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DEPO > SEC Filings for DEPO > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for DEPOMED INC


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

Statements made in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

† the commercial success and market acceptance of Gralise® (gabapentin), our once-daily product for the management of postherpetic neuralgia, Zipsor® (diclofenac potassium) liquid filled capsules, our non-steroidal anti-inflammatory drug for the treatment of mild to moderate pain in adults, and Lazanda® (fentanyl) nasal spray, our product for the management of breakthrough pain in adult, opioid-tolerant cancer patients;

† the commercial success of Glumetza® (metformin hydrochloride extended-release tablets) in the United States, and the efforts of our Glumetza commercial partner, Santarus, Inc. (Santarus);

† the results of our ongoing litigation against filers of Abbreviated New Drug Applications (each, an ANDA) to market generic Gralise in the United States and the filer of an ANDA to market generic Zipsor in the United States;

† the results of our ongoing litigation with the U.S. Food and Drug Administration (FDA) to obtain orphan drug exclusivity for Gralise in the United States;

† the outcome of our ongoing litigation against filers of ANDAs to market generic Glumetza in the United States;

† the outcome of our ongoing litigation against Purdue Pharma L.P. (Purdue) and Endo Pharmaceuticals Inc. (Endo);

† any additional patent infringement or other litigation that may be instituted related to Gralise, Zipsor, Lazanda, Glumetza or any other of our products or product candidates;

† our and our collaborative partners' compliance or non-compliance with legal and regulatory requirements related to the promotion of pharmaceutical products in the United States;

†          our plans to in-license, acquire or co-promote other products;

†          the results of our research and development efforts;

†          submission, acceptance and approval of regulatory filings;

†          our need for, and ability to raise, additional capital; and

†          our collaborative partners' compliance or non-compliance with
obligations under our collaboration agreements.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the "RISK FACTORS" section and elsewhere in this Quarterly Report on Form 10-Q. We disclaim any intent or obligation to update or revise these forward-looking statements to reflect new events or circumstances.

ABOUT DEPOMED

Depomed is a specialty pharmaceutical company initially focused on pain and other conditions and diseases of the central nervous system. The core products of our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, a product for the treatment of mild to moderate acute pain that we acquired in June 2012, and Lazanda® (fentanyl) nasal spray, a product for the management of breakthrough pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain that we acquired in July 2013. We promote Gralise and Zipsor with a field force of 155 full-time sales representatives who are Depomed employees, as well as 29 primarily part-time sales representatives dedicated to the Company and employed by a contract sales organization. We will initially promote Lazanda with a small field force of full-time sales representatives dedicated to the Company and employed by a contract sales organization. We actively seek to expand our product portfolio through in-licensing, acquiring or obtaining co-promotion rights to commercially available products or late-stage product candidates that could be marketed and sold effectively with our existing products through our sales and marketing capability.


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We also have a portfolio of royalty and milestone producing assets based on our proprietary drug delivery technologies. The cornerstone of that portion of our business is Glumetza®, a once-daily treatment for adults with type 2 diabetes that we licensed to, and is currently being commercialized by, Santarus, Inc. (Santarus) in the United States. We have license and development arrangements associated with our Acuform® gastroretentive drug delivery technology with Mallinckrodt Pharmaceuticals (Mallinckrodt), Boehringer Ingelheim International GMBH (Boehringer Ingelheim), Ironwood Pharmaceuticals, Inc. (Ironwood), Merck & Co., Inc. (Merck), Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (Janssen).

As of June 30, 2013, the Company has one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and the Company announced a summary of the results of that trial in November 2012.

Commercialized Products and Product Candidate Development Pipeline

The following table summarizes our and our partners' commercialized products and product candidate development pipeline:

                        Depomed Commercialized Products



Product                      Indication                        Status

Gralise®            Postherpetic neuralgia         Currently sold in the United
                                                   States.
                                                   Launched in October 2011

Zipsor®             Mild to moderate acute pain    Currently sold in the United
                                                   States.
                                                   Acquired by Depomed in
                                                   June 2012

Lazanda®            Breakthrough pain in           Currently sold in the United
                    opioid-tolerant patients 18    States.
                    years of age and older         Acquired by Depomed in
                    already receiving and who      July 2013
                    are tolerant to continuous
                    opioid therapy for
                    underlying persistent cancer
                    pain.

