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Depomed (DEPO): Reports another solid quarter, changes made in 2013 makes DEPO quite attractive
Depomed (DEPO), which has been a nice mover since being added to our EG rankings on December 23 at $10.15 (+44%, including move in pre-mkt), is trading about 8% higher after reporting Q4 results last night and guiding higher for 2014. We wanted to use this opportunity to provide some color on the earnings report and to update the story generally.
Depomed Transformation
We profiled DEPO on December 19, so we encourage you to read that for more in-depth info on DEPO. But the quick version is that Depomed is a specialty pharma company that commercializes products for pain and neurology. Products include: 1) Gralise, a once-daily treatment approved for the management of postherpetic neuralgia, 2) Zipsor, which is a liquid filled capsule that is a non-steroidal anti-inflammatory drug (NSAID) indicated for relief of acute pain in adults, 3) Lazanda, an intranasal fentanyl drug used to manage breakthrough pain in people who are already taking other opioid pain medicines around-the-clock for cancer pain and 4) they recently added a fourth product in December 2013: Cambia, an NSAID for migraine attacks.
DEPO has been undergoing quite a bit of change over the last couple of years. In October 2013, it sold its royalty and milestone interest in its type 2 diabetes portfolio to PDL BioPharma (PDLI), including Glumetza, for $240.5 million. Also, DEPO has been active on the M&A front. They have now acquired three pain products in just the past 18 months (Zipsor, then Lazanda in July 2013 and Cambia in Dec 2013). They clearly want to focus on pain and neurology as they see a lot of cross-selling opportunities in these areas.
Q4 Results and Guidance
The sale of Glumetza to PDLI has resulted in some pretty hairy results. As a result of ongoing supply order obligations, Depomed is accounting for this transaction under the debt accounting method. Although the royalty and milestone payments were sold to PDLI, debt accounting requires the co to continue to recognize the underlying royalties and milestones as revenue and record the proceeds of $240.5 million as a liability. As royalties and milestones are received by PDLI, DEPO's liability is reduced and non-cash implied interest expense is recognized. In Q4, Depomed recognized $18.1 million of non-cash revenues and $4.5 million in non-cash interest expense related to this arrangement.
As such, the Q4 results are a bit difficult to interpret as Q4 GAAP EPS came in at $0.72 and this this does not seem to compare to the consensus estimate of $(0.20). But this includes the PDLI revenue. Probably the analysts are as confused as everybody else and DEPO's decision to use the debt accounting method may not have been known to analysts. This was the first quarter with the new accounting method. We suspect that they will get a better handle on what to expect starting in Q1.
Aside from the hairy Q4 results, we think the more important thing to focus on is the guidance. DEPO is guiding to FY14 non-GAAP EPS of $0.00-0.16. This was well above consensus of $(0.29). They are also guiding to 2014 product revenue of $115-125 mln and total revenue of $200-215 mln (includes PDLI). Consensus was $129.7 mln.
Product Updates
DEPO had already provided Q4 revenue by product in late February. However, on the call, management provided some helpful updates on their key products. Starting with Gralise, DEPO's largest revenue generator, management noted that its market opportunity is large and growing. As of year-end 2013, its annual revenue run rate was more than $50 million and that was prior to DEPO's recent price increase. DEPO continues to focus on managed care, especially Medicare Part D and the company expects the addition of new managed care coverage during this year.
Further strengthening the value of Gralise was the favorable Markman claim construction hearing in January 2014 in DEPO's litigation against three companies that have filed to market generic versions of Gralise. The ruling either adopted DEPO's proposed claim construction or the plain meaning of the term in 23 of the 24 disputed terms. DEPO continues to believe that its strong IP protection will provide long-term market exclusivity for Gralise.
They also provided an important update on Cambia which was acquired in December 2013. DEPO relaunched the drug in only six weeks with full sales force efforts starting in February. DEPO has already implemented a 26% price increase. As the only single agent drug in its class approved for the treatment of acute migraine, Depomed believes it can grow sales of Cambia significantly. Given the great overlap Cambia has with Gralise, many of the physicians who write Cambia scrips also write Gralise prescriptions. On the other hand, with the very limited nature of the overlap with Zipsor, Cambia represents an "outstanding opportunity" to grow DEPO's business in the neurology community.
With respect to its other two products, DEPO sees Zipsor as an important product as it extends the company's franchise as a pain specialist. That product now has a $25 mln annual run rate. Finally, with Lazanda (acquired in July 2013), DEPO relaunched the drug in late October with its new Signature Support Program designed to improve patient access. Elements of the program include benefit verifications and prior authorization facilitation, reimbursement assistance with co-pay support, a 1-800 reimbursement support hotline and prescription reminders.
Conclusion
In sum, 2013 was a transformational year for Depomed. It executed a series of transactions that has cemented DEPO's position in pain and neurology. DEPO now has four marketed products with lengthy periods of commercial exclusivity and the company has about $275 mln in cash on the balance sheet, or $4.74 per share. In short, DEPO more than doubled its direct product revenue and tripled its cash position compared to year end 2012.
We think DEPO is a name to keep on the radar as they now have four attractive drugs in their portfolio in pain/neurology. While some pharma names understandably prefer more product diversity, DEPO is going the other way and going all in on pain management. The rationale behind focusing on one area is that the company already has established accounts with doctors who treat pain and they can now leverage that position to cross-sell new drugs into those accounts. They made this point with their recent acquisition, Cambia. Its sales are fairly small now but DEPO thinks it can greatly boost sales by leveraging its existing accounts.
Overall, we continue to think there is good potential with DEPO. The name is a bit under the radar for many investors but the changes made by DEPO in 2013 should start to garner more attention this year.
--Robert Reid, Briefing.com |
