Review Of Fourth Quarter & Full Year 2012 Financial Results

Zacks Small Cap Research

By Jason Napodano, CFA

On February 20, 2013, Depomed, Inc. (DEPO) reported financial results for the fourth quarter and full year 2012. Total revenues in the quarter were $26.6 million, essentially in-line with our estimate for total revenues of $26.8 million. Revenues increased 119% year-over-year thanks to strong growth in Gralise and royalties on Glumetza, and new revenues from recently acquired Zipsor. For the full year 2012, revenues totaled $90.8 million, down 32% from 2011 when the company recognized one-time payments from Abbott Labs (ABT) totaling $48 million for the returning of rights to Gralise.

Net loss for the fourth quarter totaled $3.7 million, or $0.07 per share. This was slightly better than our expectations for a loss of $0.09 per share. Both SG&A expense and R&D expense were lower than we modeled. SG&A at $24.0 million was down sequentially from the $26.8 million in the third quarter 2012. R&D expense of $3.2 million was also down meaningfully from the $5.3 million in the third quarter 2012. We note R&D in the third quarter 2012 included an expense of $1.8 million for the Sefelsa (formerly Serada) new drug application (NDA) and $0.6 million in milestone expense to PharmaNova related to the NDA application submission under the company’s sub-license agreement for Sefelsa. For the full year 2012, net loss total $29.8 million, or $0.53 per share.

Depomed exited the fourth quarter ended December 31, 2012 with $77.9 million in cash and investments, down from $139.8 million at the end of 2011. Cash usage in 2012 was $61.9 million, which included $26.4 million in payment for the acquisition of Zipsor in the second quarter 2012. Cash of $77.9 million was in-line with our model

Source: Depomed Inc., & Zacks Investment Research, Inc.
…Guidance For 2013…

Management provided initial financial guidance for the full year 2013 on its update call on February 20, 2013. Because of the uncertainty surrounding the outcomes of the Sefelsa FDA advisory committee on March 4, 2013 and the FDA review with a PDUFA date of May 31, 2013, guidance currently excludes any additional investment in Sefelsa after the date of the FDA advisory committee meeting.
- Total revenues of approximately $125 to $135 million, which includes approximately $6 million in anticipated milestones under the company’s collaborative arrangements.
- Operating expenses of approximately $120 to $130 million, which includes approximately $4 million of intangible amortization related to the acquisition of Zipsor.
- Year-end 2013 cash and investments of $70 to $80 million 
For the full year 2013, we currently model total revenues of $129.3 million. We model total operating expenses of $125.5 million, resulting in EPS for the full year of $0.02. We forecast the company will turn cash flow positive, Sefelsa notwithstanding, in the second half of 2013. Depomed should exit 2013, assuming no new business development activities, with roughly $75 million in cash and investments.

Recommendation

We think Sefelsa represents tremendous upside to the Depomed story, a stock we feel is cheap even without Sefelsa on the market. Case in point, Depomed is currently trading with a market capitalization of $390 million, or roughly 3X our projected 2013 revenues of $130 million. The company exited 2012 with $77.9 million in cash. In 2012, Depomed booked over $40 million in royalties on Glumetza, sold through partner Santarus (SNTS). Management expects to book over $50 million in 2013. Booking similar amounts in 2014 and 2015 nets a present value of at least $125 million. 

Prescriptions of Gralise for the week ended February 8, 2013 show the drug annualizing well over $30 million and growing steadily. We think Gralise, the company's flagship pain / neurology product is easily worth another $100 million in present value. Throw in anti-inflammatory pain medication, Zipsor, promoted in the No. 2 position behind Gralise, and some royalties on big pharma drugs like Merck's (MRK) Janumet-XR and J&J's (JNJ) Nucynta-ER and investors can see that buying Depomed today gets you Sefelsa for free. We reiterate our Outperform rating on the stock and $9 price target.

A copy of our full research report, which includes an analysis of each product and a review of the upcoming Sefelsa advisory comittee meeting can be obtained here > DEPO_Feb21/Napodano

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