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, and Zipsor (diclofenac potassium) liquid filled capsules, our NSAID
for the treatment of mild to moderate pain in adults;
? 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;
? the outcome of our ongoing litigation against filers of ANDAs to
market generic Glumetza in the United States;
? any additional patent infringement or other litigation that may be
instituted related to Gralise, Zipsor, 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 commercial success and market acceptance of Serada if we receive
approval to market Serada in the United States;
? the results and timing of our clinical trials;
? 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; and
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 centerpieces of
our specialty pharmaceutical business are Gralise (gabapentin), a once-daily
product for the management of postherpetic neuralgia that we launched and made
commercially available in October 2011, and Zipsor (diclofenac potassium) liquid
filled capsules, a product for the treatment of mild to moderate acute pain that
we acquired from Xanodyne in June 2012. 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 in the United States. We have a number of other
license and development arrangements associated with our Acuform gastroretentive
drug delivery technology. In addition, we have two product candidates in
clinical development. We submitted a New Drug Application (NDA) in July 2012 for
Serada for the treatment of menopausal hot flashes. DM-1992 is currently in
Phase 2 trials for Parkinson's disease.
We are seeking to develop and commercialize a number of pharmaceutical products
for pain and other conditions and diseases of the central nervous system that
can be promoted together effectively. We are actively seeking 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 through our existing sales and marketing capability.
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We also seek to realize value from our drug delivery technology and related
intellectual property through licensing and collaborative development
partnerships with other companies. Our license agreement with Santarus which we
restructured in August 2011, our license and development arrangements with
Covidien, Janssen Pharmaceutica N.V. (Janssen), Boehringer Ingelheim
International GMBH (Boehringer Ingelheim), and Ironwood Pharmaceuticals, Inc.
(Ironwood) and our license agreement with Merck & Co., Inc. (Merck) are examples
of this element of our strategy.
The following table summarizes our marketed products and product pipeline.
Commercialized Products
Product Indication Status
Gralise Postherpetic neuralgia Currently sold in the United States.
Approved by the FDA in January 2011.
Launched in October 2011.
Zipsor Mild to moderate acute pain Currently sold in the United States.
Approved by the FDA in June 2009.
Acquired from Xanodyne in June 2012.
Glumetza Type 2 diabetes Currently sold in the United States and
Canada.
United States rights held by Santarus.
Canadian rights held by Valeant.
Product Pipeline
Product Indication Status
Serada Menopausal hot flashes NDA filed in July 2012. Three Phase
3 studies completed (Breeze 1,
Breeze 2, and Breeze 3).
DM-1992 Parkinson's disease Phase 2 study commenced in
January 2012.
Significant Developments and Highlights for the Quarter Ended June 30, 2012
? In April 2012, we announced our intention to file an NDA for Serada
for the treatment of menopausal hot flashes and. The NDA was submitted to the
FDA in July 2012.
? In May 2012, we received a $1.0 million payment as a result of our
achievement of the first milestone under our agreement with Ironwood related to
delivery of experimental batches of prototype formulations that meet agreed upon
specifications.
? In June 2012, we acquired all rights to Zipsor from Xanodyne in
exchange for $25.9 million in cash and the assumption of certain liabilities. In
addition we paid $0.5 million to acquire Zipsor inventory. We began selling
Zipsor in June 2012.
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, 2012
were $3.2 million and $5.0 million, respectively.
Ventiv Commercial Services, LLC. In June 2011, we entered into a service
agreement with Ventiv Commercial Services, LLC (Ventiv), pursuant to which
Ventiv's outsourced sales business, inVentiv Selling Solutions, provides us with
sales force recruiting, training, deployment and ongoing operational support to
promote Gralise. The agreement provides for a sales force of 164 full-time sales
representatives dedicated to the Company, all of whom are employees of Ventiv.
The sales representatives were hired in September 2011, began promoting Gralise
to physicians in October 2011 and began promoting Zipsor to physicians in
June 2012. Members of sales management are our employees.
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Under the terms of the agreement, we incurred an upfront implementation fee, and
we pay fixed monthly management fees. The monthly management fee is subject to
adjustment for actual staffing levels. A portion of the monthly management fee
is payable only on Ventiv's achievement of specified performance objectives. We
also pay certain pass-through costs of Ventiv. In June 2012, we exercised an
early termination clause under the agreement to end the agreement in
September 2012 in conjunction with converting the sales representatives to
Depomed employees.
In May 2012, we entered into an additional service agreement with Ventiv, which
provides for 78 part-time sales representatives dedicated to the Company, all of
whom are employees of Ventiv. Under the terms of the agreement, we incurred an
upfront implementation fee, and we pay fixed monthly management fees. The
monthly management fee is subject to adjustment for actual staffing levels.
