DepoMed: Protected by Cash and Headed Higher by: Three Brothers Health June 24, 2009
DepoMed’s (DEPO) two Phase III trials for vasomotor symptoms ("hot flashes") ended in March 2009 and April 2009. The neuropathic pain trial ("PHN") was completed in May 2009. The results for all three trials will be released in late September or early October 2009.
Neuropathic pain and vasomotor symptoms, represent huge respective markets. Sales for Neurontin and Lyrica for neuropathic pain and fibromyalgia are projected above $2 billion in 2009. Current
estimates presume a hot flash market of above $3 billion. The hot flash market, compromised mainly of hormones, collapsed in 2003 due to the Women's Health Initiative ("WHI"), which demonstrated egregious adverse events associated with the incumbent therapy: Hormone Replacement Therapy.
Before the WHI, yearly sales for hormones for the treatment of hot flashes were approaching $2 billion. Currently, SSRIs and other anti-depressants are being used off-label to treat hot flashes. This presents a huge opportunity for non-hormonal, non-antidepressant therapies, such as DepoMed’s Serada, if approved.
The phase III trial for PHN has been re-formulated with two treatment arms, and increased statistical power. Assuming similar results of the previous trial, this current trial will achieve statistical significance. The previous PHN trial failed due to poor trial design and an unusually high placebo effect. The two Phase III trials for hot flashes are very promising. A recent meta-analysis in JAMA showed clear statistical significance for Gabapentin use for hotflashes. Several reports from the University of Rochester, confirm the efficacy as well.
To boot, the side effects profile for both drugs (PHN and "hot flashes") are stellar, especially compared to incumbent therapies (Lyrica & Premarin/SSRIs). Plus, recent competitors' trials have failed or are being retested for safety and efficacy (Wyeth-Pristiq, Xenoport-Solzira, etc.)
Cash burn is about 7 million per quarter. They have a healthy 100 million dollar cash position, which could last them about three years, assuming complete failure.
Plus, there are two mid-stage, well-differentiated products that management has indicated they will partner in the near-term. One product is an extended release LevaDopa/Carbidopa, which has received grants from the Michael J. Fox Foundation. The other product is a pulsatile version of Nexium, which will treat Nocturnal Acid Breakthrough. According to management these two products will most likely be partnered by Q1 2010, or the next 6-9 months, depending on ongoing partnership talks, trial results and manufacturing design.
Risk/reward is in favor of purchasing at these levels, as the stock is protected by cash, and several near-term events (with their resepctive milestone payments) could potentially push the price higher.
There are risks: placebo effect for both vasomotor symptoms and neuropathic pain tend to be high, and could lead to trial failure, plus any potentially harmful news about gabapentin could seriously harm DepoMed's near-term pipeline. This stock is NOT for risk averse investors. Disclosure: Author holds a long position in DepoMed. http://seekingalpha.com/article/145054-depomed-protected-by-cash-and-headed-higher
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