             Partner Commercialized Products and Product Candidates



Product / Product
Candidate                      Indication             Partner            Status

Glumetza®                 Type 2 diabetes        United States        Currently
                                                 rights held by       sold in the
                                                 Santarus; Canadian   United States
                                                 rights held by       and Canada
                                                 Valeant

Janumet® XR               Type 2 diabetes        Merck                License
                                                                      covers sales
                                                                      of
                                                                      Janumet® XR
                                                                      in the United
                                                                      States and
                                                                      certain other
                                                                      countries
                                                                      Currently
                                                                      sold in the
                                                                      United
                                                                      States,
                                                                      foreign
                                                                      regulatory
                                                                      filings in
                                                                      process

NUCYNTA® ER               Moderate to severe     Janssen              License
                          chronic pain;                               covers sales
                          neuropathic pain                            of NUCYNTA®
                          associated with                             ER in the
                          diabetic peripheral                         United
                          neuropathy (DPN)                            States,
                                                                      Canada and
                                                                      Japan
                                                                      Currently
                                                                      sold in the
                                                                      United States
                                                                      and Canada

Canagliflozin/metformin   Type 2 diabetes        Janssen              In
XR combination products                                               development

Boehringer                Type 2 diabetes        Boehringer           In
compounds/metformin XR                           Ingelheim            development
combination products

Acetaminophen/opiate      Pain                   Covidien             NDA for
combination products                                                  MNK-795
                                                                      accepted and
                                                                      granted
                                                                      priority
                                                                      review by FDA
                                                                      in July 2013
                                                                      MNK 155 in
                                                                      Phase 3
                                                                      clinical
                                                                      trials

Undisclosed Ironwood      Gastrointestinal       Ironwood             Early stage
compounds using                                                       development
Acuform® drug delivery
technology

                            Depomed Product Pipeline



Product                      Indication                        Status

DM-1992             Parkinson's disease            Phase 2 study completed in
                                                   September 2012. Top-line
                                                   results of Phase 2 study
                                                   reported in November 2012


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PRODUCT DEVELOPMENTS AND TRANSACTIONS

Gralise (gabapentin) tablets for the Management of Postherpetic Neuralgia

In October 2011, we launched and announced the commercial availability of Gralise. Gralise product sales for the three and six months ended June 30, 2013 were $8.6 million and $14.6 million, respectively. Gralise product sales for the three and six months ended June 30, 2012 were $3.2 million and $5.0 million, respectively.

We promote Gralise through a field sales force of 155 full-time specialty sales representatives who are our employees and 29 contract sales representatives who are employed by Ventiv, our contract sales organization.

Orphan Drug Designation. In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity for Gralise on the basis of FDA's interpretation of the statute and regulations governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or FDA's regulations related to Orphan Drugs. The lawsuit seeks a determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that FDA act accordingly. Briefing in the case was completed in March 2013 and a hearing on our summary judgment motion is scheduled for August 2013. We currently expect a decision by the end of 2013.

Zipsor (diclofenac potassium) liquid-filled capsules for Mild to Moderate Acute Pain

On June 21, 2012, we entered into an Asset Purchase Agreement with Xanodyne Pharmaceuticals, Inc. (Xanodyne), pursuant to which we acquired Xanodyne's product Zipsor and related inventory for $26.4 million in cash, and assumed certain liabilities relating to Zipsor. In addition, the agreement requires a one-time contingent payment to Xanodyne of $2.0 million in cash at the end of the first calendar year in which our net sales of Zipsor products exceed $30.0 million and an additional, one-time contingent payment to Xanodyne of $3.0 million in cash at the end of the first year in which our net sales of Zipsor products exceed $60.0 million. We also purchased Xanodyne's existing inventory and samples of Zipsor for approximately $0.5 million. We assumed responsibility for returns on product previously sold by Xanodyne with a fair value of $1.8 million as of the date of our acquisition of Zipsor. We began commercial sales of Zipsor in June 2012 and currently promote Zipsor through our field sales force. We recognized $5.6 million and $8.6 million in Zipsor revenue for the three and six months ended June 30, 2013.

Ventiv Commercial Services, LLC. In May 2012, we entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), which initially provided for a sales force of 78 part-time sales representatives employed by the Ventiv but dedicated to us. Under the agreement, we paid Ventiv a monthly fixed fee of $0.5 million during the initial term of the agreement, which expired in June 2013. In June 2013, we and Ventiv amended the agreement and reduced the contract sales force to 27 part-time and two full-time sales representatives. Under the terms of the amended agreement, we are required to pay Ventiv a monthly fixed fee of $0.2 million during the term of the agreement, which expires in June 2014.