The
initial term of the agreement is for one year, with the option to extend the
agreement for a longer period.
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,
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 purchase. We
began commercial sales of Zipsor in June 2012.
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.
Pursuant to the commercialization agreement, we transitioned to Santarus
responsibility for manufacturing, distribution, pharmacovigilance and regulatory
affairs. We ceased shipments of Glumetza in August 2011, and Santarus began
selling Glumetza in September 2011. Santarus is responsible for advertising and
promotional marketing activities for Glumetza. In November 2011, we and Santarus
entered into an assignment and assumption agreement pursuant to which Santarus
assumed all of our rights and obligations under our commercial manufacturing
agreement with Patheon, which provides that Patheon will serve as Santarus' sole
commercial supplier of the 500mg Glumetza in the United States. 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 generic
entry of a Glumetza product.
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 will be 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 will also be financially responsible for
Glumetza rebates and chargebacks up to the amount of our reserve account for
those items. Santarus will be responsible for all other Glumetza returns,
rebates and chargebacks.
Under the commercialization agreement, we will continue to manage the ongoing
patent infringement lawsuit against Sun Pharmaceutical Industries, Inc. (Sun),
subject to certain consent rights in favor of Santarus, including with regard to
any proposed settlements. Santarus will reimburse us for 70% of our
out-of-pocket costs, and we will reimburse Santarus for 30% of its out-of-pocket
costs related to these two infringement cases. We were also responsible for
managing the patent infringement lawsuit with Lupin Limited (Lupin), which was
settled in February 2012.
During 2011, we sold Glumetza for the first eight months of the year, recognized
Glumetza product sales and paid Santarus a promotion fee equal to 75% of
Glumetza gross margin. In August 2011, the distribution and sales responsibility
transitioned to Santarus and Santarus started paying us a royalty on net sales
of Glumetza. For the three and six months ended June 30, 2011, the Company
recognized $11.1 million and $21.3 million, respectively, in promotion fee
expense to Santarus related to sales of Glumetza by Depomed.
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.
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Litigation.
We are involved in patent litigation associated with Glumetza against Sun and
Watson, as described below under "Legal Proceedings". In February 2012, we and
Santarus entered into a settlement and license agreement with Lupin to resolve
patent litigation involving Glumetza. The agreement grants Lupin the right to
begin selling a generic version of Glumetza on February 1, 2016, or earlier
under certain circumstances.
Serada for Menopausal Hot Flashes
Serada is our proprietary extended release formulation of gabapentin in
development for the treatment of menopausal hot flashes. We have completed three
Phase 3 clinical trials evaluating Serada for menopausal hot flashes.
Study Design. Breeze 3 was a randomized, double-blind, placebo-controlled study
of 600 patients. Patients were randomized into one of two treatment arms, with
patients receiving either placebo or a total dose of 1800mg of Serada dosed
600mg in the morning and 1200mg in the evening. The co-primary efficacy
endpoints in the study were reductions in the mean frequency of
moderate-to-severe hot flashes, and the average severity of hot flashes,
measured after four and 12 weeks of stable treatment. As in the prior Breeze 1
trial, the treatment duration of the study was 24 weeks, to address the FDA's
view that an effective drug should also show statistically significant
persistence of efficacy at 24 weeks. The trial also included a responder
analysis to assess the clinical meaningfulness of any reduction in the frequency
of hot flashes in the active arm relative to the placebo arm.
In August 2010, we reached agreement with the FDA regarding a Special Protocol
Assessment (SPA) on the design and analysis of Breeze 3. An SPA is an agreement
with the FDA that a proposed trial protocol design, clinical endpoints and
statistical analyses are acceptable to support a product candidate's regulatory
approval. We began enrollment in Breeze 3 in August 2010 and completed
enrollment in March 2011.
Study Results. Under the statistical analyses set forth in the SPA, certain
primary endpoints did not meet statistical significance. The primary severity
endpoints were achieved with statistical significance at four weeks (p < 0.001)
and 12 weeks (p < 0.01). The frequency endpoint at four weeks was achieved with
statistical significance (p < 0.001). The frequency endpoint at 12 weeks, as
well as the key secondary frequency and severity endpoints at 24 weeks, were not
met.
Serada was generally well tolerated in Breeze 3. The most common adverse events
were dizziness and somnolence. The incidence of dizziness in the active arm was
12.7% compared to 3.4% for the placebo arm. Somnolence was 6.0% in the active
arm compared to 2.7% in the placebo arm. Withdrawals due to adverse events in
the active arm were 17%, compared to 12% in the placebo arm.
