Kudrna's Stock Market Talk

Zipsor is under formulation patent protection (with ProSorb) until 2019. Management noted four additional method of use patents that aim to protect the product to 2029. And, management plans to actively pursue additional exclusivity protection of the product, calling Zipsor’s IP a “live portfolio with prosecution ongoing.” We note there are currently no active paragraph IV challenges to the product. Depomed plans to amortize the cost of the acquisition, which was all cash, through 2019. This will result in approximately $1 million in amortization expense per quarter over the next 28+ quarters.

…The Upside…

Trailing twelve month sales for Zipsor at Xanodyne totaled roughly $19 million. We note that Xanodyne was accomplishing this level of sales with only 70 full-time representatives. Xanodyne has been winding-down its operations over the past year. The company launched Zipsor in June 2009, and at one time had over 200 representatives promoting the product. At its peak, Zipsor was doing roughly $25 million in sales for Xanodyne. Prescriptions over the past several months have been relatively flat. We suspect the remaining 70 representatives promoting the product at Xanodyne were aware of the company’s plans to divest Zipsor.

Depomed plans to insert Zipsor into the No. 2 position behind Gralise with its 164 full-time reps and 75 flex reps. These reps are now actively calling on pain docs, neurologists, and primary care physicians. We see significant synergy here, as most of the Zipsor prescriptions are coming from pain, orthopedics, and primary care. As of May 2012, pain and primary care docs account for 64% of the Gralise prescriptions. Adding in nurse practitioners and physicians assistants and the total jumps to 77%. We suspect that Depomed will look to target high-prescribing orthopedic docs with some of its 75 flex reps. At this time, management is unsure if they will look to acquire any of the Xanodyne sales staff, although the potential certainly exists where there are openings for flex reps.

Depomed plans to re-launch Zipsor with a full promotional effort by late July 2012. The company will focus on promoting the rapid onset of action and lowest available dose. Besides driving volume, management believes there is upside to the current pricing (revenue per Rx is around $140 / per) given that Xanodyne has not taken a price increase in 16+ months. Depomed will also turn its attention on improving managed care positioning for the product. There is a co-pay reduction and e-voucher program active that Depomed plans to maintain for the re-launch in July.

…Impact On Our Model…

As noted above, the acquisition price, including the first $2 million milestone payment for achieving calendar sales of greater-than $30 million, equated to less than 1.5x TTM sales. Depomed expects to spend around $4.5 to $5 million on sales, marketing, clinical, and regulatory expenses for Zipsor. With a 95% gross margin, and around $4 million per year in amortization expense, Zipsor looks to contribute about $9 million in pre-tax earnings to Depomed in the first year ($13 million in cash).

We see this as an impressively structured deal for Depomed. The payback period is about two years on cash, and that assumes little to no growth. We think even with modest growth, Depomed will be in the black on Zipsor in less than two years. After that, it’s all upside. More so, giving the 239 Gralise sales representatives another calling option is a significant positive in our view. We have been calling on the company to acquire a second product to promote alongside of Gralise. Zipsor, while not nearly as sexy in terms of upside, is a near-perfect fit and should be accretive by the fourth quarter 2012.

We have made the following adjustments to our financial model for 2012:

For 2013 and 2014, we’ve made the following changes:

We expect that Depomed will exit 2012 with $75.4 million in cash and investments, in-line with management’s new guidance for cash and investments between $65 and $80 million at year end.