Depomed A 'Turtle' Gaining In Specialty Pharma Race

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Specialty pharmaceutical companyDepomed ( DEPO ) has been around nearly 20 years. But as CEO James Schoeneck says, it has only just begun to realize its potential.

Of the four drugs in its product portfolio, three were acquired since 2012. The most recent, migraine drug Cambia, was bought in December from Nautilus Neurosciences for $48.7 million.

Cambia may eventually become a runner-up to Depomed's No. 1 drug, Gralise, which treats persistent pain caused by shingles. Gralise uses the firm's proprietary Acuform gastro-retentive drug delivery technology, the reason for its existence in the first place.

Depomed was founded in 1995, driven by its novel drug delivery technology, which helps drugs stay in the stomach longer than usual.

Licensing and milestone payments from drug companies using the technology have comprised a significant share of the company's revenue. Licensing, milestones and other nonproduct revenue accounted for nearly 60% of Depomed's $134.2 million in revenue last year.

Partners And Profit

Two prominent partners using Acuform technology areJohnson & Johnson 's ( JNJ ) Janssen Pharmaceuticals for Nucynta ER andMallinckrodt Pharmaceuticals ( MNK ) for Xartemis XR, both pain drugs.

Nucynta ER is currently on the market and Xartemis XR recently won Food and Drug Administration approval, prompting a $10 million milestone payment. A second pain drug from Mallinckrodt, MNK 155, is in late-stage clinical development. Depomed will get a $5 million milestone payment upon approval of that drug.

Depomed says it will get "high-single-digit royalties" on net sales from the Mallinckrodt products. The company's outlook for 2014 calls for product sales to equal roughly half of the firm's expected $200 million-$215 million in revenue.

The three acquired products in Depomed's commercial portfolio don't use its technology, but all focus on pain and neurology. Shingles-related pain drug Gralise, which does use the technology, will likely continue to lead the pack. It took in $36.2 million last year, more than double 2012's tally.

"Shingles is a large market. We're already at a run rate of $55 (million) to $60 million," Schoeneck told IBD.

Pain medication Zipsor is currently the firm's second-biggest seller. Acquired in June 2012 for $25.9 million, the nonsteroidal anti-inflammatory drug treats acute pain. It generated $20.3 million in sales for Depomed in 2013, up from $9.8 million in 2012.

The other drug, Lazanda, was acquired in July from a European company leaving the U.S. market. Depomed re-launched it in October. The fentanyl nasal spray manages breakthrough pain in cancer patients already taking opioid pain medicines. It works within minutes and quickly leaves the system.

Even Gralise has had a relatively brief shelf life. Depomed launched the drug in October 2011.

Management's earnings per share guidance for 2014 calls for adjusted EPS between break-even and 16 cents. Analysts polled by Thomson Reuters expect another loss. But the 8-cent loss they forecast is half that of 2013, and they predict the company will turn a profit of 51 cents a share next year.

"They're the classic case of the turtle instead of the rabbit," said John Gordon, senior managing director of Deltec Asset Management, which has owned shares in Depomed for several years. "They methodically move along, but they have a very coherent game plan."

Depomed decided six to seven years ago to commercialize its own products. Gralise was one of two products it brought to market using its Acuform technology. The other was Glumetza, a once-daily drug for Type 2 diabetes, licensed to Santarus, which recently was acquired bySalix Pharmaceuticals ( SLXP ) .

But in October, Depomed sold its interest in Type 2 diabetes therapies toPDL BioPharma ( PDLI ) for $240.5 million because, Schoeneck said, "it wasn't in our core area."

As part of the complicated transaction, Depomed recognized $18.1 million of noncash revenue in the fourth quarter of 2013 and $4.5 million in noncash interest. More noncash revenue will be recognized in subsequent quarters.

While milestones and royalties will continue to be major contributors in the future, they'll be a smaller part of the pie this year, due chiefly to the loss of royalties from diabetes drug Glumetza, which brought in $45 million last year.

Pipeline Strategy

Schoeneck takes the Glumetza loss in stride, since it's part of the company's tighter focus on pain and neurology. And the October sale gives the company more firepower to make acquisitions.

"We finished last year with $276 million in cash and no debt," Schoeneck said. "We're set to make more acquisitions in pain and neurology." He says timing is "tough to predict."

If its acquisitions so far are any indication, Depomed will be looking for bargains.

"They have been shockingly inexpensive," Gordon said of the acquisitions. Depomed paid just $4 million for Lazanda, which had annual sales of $3.5 million at the time.

"We're very excited about (Lazanda)," Schoeneck said, adding "we were able to get an attractive price."

Gralise still holds just a tiny share of the market for treating post herpetic neuralgia, or pain that can last months or years after a shingles viral infection. Some 50 million prescriptions are written yearly for sufferers, mostly patients over 60. Generics are about 80% of the market.Pfizer 's (PFE) Lyrica is the top brand-name drug used to treat the pain .

Since patients take Depomed's extended-release Gralise once a day instead of the two or three times typical for other drugs, they have fewer side effects, such as dizziness or daytime sleepiness, Schoeneck says. Depomed expects to keep logging higher sales as physicians become better aware of the drug's benefits.

"We've got 165 salespeople selling the drug, targeting pain specialists and neurologists," he said.

Gordon says the sales force can easily talk up Zipsor while they're selling physicians on Gralise.

Depomed's four in-house drugs have lengthy periods of commercial exclusivity, Schoeneck says.

Gralise has nine patents, the first expiring in 2016 but five lasting until between 2022 and 2024. Three challenges from generic drug companies remain, but Schoeneck says he's confident of winning them because of the "breadth and depth" of patents.

Cambia has exclusivity until early 2023, while Zipsor has protections reaching from 2019 to 2029. Lazanda is good until 2024 at the earliest.

"Depomed has a growing product suite, its own sales force and a lot of cash," said Jason Napodano, senior biotech analyst with Zacks Investment Research. "It has the makings of a nice, steady, small specialty pharmaceutical company."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: DEPO , JNJ , MNK , SLXP , PDLI

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