In April 2012, we completed a Type B Pre-NDA meeting with the FDA to discuss the
results of our three completed Phase 3 clinical trials for Serada. Based on the
results of that meeting, we submitted a New Drug Application with the FDA in
July 2012. However, we cannot be certain that the FDA will determine the product
candidate is sufficiently safe and effective to allow a New Drug Application to
be accepted for review and/or approved.
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 & Co., Inc.
(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
In March 2011, we entered into a license and service agreement with Boehringer
Ingelheim granting Boehringer Ingelheim a license to certain patents related our
Acuform drug delivery technology to be used in developing fixed dose
combinations of extended release metformin and proprietary Boehringer Ingelheim
compounds in development for type 2 diabetes.
In connection with the license and service agreement, we received the upfront
license payment of $10.0 million less applicable withholding taxes of
approximately $1.5 million, for a net receipt of approximately $8.5 million in
April 2011. We received the remaining $1.5 million of taxes previously withheld
directly from German tax authorities in June 2011.
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In March 2012, we received an additional $2.5 million upon delivery of
experimental batches of prototype formulations that met agreed-upon
specifications, and we may receive 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. All formulation work required by
Depomed has been completed.
Ironwood Pharmaceuticals, Inc.
In July 2011, we entered into a collaboration and license agreement with
Ironwood Pharmaceuticals, Inc. (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.
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.
Under the agreement, we are responsible for assisting with initial product
formulation and Ironwood is responsible for all development and
commercialization of the product. The initial formulation work we perform is
reimbursed by Ironwood on an agreed-upon FTE rate per hour plus out-of-pocket
expenses.
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
enrolled 34 patients at 8 U.S. centers and enrollment was completed in
July 2012. The trial is 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 study will assess
efficacy, safety and pharmacokinetic variables. The primary endpoint for the
study is change in off time as measured by patient self-assessment and clinician
assessment.
In September 2010, we initiated a second pharmacokinetic-pharmacodynamic Phase 1
study for the DM-1992 program. We completed the study in February 2011. The
trial was a randomized, open-label crossover study that enrolled 16 patients
with stable Parkinson's disease at two leading neurology centers in Russia. The
objective of the study was to compare the pharmacokinetics-pharmacodynamics of
two distinct twice-daily formulations of DM-1992 and a generic version of
Sinemet CR sustained release carbidopa-levodopa dosed three-times daily, as well
as the safety and tolerability of the formulations. Patients in the trial
received a full day's dose of each of the three treatments being studied, two
doses of each DM-1992 formulation (460mg levodopa and 150mg carbidopa per dose)
twelve hours apart, and three doses of generic levodopa-carbidopa over a 12 hour
period (200mg of levodopa and 50mg of carbidopa per dose). During the 2 hour
period following administration of each treatment, blood samples were drawn and
a standard finger tapping test was given to assess efficacy. In the study, both
formulations of DM-1992 maintained therapeutic blood levels above the
efficacious threshold of 300 ng/mL for 24 hours. DM-1992 was well tolerated in
the study.
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
assumptions had been made. We consider certain accounting policies related to
revenue recognition, accrued liabilities and stock-based compensation to be
critical policies. There have been no changes to our critical accounting
policies since we filed our 2011 Annual Report on Form 10-K with the Securities
and Exchange Commission on March 8, 2012. For a description of our critical
accounting policies, please refer to our 2011 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations in 2012 will differ significantly from our reported
results for 2011. For example, in 2011 we recognized $48 million in milestone
revenue and a $40 million gain on settlement with regard to termination of our
agreement with Abbott relating to Gralise. These were one-time payments and will
not recur in 2012. In 2011, we reflect eight months of Glumetza product revenue,
cost of sales and corresponding promotion expense to Santarus and four months of
Glumetza royalty revenue from Santarus. As a result of the restructuring of our
agreement with Santarus in August 2011, we will recognize royalty revenue from
Santarus in
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2012, but no product revenue or promotion expense for Glumetza. In 2011, we
recognized $0.5 million of revenue from sales of Gralise and a partial year of
corresponding sales and marketing expense. We expect to recognize a full year of
Gralise sales in 2012 and to incur a full year of sales and marketing expense in
2012. Accordingly, we expect Gralise product sales and selling, general and
administrative expense to be substantially higher in 2012 than in 2011. In
addition, we acquired Zipsor in June 2012 and a small amount of Zipsor revenue
and expense is reflected in our results of operations for the quarter ended
June 30, 2012.