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Lazanda (fentanyl) nasal spray for the Management of Breakthrough pain in cancer patients, 18 years of age and older, who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain

On July 29, 2013, we entered into an Asset Purchase Agreement with each of Archimedes Pharma US Inc., a Delaware corporation, Archimedes Pharma Ltd., a corporation registered under the laws of England and Wales, and Archimedes Development Ltd., a company registered under the laws of England and Wales (collectively, Archimedes), pursuant to which we acquired Archimedes' product Lazanda and related inventory for $4.0 million in cash, and assumed certain liabilities relating to Lazanda. In addition, the agreement requires the payment of royalties based on our net sales of Lazanda, although in 2013 and 2014, we will not pay royalties to Archimedes and third party royalties assumed by us in connection with the acquisition will be less than 5% of our net sales of Lazanda. Beginning January 2015, we will pay royalties to Archimedes and third parties totaling 13% to 15% of our net sales of Lazanda. In addition, the agreement requires the following one-time, cash contingent payments to Archimedes upon the achievement by our net sales of Lazanda equal to or in excess of the following net sales milestones: (i) $1.0 million at the end of the first calendar year in which net sales of Lazanda products are $20.0 million;
(ii) $2.5 million at the end of the first calendar year in which net sales of Lazanda are $45.0 million; (iii) $5.0 million at the end of the first calendar year in which net sales of Lazanda are $75.0 million; and (iv) $7.5 at the end of the first calendar year in which net sales of Lazanda products are $100.0 million.

Publicis Touchpoint Solutions, Inc. In July 2013 and in connection with our acquisition of Lazanda, we assumed a services agreement previously entered into between Archimedes and Publicis Touchpoint Solutions, Inc. (Publicis) which provides for up to 15 full-time sales representatives employed by Publicis but dedicated to us. Under the agreement, we pay Publicis a monthly fixed fee of approximately $0.3 million during the term of the agreement, which expires in September 2013.

Glumetza for Type 2 Diabetes

Santarus. In August 2011, we entered into a commercialization agreement with Santarus granting Santarus exclusive rights to manufacture and commercialize Glumetza in the United States. The commercialization agreement supersedes the previous promotion agreement between the parties originally entered into in July 2008. Under the commercialization agreement, we granted Santarus exclusive rights to manufacture and commercialize Glumetza in the United States in return for a royalty on Glumetza net sales. We recognized $14.2 million and $27.5 million in royalty revenue for the three and six months ended June 30, 2013, respectively, under the commercialization agreement. We recognized $9.4 million and $18.6 million in royalty revenue for the three and six months ended June 30, 2012, respectively, under the commercialization agreement.

Pursuant to the commercialization agreement, we transitioned to Santarus responsibility for manufacturing, distribution, pharmacovigilance and regulatory affairs. Santarus pays us royalties on net product sales of Glumetza in the United States of 29.5% in 2012; 32.0% in 2013 and 2014; and 34.5% in 2015 and beyond prior to any future generic entry of a Glumetza product. Santarus has the exclusive right to commercialize authorized generic versions of the Glumetza products. In the event of generic entry of a Glumetza product in the territory, the parties will equally share proceeds based on a gross margin split. Santarus has the exclusive right to commercialize authorized generic versions of Glumetza.

In connection with its assumption of distribution and sales responsibility of Glumetza, Santarus purchased our existing inventory of Glumetza and bulk metformin hydrochloride at cost. We are financially responsible for returns of Glumetza distributed by us, up to the amount of our product returns reserve account for Glumetza product returns on the date immediately before Santarus began distributing Glumetza. We are also financially responsible for Glumetza rebates and chargebacks up to the amount of our reserve account for those items on the date immediately before Santarus began distributing Glumetza. Santarus is responsible for all other Glumetza returns, rebates and chargebacks.

Litigation. The settlement and license agreement we entered into with Lupin in February 2012 grants Lupin the right to begin selling a generic version of Glumetza on February 1, 2016, or earlier under certain circumstances. The settlement and license agreement we entered into with Sun in January 2013 grants Sun the right to begin selling a generic version of Glumetza on August 1, 2016, or earlier under certain circumstances. We are involved in patent litigation associated with Glumetza that is described under "Legal Proceedings".

