The reality is the “Sequester” is similar to the “Fiscal Cliff” in that it’s blown completely out of proportion as a scare tactic.   The pocket change discussed being cut is so minuscule that if we can’t even agree on cutting this, how in the world does anyone think we can possibly fix a yearly deficit over $1 trillion dollars?

Will people and companies be hurt by these cuts?  Absolutely.  This is not to say that people will not be hurt.  It is a shame people must be hurt at all, but when the entire country is at risk, it’s a necessity.  Everyone must face some pain and these cuts must be deeper and more across the board so that everyone is sharing in the pain to fix our future.  One quick method to clean us up is simply going back to 2008 spending levels.  We’d cut about half of the deficit or more just by going back to 2008 spending levels as Ron Paul suggested over a year ago.  Want to see a REAL recovery?  Make the cuts, take our medicine for the next 12 months and watch us bounce back with a vengeance as companies/people digest the changes and overcome it like every other major depression/recession except the current one.

However, if you talk to the media or mostly left political figures at the moment, we can’t cut anything even though it contradicts earlier speeches from these same people that claim if we don’t balance the budget, cut spending and reduce debt, that our future will be bleak, especially for our children.  Anyone tired of this yet?  I know I am.  Make the cuts already, so we can fix our financial problems!

As I’ve noted many times before, Canada had very similar issues to us.  They cut $7 to $1 tax increase and grew jobs during the dot-com bust.

Trade Reaction: I’d be looking for odds of a short-term market pullback, but no collapse.  As long as the Fed is printing more money creating additional liquidity and inflation (therefore indirectly taxing you as your money becomes less valuable), I don’t see a collapse until the bubble grows much bigger.

Video:  Video doesn’t load on your browser?  See it on CNBC

For those of you who don’t know, Canada had very similar issues to us in the 90′s.  In response, Canada cut $7 to $1 in tax increases, balanced their budget AND grew jobs during the dot-com bust when the global economy was hurting.  Now, they are fiscally responsible and therefore better able to handle whatever the next problem their nation faces (many anticipating a housing bust shortly).  You can review a well-written (not mine) college research paper on the subject written in 2011: 

So, instead of learning from this fact, we seemingly do the exact opposite.  This current fiscal cliff deal, if those numbers above are correct, is over $41 in tax increases to $1 in spending cuts on over a 1.3 yearly trillion dollar deficit.

Sickening

Below, Santelli and company eloquently sum up our entire situation in America.  Everything from the Economy, Banks, Bernanke, Jobs/Unemployment, Bond Market to the path we are on.  I can’t say it better myself, so I won’t attempt to.  Watch the video for yourself and digest the information as it is very serious and important to understand.  It is unfortunate when knowledgable media individuals like him are drowned out by the clowns on all the various tv stations today.

I fear one day we’ll look back and say, “we should have listened more carefully to Rick Santelli’s concerns.”  I, for one, prefer to be wrong on that.

Stock Radar with Price Targets

Good luck out there,

Mike

Stock Radar with Price Targets

Good luck out there,

Mike

Stock Radar with Price Targets

Good luck out there,

Mike

Stock Radar with Price Targets

Good luck out there,

Mike

Stock Radar with Price Targets

Good luck out there,

Mike

Zipsor is the lowest prescription-strength diclofenac available. The ProSorb technology allows for rapid delivery and dispersion of the medicine. The low-dose offers minimal systemic drug exposure. Depomed believes these advantages will help them drive Zipsor sales in the coming years.

…Terms…

Depomed paid Xanodyne $25.9 million in cash for worldwide rights to the drug. Xanodyne has the potential to earn two milestone payments from Depomed based on Zipsor sales. These include a $2 million payment if sales eclipse $30 million in a calendar year and $3 million if sales eclipse $60 million in a calendar year. All in, the acquisition price equate to about 1.5x sales – a very attractive price. There are no royalties associated with the transaction. Ongoing phase 4 obligations are minimal at around $0.2 million. Depomed acquired about $0.5 million in inventory. The product has a gross margin at around 95% with the current sales run-rate of around $20 million per year. Depomed plans to start booking sales of Zipsor immediately.

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.

Stock Radar with Price Targets

Good luck out there,

Mike