Three and Six Months Ended June 30, 2012 and 2011
Revenue
Total revenues are summarized in the following table (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Product sales:
Gralise $ 3,201 $ - $ 4,950 $ -
Glumetza - 16,153 - 31,452
Proquin XR - - 360 12
Total product sales 3,201 16,153 5,310 31,464
Royalties:
Santarus 9,424 - 18,646 -
Others 153 67 352 232
Total royalty revenue 9,577 67 18,998 232
License and Other
revenue:
Gralise - - - 60,592
Glumetza 1,387 626 2,775 4,261
Boehringer Ingelheim - 4,372 2,617 5,466
Janssen - - - 2,250
Other (55 ) - 1,245 54
Total license and other
revenue: 1,332 4,998 6,637 72,623
Total revenues $ 14,110 $ 21,218 $ 30,945 $ 104,319
Product sales
Gralise. In October 2011, we announced the commercial availability of Gralise
and began distributing Gralise to wholesalers and retail pharmacies. We defer
recognition of revenue on product shipments of Gralise until the right of return
no longer exists, which occurs at the earlier of (a) the time Gralise units are
dispensed through patient prescriptions or (b) expiration of the right of
return. At June 30, 2012, we have a deferred revenue balance, which is
classified as a liability on the balance sheet, of $4.5 million associated with
the deferral of revenue on Gralise product shipments, which is net of estimated
wholesaler fees, retail pharmacy discounts, stocking allowances and prompt
payment discounts. We will recognize revenue upon the earlier of prescription
units dispensed or expiration of the right of return until we can reliably
estimate product returns, at which time we will record a one-time increase in
net revenue related to the recognition of revenue previously deferred. We
expect Gralise product sales and prescriptions to increase in the second half of
2012.
Glumetza. In August 2011, we restructured our agreement with Santarus and
entered into a commercialization agreement that superseded the July 2008
promotion agreement. 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 ceased shipments of Glumetza
in August 2011, and Santarus began selling Glumetza in September 2011.
Proquin XR. We ceased shipments of Proquin XR in the fourth quarter of 2010 and
because of estimated significant levels of inventory at wholesalers and
pharmacies in comparison to prescription demand, we deferred revenue recognition
on product shipments of Proquin XR until the right of return no longer existed,
which occurred at the earlier of the time Proquin XR units were dispensed
through patient prescriptions or expiration of the right of return. At
March 31, 2012, all rights of return expired and the remaining deferred revenue
balance for Proquin XR was recognized as revenue during the first quarter of
2012.
Zipsor. On June 21, 2012, we acquired Zipsor from Xanodyne. Product sales for
the period between the acquisition date and June 30, 2012 were immaterial. We
expect Zipsor revenues to increase substantially during the remainder of 2012.
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Royalties
Santarus. Santarus royalties relate to royalties we received from Santarus based
on net sales of Glumetza in the U.S. Royalty revenue from Santarus for the three
and six months ended June 30, 2012 was $9.4 million and $18.6 million and
represents a 29.5% royalty on Santarus' net sales of Glumetza. There were no
royalty revenue amounts from Santarus for the same period in the prior year. We
currently expect royalty revenue to increase in future periods in 2012 based on
our expectation of increasing net sales of Glumetza by Santarus.
Other Royalties. In January 2012, Merck received FDA approval to market Janumet
XR in the United States, and Merck began selling Janumet XR during the first
quarter of 2012. We currently receive very low single digit royalties on net
product sales of Janumet XR. As such, we began recognizing royalty revenue in
the first quarter of 2012. Other royalties also include royalties we received
from Valeant on net sales of Glumetza in Canada and from LG Life Sciences on net
sales of LG's version of Glumetza, Novamet GR, in Korea.
License and other revenue
Gralise. In January 2011, Abbott Products received FDA approval of Gralise for
the management of postherpetic neuralgia, which triggered a $48.0 million
development milestone from Abbott to us, which we received in February 2011.
Because the milestone was substantive in nature, achieved and based on past
performance, the entire $48.0 million was recognized as license revenue in the
first quarter of 2011.
Pursuant to the exclusive license agreement originally entered into in
November 2008, Solvay paid us a $25.0 million upfront fee in February 2009. The
upfront payment received was originally scheduled to be recognized as revenue
ratably until January 2013, which represented the estimated length of time our
development and supply obligations existed under the agreement. In connection
with the termination of the license agreement with Abbott Products, we no longer
have continuing obligations to Abbott Products. Accordingly, all remaining
deferred revenue related to the $25.0 million upfront license fee previously
received from Abbott Products was fully recognized as revenue in March 2011,
resulting in immediate recognition of approximately $11.3 million of license
revenue.
Glumetza. Glumetza license revenue for the three and six months ended June 30,
2012 and 2011 also consisted of license revenue recognized from the $25.0
million upfront license fee received from Biovail in July 2005 and the $12.0
million upfront fee received from Santarus in July 2008.