Mallinckrodt

In July 2013, the FDA accepted for filing a NDA from Mallinckrodt for MNK-795. MNK-795 is a controlled-release oral formulation of oxycodone and acetaminophen that has been studied for the management of moderate to severe acute pain where the use of an opioid analgesic is appropriate. MNK-795 is formulated with Depomed's Acuform® drug delivery technology. The NDA acceptance triggers a $5 million milestone payment to Depomed under a license agreement between Depomed and Mallinckrodt payable in the third quarter of 2013. The FDA granted the NDA a priority review, a designation given to drugs that, if approved, offer significant improvements in the safety or effectiveness of the treatment when compared to standard applications.


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Janssen Pharmaceutica N.V.

In August 2010, we entered into a non-exclusive license agreement with Janssen granting Janssen a license to certain patents related to our Acuform drug delivery technology to be used in developing fixed dose combinations of canagliflozin and extended release metformin. We also granted Janssen a right to reference the Glumetza NDA in Janssen's regulatory filings covering the products. In August 2010, Janssen paid us a $5.0 million upfront license fee. In September 2010, we achieved the first development milestone under the agreement related to formulation work, which triggered a $5.0 million milestone payment which we received in October 2010. We remain eligible to receive additional development milestones, as well as royalties on net sales of the products.

In February 2013, we completed a project for Janssen related to this program and recognized $2.2 million in revenue during the first quarter of 2013. We currently do not anticipate any further collaborative revenue for the remainder of 2013 related to this program.

Merck & Co., Inc.

We have received $12.5 million in upfront and milestone payments and will receive very low single digit royalties on Merck's net sales of Janumet XR in the United States and other licensed territories through the expiration of the licensed patents under a July 2009 license agreement with Merck. The non-exclusive license agreement grants Merck a license as well as other rights to certain of our patents directed to metformin extended release technology for Janumet XR, Merck's fixed-dose combination product for type 2 diabetes containing sitagliptin and extended release metformin that was approved by the FDA in January 2012. Merck began selling Janumet XR during the first quarter of 2012.

Boehringer Ingelheim

We have received $12.5 million in upfront and milestone payments and may receive additional development milestones, as well as royalties, pursuant to a March 2011 license and service agreement with Boehringer Ingelheim related to fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the agreement, we granted Boehringer Ingelheim a license to certain patents related to our Acuform drug delivery technology to be used in developing the combination products. Boehringer Ingelheim was also granted a right to reference the New Drug Application covering Glumetza in regulatory submissions for the products.

In March 2012, we received an additional $2.5 million upon delivery of experimental batches of prototype formulations that met agreed-upon specifications. The agreement provides for additional milestone payments based on regulatory filings and approval events, as well as royalties on worldwide net sales of products.

We were responsible for providing certain initial formulation work associated with the fixed dose combination products. Services performed by us under the agreement were reimbursed by Boehringer Ingelheim on an agreed-upon rate, and out-of-pocket expenses were reimbursed. We have completed all formulation work required under the agreement.

Ironwood Pharmaceuticals, Inc.

In July 2011, we entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to our Acuform drug delivery technology for an undisclosed Ironwood early stage development program. In connection with the research collaboration and license agreement, we received an upfront payment of $0.9 million and were reimbursed for initial product formulation work.

In March 2012, we achieved the first milestone under the agreement upon delivery of experimental batches of prototype formulations that met agreed-upon specifications. This triggered a nonrefundable $1.0 million milestone payment which we received in May 2012. We may also receive milestone payments based on achievement of certain development and regulatory milestones, as well as royalties on product sales.

DM-1992 for Parkinson's Disease

In January 2012, we initiated a Phase 2 study to evaluate DM-1992 for the treatment of motor symptoms associated with Parkinson's disease. The trial was a randomized, active-controlled, open-label, crossover study testing DM-1992 dosed twice daily against a generic version of immediate-release carbidopa-levodopa dosed as needed. The trial enrolled 34 patients at 8 U.S. medical centers. The study assessed efficacy, safety and pharmacokinetic variables. The primary endpoint for the study was change in off time as measured by patient self-assessment and clinician assessment.


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Enrollment was completed in July 2012 and the study was completed in September 2012. In November 2012, we reported top-line results of the Phase 2 study, which we continue to evaluate as we consider partnering opportunities for DM-1992 and monitor competitive developments.

SefelsaTM for Menopausal Hot Flashes

In July 2012, we submitted a New Drug Application (NDA) for Sefelsa for the treatment of menopausal hot flashes. In May 2013, the FDA issued a complete response letter (CRL) for Sefelsa. The CRL states that the FDA cannot approve the application in its present form. Based on the letter, we currently do not intend to further invest in the product candidate.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other . . .

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