labs for the U.S. FDA acceptance of the DM-1796 new drug application (NDA).
Net income reported during the second quarter was $4.1 million, or 8 cents per diluted share. This was 1 cent higher than our expectations. The company exited June 2010 with approximately $76.9 million in cash and investments.
We view the current cash position as sufficient to fund operations for the foreseeable future, and into profitability should the U.S. FDA approval DM-1796 in January 2011. Approval will trigger an additional milestone payment of $35 to $60 million, along with 14% and 20% royalty on North American sales of DM-1796, and the potential for an additional $300+ million in sales-related milestone from Abbott Labs.
Another Collaboration
Janssen Pharmaceutica N.V., a division of Johnson & Johnson, licensed worldwide rights to Depomed's Acuform gastric retentive drug delivery technology to be used for the non-exclusive development of a fixed-dose combination formulation of canagliflozin, a sodium glucose transport 2 (SGLT2) inhibitor and extended-release metformin (Glumetza). J&J has also been granted a right of reference to the Glumetza NDA and associated data for use in developing the combination product.
Under the terms of the agreement, Depomed will formulate the fixed-dose combination product and J&J will have the commercialization rights. Depomed will receive a $5 million upfront license fee, plus reimbursements for its formulation work on the project and an additional $5 million license fee following completion of Depomed's formulation work -- which we estimate will be completed by the end of the first quarter 2011. Depomed is also eligible for an additional milestones plus a royalty on potential future net sales of the combined product.
The deal is reminiscent of the company’s $10 million agreement with Merck in July 2009, whereby Merck obtained a non-exclusive license to extended release metformin to co-formulate along with its DPP-IV agent, Januvia (sitagliptin). Merck recently stated that they plan to file for approval of its fixed-dose combination sitagliptin + metformin-XR product, Janumet-XR, later this year. Depomed will earn a milestone payment from Merck (not yet disclosed) upon U.S. FDA acceptance of the Janumet-XR NDA.
We note that Depomed is also eligible for royalties on sales of Janumet-XR once approval. Januvia and Janumet posted sales of $1,922 million and $658 million, respectively, in 2009. We expect that once approved, Janumet-XR will quickly cannibalize all of Janumet current sales, thus providing Depomed with a handsome royalty, even if at only a low-single digit rate.
DM-1796 PDUFA Set for Late January 2011
On March 30, 2010, Abbott Labs submitted the new drug application (NDA) on DM-1796 for the management of post-herpetic neuralgia (PHN), or pain after shingles. Assuming a 10-month review cycle, approval of the NDA in late January 2011 will trigger a $35 million milestone payment from Abbott to Depomed, as well as an additional milestone of up to $25 million depending upon how the side effects are reflected in the eventual product label.
Plus, Depomed will collect between 14% and 20% royalty on North American sales of DM-1796 at Abbott Labs, and is eligible to receive another $300+ million in sales or future development milestones on DM-1796.
We believe Abbott is an ideal partner for Depomed. The company is a major force in the pharmaceutical industry and has significant experience in the neurology / pain market. Gabapentin and Lyrica are producing roughly 3 million prescriptions monthly (~35 million yearly). Lyrica has stalled at around 800k prescriptions monthly (~10 million yearly) while generic gabapentin has steadily increased.
Lyrica seems to offer no real advantages over generic gabapentin in terms of efficacy or tolerability profile. Still, the drug posted worldwide sales of $2.8 billion in 2009 thanks to the marketing muscle of Pfizer.
Therefore, given a similar efficacy profile of DM-1796 with Lyrica, with vastly improved safety and tolerability, as well as improved compliance and dosing, we think DM-1796 has the potential to be a sizable share gainer in the PHN market. And, with the marketing muscle of Abbott Labs in North America, DM-1796 has at least $500 million peak sales -- potentially more with an expanded label to include additional indications such as fibromyalgia syndrome or peripheral neuropathy.
BREEZE-3 Ready to Begin Shortly
Over the past several months Depomed management has been in discussion with the U.S. FDA on a special protocol assessment for the phase III BREEZE-3 program with Serada. Management and the FDA last met in late June 2010.
We expect Depomed to receive a final assessment for the BREEZE-3 protocol shortly, and begin enrolling patients here in the third quarter 2010. In the meantime, Depomed has been active in screening patients for the program. In fact, over 200 have been screened already, so we expect a quick enrollment once the program has been initiated.
Management has made a number of significant changes to the design of BREEZE-3 to help mitigate the placebo response seen in BREEZE-1 and -2. We discuss these in detail in our research report.
We expect BREEZE-3 will complete in the third quarter of 2011. We expect data in the fourth quarter 2011. We estimate the total cost will be around $15 million. If all goes well, the company should be able to file for approval with the entire data set from BREEZE-1, -2 and -3, either late 2011 or early 2012. This puts potential U.S. FDA action towards the end of 2012.
Hormone replacement therapy (HRT) is currently the only FDA-approved single-agent therapy for the treatment of menopausal hot flashes. Results from these Women’s Health Initiative (WHI) trials in 2003 caused HRT prescriptions to decline by 60% from 2001 levels. Primary-care physicians and Ob/Gyns have dramatically reduced their use of HRT products during the last decade, and as a result there is a significant void in the market.
Several pharmaceutical and biotechnology companies are working on treatments, but as of yet there are no non-HRT approved single-agent therapy option for the treatment of hot flash in the U.S. Many physicians have been prescribing off-label anti-depressants or herbal / botanical remedies. We believe an FDA approved small molecule, such as Serada, would be a first-line therapy for hot flash.
According to Breastcancer.org, 80% of the women in the U.S. (~35 million) experience hot flashes of some kind as they approach menopause, and for the first year or two after their periods stop. Between 25% and 50% of women continue to have them for many more years. About 40% (14 million) seek medical treatment.
Serada would reach $2 billion in sales if only 20% of these women were to use the drug, assuming pricing consistent with anti-depressants and 7 months of use. Therefore, a significant opportunity exists with Depomed’s drug.
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