We are recognizing the $25.0 million upfront license fee payment from Biovail as
revenue ratably until October 2021, which represents the estimated length of
time our obligations exist under the arrangement related to royalties we are
obligated to pay Biovail on net sales of Glumetza in the United States and for
our obligation to use Biovail as our sole supplier of the 1000mg Glumetza.
Pursuant to the promotion agreement originally entered into in July 2008,
Santarus paid us a $12.0 million upfront fee. The upfront payment received was
originally being amortized as revenue ratably until October 2021, which
represented the estimated length of time our obligations existed under the
promotion agreement related to manufacturing Glumetza and paying Santarus
promotion fees on gross margin of Glumetza. The commercialization agreement in
August 2011 superseded the promotion agreement and removed our manufacturing and
promotion fee obligations. The commercialization agreement includes obligations
with respect to manufacturing and regulatory transition to Santarus and managing
the patent infringement lawsuits against Sun and Lupin. These obligations are
estimated to be completed in December 2013. Accordingly, on the effective date
of the commercialization agreement, the amortization period related to remaining
deferred revenue on the $12.0 million upfront fee has been adjusted, and the
remaining deferred revenue will be recognized ratably until December 2013. We
recognized approximately $1.0 million and $2.0 million of revenue associated
with this upfront license fee during the three and six months ended June 30,
2012, respectively. We recognized approximately $0.2 million and $0.5 million of
revenue associated with this upfront license fee during the three and six months
ended June 30, 2011, respectively. The remaining deferred revenue balance is
$5.8 million at June 30, 2012.
In January 2011, we achieved the first sales milestone under the promotion
agreement with Santarus related to net sales of Glumetza reaching $50.0 million
for the 13 month period ending January 31, 2011, which triggered a milestone
payment of $3.0 million, which we received in March 2011. As the milestone was
achieved and related to past performance the entire $3.0 million was recognized
as milestone revenue in the first quarter of 2011.
Boehringer Ingelheim. Under our license and services agreement with Boehringer
Ingelheim entered into in March 2011, Boehringer Ingelheim paid us a $10.0
million upfront license fee which we received in April 2011, less applicable
withholding taxes of approximately $1.5 million, for a net receipt of
approximately $8.5 million. We received the remaining $1.5 million of taxes
previously withheld directly from German tax authorities in June 2011.
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The $10.0 million was amortized ratably through November 2011, which was the
estimated length of time we were obligated to perform formulation work under the
agreements. As such the entire amount was recognized as license revenue in 2011.
We recognized approximately $3.9 million and $4.9 million of revenue associated
with this upfront license fee for the three and six months ended June 30, 2011.
Under the terms of the agreement, we received an additional nonrefundable $2.5
million payment in March 2012 upon delivery of experimental batches of prototype
formulations that meet required specifications. As the milestone event was
substantive in nature, achievement was not reasonably assured at the inception
of the agreement and the milestone was related to past performance, we
recognized the entire amount of this payment as revenue during the first quarter
of 2012.
We also provided certain initial formulation work associated with the fixed dose
combination products. Work performed by us under the service agreement was
reimbursed by Boehringer Ingelheim on an agreed-upon FTE rate per hour plus
out-of-pocket expenses. We recognized approximately $0.1 million of revenue
associated with the reimbursement of formulation work under the service
agreement during the three and six months ended June 30, 2012. We recognized
approximately $0.5 million and $0.6 million of revenue associated with the
reimbursement of formulation work under the service agreement during the three
and six months ended June 30, 2011, respectively.
Janssen. 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. Janssen paid us a $5.0 million
upfront license fee associated with the license agreement. The $5.0 million was
amortized ratably through March 2011, which is the estimated length of time we
were obligated to perform formulation work under the agreements. We recognized
approximately $1.9 million of revenue associated with this upfront license fee
during the first quarter of 2011.
We also entered into a service agreement with Janssen under which we provide
formulation work for Janssen and are reimbursed by Janssen on an agreed-upon FTE
rate per hour plus out-of-pocket expenses. We recognized approximately $0.3
million of revenue associated with the reimbursement of formulation work under
the service agreement during the first quarter of 2011.
All formulation work under the agreement was completed at March 31, 2011 and
there is no remaining deferred revenue.
Ironwood Pharmaceuticals, Inc. In July 2011, we entered into a collaboration and
license agreement with Ironwood granting Ironwood a license for worldwide rights
to the Company's Acuform drug delivery technology for an undisclosed Ironwood
early stage development program. In connection with the research collaboration
and license agreement, the Company received an upfront payment of $0.9 million
which was amortized ratably through June 2012, which is the estimated length of
time Depomed is obligated to perform formulation work under the agreement. We
recognized approximately $0.2 million and $0.5 million of revenue associated
with this upfront license fee for the three and six months ended June 30, 2012.
There is no remaining deferred revenue related to this upfront payment at
June 30, 2012.
In March 2012, we achieved a milestone under the agreement with respect to
delivery of experimental batches of prototype formulations that meet required
specifications. The associated $1.0 million milestone payment is nonrefundable
and was received in May 2012. As the nonrefundable milestone was substantive in
nature, achievement of the milestone was not reasonably assured at the inception
of the agreement, the milestone was related to past performance, and the
collectability of the milestone is reasonably assured, we recognized the
$1.0 million as revenue during the first quarter of 2012.
Under the terms of the agreement, the Company will assist with initial product
formulation and Ironwood will be responsible for all development and
commercialization of the product. The initial formulation work performed by the
Company under the agreement will be reimbursed by Ironwood on an agreed-upon FTE
rate per hour plus out-of-pocket expenses. We recognized approximately $0.1
million of revenue associated with the reimbursement of formulation work under
the agreement during the three and six months ended June 30, 2012.
Cost of Sales
Cost of sales consists of costs of the active pharmaceutical ingredient,
contract manufacturing and packaging costs, inventory write-downs, product
quality testing, internal employee costs related to the manufacturing process,
distribution costs and shipping costs related to our product sales of Gralise,
Glumetza, Zipsor and Proquin XR. Total cost of sales for the three and six
months ended June 30, 2012, as compared to the prior year, was as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Cost of sales $ 1,442 $ 2,140 $ 1,960 $ 3,775
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Cost of sales for the three and six months ended June 30, 2012 primarily relates
to Gralise and includes a $0.7 million charge related to slow-moving Gralise
starter pack inventory that is not expected to be sold prior to expiry. Cost of
sales for the three and six months ended June 30, 2011 primarily relates to
Glumetza. We expect cost of sales to increase in 2012 as we expect product sales
of Gralise to increase from current levels. We also commenced product sales of
Zipsor in June 2012. The fair value of inventories acquired included a step-up
in the value of Zipsor inventories of $1.9 million which will be amortized to
cost of sales as the acquired inventories are sold.
The costs of manufacturing associated with deferred revenue on Gralise product
shipments are recorded as deferred costs, which are included in inventory, until
such time as the deferred revenue is recognized.
Research and Development Expense
Our research and development expenses currently include salaries, clinical trial
costs, consultant fees, supplies, manufacturing costs for research and
development programs and allocations of corporate costs. The scope and magnitude
of future research and development expenses cannot be predicted at this time for
our product candidates in research and development, as it is not possible to
determine the nature, timing and extent of clinical trials and studies, the
FDA's requirements for a particular drug and the requirements and level of
participation, if any, by potential partners. As potential products proceed
through the development process, each step is typically more extensive, and
therefore more expensive, than the previous step. Success in development
therefore, generally results in increasing expenditures until actual product
approval. Total research and development expense for the three and six months
ended June 30, 2012 as compared to the prior year, was as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Research and development
expense $ 3,525 $ 4,043 $ 7,007 $ 9,197
Dollar change from prior
year (518 ) (2,190 )
Percentage change from
prior year (12.8 )% (23.8 )%
We categorize our research and development expense by project. The table below
shows research and development costs for our major clinical development
programs, as well as other expenses associated with all other projects in our
product pipeline.
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2012 2011 2012 2011
Serada $ 1,617 $ 2,486 $ 2,717 $ 5,739
DM-1992 1,160 290 2,122 488
Other projects 748 1,267 2,168 2,970
Total research and
development expense $ 3,525 $ 4,043 $ 7,007 $ 9,197
The decrease in research and development expense for the three and six months
ended June 30, 2012 as compared to the three and six months ended June 30, 2011
was primarily due to reduced clinical research organization costs associated
with our Breeze 3 Phase 3 clinical trial for Serada, which was completed in
October 2011.
We categorize our research and development expense by project. The table below
shows research and development costs for our major clinical development
programs, as well as other expenses associated with all other projects in our
product pipeline.
We submitted a New Drug Application for Serada in July 2012. We incurred a
filing fee of $1.8 million and are obligated to pay PharmaNova, under our
sublicense agreement for Serada, a remaining $0.7 million milestone on
submission of a New Drug Application filing to the FDA. These amounts will be
recorded as research and development expenses within the third quarter of 2012.
Selling, General and Administrative Expense
Selling, general and administrative expenses primarily consist of personnel,
contract personnel, marketing and promotion expenses associated with our
commercial products, personnel expenses to support our administrative and
operating activities, facility costs and professional expenses, such as legal
fees. Total selling, general and administrative expense, as compared to the
prior year, were as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Selling, general and
administrative expense:
Promotion fee expense $ - $ 11,055 $ - $ 21,317
Other selling, general and
administrative expense 25,021 9,976 46,793 17,216
Total selling, general and
administrative expense $ 25,021 $ 21,031 $ 46,793 $ 38,533
Dollar change from prior year 3,990 8,260
Percentage change from prior
year 19.0 % 21.4 %
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The increase in selling, general and administrative expense in 2012 was
primarily due to increased sales and marketing costs related to the launch of
Gralise including marketing activities and costs associated with our contract
sales organization. In October 2011, we initiated commercial sales of Gralise
and began promoting Gralise through our contract sales organization, Ventiv,
providing for 164 full-time sales representatives dedicated to promoting
Gralise. In June 2012, we expanded our contact sales force, adding 78 part-time
sales representatives through Ventiv dedicated to promoting Gralise. In the
third quarter of 2012, we anticipate converting the 164 full-time sales
representative sales force from a contract sales force to full-time employees of
Depomed. This conversion is not expected to materially change selling, general
and administrative expense. However, we expect selling, general and
administrative expense to increase from the current run-rate as a result of the
addition of the 78 part-time sales representative sales force in June 2012 and
marketing expenses related to Zipsor, which we acquired in June 2012.
As a result of the Santarus commercialization agreement entered into in
August 2011, we no longer have promotion fee expense to Santarus.
Amortization of Intangible Assets
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2012 2011 2012 2011
Amortization of
intangible assets $ 105 $ - $ 105 $ -
The Zipsor product rights of $27.1 million have been recorded as intangible
assets on the accompanying condensed balance sheet and are being amortized over
the estimated useful life of the asset on a straight-line basis through
July 2019. Total amortization expense for the three and six months ended
June 30, 2012 was approximately $0.1 million.
Gain on Settlement with Abbott Products
In March 2011, we entered into a settlement agreement with Abbott Products which
provided for (i) the immediate termination of the parties' license agreement;
(ii) the transition of Gralise back to Depomed; and (iii) a $40.0 million
payment from Abbott to us which was paid in March 2011. The $40.0 million
payment was recognized as a gain within operating income in the first quarter of
2011.
Interest Income and Expense
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2012 2011 2012 2011
Interest and other income $ 204 $ 357 $ 347 $ 436
Interest expense - (39 ) - (109 )
Net interest income (expense) $ 204 $ 318 $
347 $ 327
Interest and other income for the three months ended June 30, 2012 include $0.1
million in respect of the gain from a bargain purchase relating to the Zipsor
acquisition.
Interest expense relates to interest on the credit facility we entered into in
June 2008 with General Electric Capital Corporation and Oxford Finance
Corporation. The credit facility was fully repaid in July 2011.
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LIQUIDITY AND CAPITAL RESOURCES
June 30, December 31,
(in thousands) 2012 2011
Cash, cash equivalents and marketable securities $ 89,031 $ 139,793
The decrease in cash, cash equivalents and marketable securities is attributable
to the $26.4 million that we paid for the Zipsor acquisition and the utilization
of cash to finance our operations.
Since inception through June 30, 2012, we have financed our product development
efforts and operations primarily from private and public sales of equity
securities, upfront license, milestone and termination fees from collaborative
and license partners, and product sales.
As of June 30, 2012, we have accumulated net losses of $122.2 million. We may
incur operating losses in future years. We anticipate that our existing capital
resources will permit us to meet our capital and operational requirements for at
least the next two years. We base this expectation on our current operating
plan, which may change as a result of many factors.
Our cash needs may also vary materially from our current expectations because of
numerous factors, including:
? sales of our marketed products;
? expenditures related to our commercialization of Gralise and Zipsor,
including our contractual obligations to Ventiv and other arrangements we make
for the commercialization of Gralise and Zipsor;
? milestone and royalty revenue we receive under our collaborative
development and commercialization arrangements;
? acquisitions or licenses of complementary businesses, products or
technologies.
? expenditures related to our commercialization and development
efforts, including arrangements we make for the commercialization of Serada, if
the product is approved for marketing;
? financial terms of definitive license agreements or other commercial
agreements we may enter into;
? results of research and development efforts;
? changes in the focus and direction of our business strategy and/or
research and development programs; and
? results of clinical testing requirements of the FDA and comparable
foreign regulatory agencies.
We will need substantial funds to:
? conduct research and development programs;
? commercialize any products we market;
? conduct preclinical and clinical testing; and
? manufacture (or have manufactured) and market (or have marketed) our
marketed products and product candidates.
Our existing capital resources may not be sufficient to fund our operations
until such time as we may be able to generate sufficient revenues to sustain
support our operations. We currently do not have any other committed sources of
capital. To the extent that our capital resources are insufficient to meet our
future capital requirements, we will have to raise additional funds through the
sale of our equity securities or from development and licensing arrangements to
continue our development programs. We may be unable to raise such additional
capital on favorable terms, or at all. If we raise additional capital by selling
our equity or convertible debt securities, the issuance of such securities could
result in dilution of our shareholders' equity positions. If adequate funds are
not available we may have to:
? significantly curtail commercialization of our marketed products or
other operations
? obtain funds through entering into collaboration agreements on
unattractive terms; and/or
? delay, postpone or terminate clinical trials;
The inability to raise any additional capital required to fund our operations
could have a material adverse effect on our company.
Cash Flows from Operating Activities
Cash used in operating activities during the six months ended June 30, 2012 was
approximately $24.9 million, compared to cash provided by operating activities
of approximately $82.1 million during the six months ended June 30, 2011. Cash
used in operating
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activities during the six months ended June 30, 2012 was primarily due to our
net loss adjusted for movements in working capital, stock-based compensation and
depreciation expense. Cash provided by operating activities during the six
months ended June 30, 2011 was primarily as a result of the $48.0 million
milestone payment and $40 million termination fee received from Abbott Products
during the first quarter of 2011.
Cash Flows from Investing Activities
Net cash provided by investing activities during the six months ended June 30,
2012 was approximately $12.9 million and consisted of a decrease in marketable
securities to fund our operations offset by the acquisition of Zipsor for $26.4
million in cash in June 2012. Net cash used in investing activities during the
six months ended June 30, 2011 was approximately $73.8 million and consisted
primarily of a net increase in marketable securities resulting from a partial
investment of the milestone payment and settlement fee received from Abbott
Products during the first quarter of 2011.
Cash Flows from Financing Activities
Cash provided by financing activities during the six months ended June 30, 2012
was approximately $1.4 million and consisted of proceeds from employee and
consultant option exercises. Cash provided by financing activities during the
six months ended June 30, 2011 was approximately $5.5 million and consisted of
proceeds from employee and consultant option exercises offset by repayments of
principal on our credit facility.
Contractual Obligations
As of June 30, 2012, our aggregate contractual obligations are as shown in the
following table (in thousands):
More than
1 Year 2-3 Years 4-5 Years 5 Years Total
Operating leases $ 1,065 $ 2,375 $ 2,499 $ 7,555 $ 13,494
Contract sales organization 7,037 - - - 7,037
Purchase commitments 2,586 - - - 2,586
$ 10,688 $ 2,375 $ 2,499 $ 7,555 $ 23, 117
At June 30, 2012, we had non-cancelable purchase orders and minimum purchase
obligations of approximately $1.7 million under our manufacturing agreement with
Patheon for the manufacture of Gralise, approximately $0.3 under our
manufacturing agreement with Accucaps Industries Limited (Accucaps) and
approximately $0.6 million under our manufacturing agreement with Mikart, Inc
for the manufacture of Zipsor. The amounts disclosed only represent minimum
purchase requirements. Actual purchases are expected to exceed these amounts.
In June 2011, we entered in to a service agreement with Ventiv. Ventiv provides
us with sales force recruiting, training, deployment and ongoing operational
support to promote Gralise and Zipsor in the U.S. through 164 full-time sales
representatives. Each month we were required to pay Ventiv a monthly fixed fee
of $1.8 million during the term of the agreement. The agreement is expected to
end in September 2012.
In May 2012, the Company entered into a service agreement with Ventiv which
provides for a sales force of 78 part-time sales representatives dedicated to
the Company, all of whom are employees of Ventiv. Under the terms of the
agreement, we are required to pay Ventiv a monthly fixed fee of $0.5 million
during the term of the agreement. The term of the agreement is for one year
beginning in June 2012.
In April 2012, the Company entered into an office and laboratory lease agreement
to lease approximately 52,500 rentable square feet in Newark, California
commencing on December 1, 2012. Operating lease payments include rent payments
for this facility as well as rent payments for our Menlo Park facility.
The contractual obligations reflected in this table exclude $2.7 million of
contingent milestone payments we may be obligated to pay in the future under our
sublicense agreement with PharmaNova related to the development of Serada. The
payments relate to various milestones for the product candidate under the
sublicense agreement, including submission to the FDA of an NDA, and FDA
approval of an NDA. The above table also excludes any future royalty payments we
may be required to pay on products we have licensed.
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The contractual obligations reflected in the above table also exclude $1.3
million of contingent milestone payments we may be obligated to pay in the
future under our Zipsor agreement.
The table above also exclude non-cancelable purchase orders and minimum purchase
obligations of approximately $2.1 million under our supply agreement with
Valeant for the supply of 1000mg Glumetza, which will be fully reimbursed by
Santarus.
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