Jul 30, 2009
Executives
Matt Gosling – VP and General Counsel Carl Pelzel – President and CEO Mike Sweeney – VP, R&D Tammy Cameron – VP, Finance
Analysts
Scott Henry – Roth Capital Jason Napodano – Zacks Investment Research Gary Hobbib – MultiTrade Securities
Operator
At this time I would like to turn things over to Mr. Matt Gosling.
Please go ahead, sir.
Matt Gosling
Good afternoon. This is Matt Gosling with DepoMed's Investor Relations Department.
With me today are Carl Pelzel, President and Chief Executive Officer of DepoMed; Tammy Cameron, our Vice President, Finance; and Dr. Mike Sweeney, our Vice President, Research and Development.
After the close of market today, we issued our financial results for the second quarter ended June 30, 2009. It can be accessed from our company Web site at www.DepoMed.com.
Before we begin, I would like to remind you that during this call we will be making forward-looking statements related to various aspects of our business, including statements related to clinical development, financial matters and commercialization of our marketed products. Actual results may differ materially from the results described.
We encourage you to review the risk factors in our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. I will now turn the call over to Carl Pelzel.
Carl Pelzel
I would like to extend our special thanks to the principal investigators in our two trials. Dr.
Wolf Udian [ph], the principal investigator for the Phase II trial, and Dr. Reit Mcadian [ph] the principal investigator for the Phase I trial.
All clinical trials are progressing as scheduled; we don't expect any delays at this point. We look forward to reporting top-line results early in the fourth quarter of this year.
Despite the expenses of running this Phase III trial we manage to end the quarter with 84 million in cash, which does not include the 10 million we will receive from Merck next month. We have built up our cash through diligent expense management that provides the operational flexibility we think is necessary to achieve our goal to be a profitable, robust, specialty pharmaceutical company.
We intend to continue to generate cash by leveraging our technology to close deals such as the Merck and Covidien deals. In addition, we see opportunities to bring in additional cash through our business development efforts focused on our non-core GERD and Parkinson's programs.
Now going forward we expect milestone and royalty payments from Solvay for DM-1796 to provide the income stream necessary to finance our growth. If DM-1796 is approved we will receive up to 70 million in precommercial milestones alone.
Serada would then form the foundation of our company's earnings power as a result of its significant market potential is the only approved Non-Hormonal Treatment for Menopausal Hot Flashes available. As a consequence of the widespread fear of the risks linked to hormone therapy women have been using alternative OTC products that has not been shown to be effective.
So we believe that is important for women to have a treatment option that is safe and effective. What all this means is that Serada's market potential is large.
We calculate that the market size is up to $5 billion at branded prices, given that approximately 60 million hormone strips have been lost after the women’s health initiative trial since 2001. Now even if just 20% of these lost prescriptions go to Non-Hormonal alternatives we will be looking at a billion dollar market.
It is important to recognize that this is not a traditional marketing situation, where the new product being introduced as to aggressively take share from well-established, well-financed competitors. In that situation the battle to gain share at the expense of others is an expensive exercise in how many sales reps, samples and promotion you can bring to bear against your weakest competitor.
In the case of Serada, we will not be competing against hormones rather we will introduce Serada as the only approved Non-Hormone therapy to physicians and patients who are currently without alternatives. We thus avoid going against any entrenched competitor.
This means that the use of promotional resources to generate revenue will be much more efficient than most pharmaceutical product launches. If approved we expect Serada will be well received by physicians and patients.
When we presented Serada's target product profile to physicians in our third-party conducted market research more than three quarters of physicians rated their overall impression as “favorable” to “extremely favorable” while two-thirds are more rated their likelihood to prescribe as “likely” to “extremely likely.” In a separate patient market research study more than half the patients who were presented Serada's target product profile indicated that they would likely request Serada as a therapy from their physicians.
Now as a result our preliminary internal and third-party external analysis indicated there is a significant market opportunity with the launch of a proprietary specialty sales force targeting the most profitable segment of high prescribing OBGYN physicians. For example, a sales force of just 90 sales representatives could cover the top four deciles of OBGYN prescribers who account for about 30% of all HRT or hormone prescriptions.
We have the option of derisking our sales force launch by initially renting sales reps from a contract sales organization. In addition, we believe that there is a significant opportunity to reach women directly and cost-effectively by building public-patient relationships through social media given that a steady broad stream of conversations regarding menopause already exist in those media.
Now let me turn to some recent achievements. Last week we announced a licensing deal with Merck, which further underscores the unique strength of our drug delivery technology.
We are excited to a license access to certain of our patents related to our Metformin, extended release technology to Merck for the development of a fixed dose combination of Januvia and extended release Metformin. We will receive a $10 million upfront fee in August, a milestone payment on the filing of a new drug application as well as modest royalty on net product sales for an agreed upon period.
It is important to note that we have no developmental obligations under this agreement. Since the license is non-exclusive the deal strengthened our intellectual property and provides a benchmark for any other potential patent access deals relating to Metformin extended release technology in combination with other compound.
Merck's current Januvia Metformin Combo Janumet is a twice a day formulation should Merck develop a once a day Janumet it maybe the first once a day DPP-IV Metformin combination. And that set the bar, the competitive bar for other DPP-IV competitors.
The other achievement I am pleased with is the sales of Glumetza which recently reached an all time high in terms of its number of prescriptions. They were 23,545 total prescriptions in the month of June.
That is equivalent to an annual sales run rate of approximately $40 million. Since Santarus started promotion in October of last year we met this market share and the branded Metformin market had consistently increased month over month from 22.6% at September to occur at 29.4% in June of 2009.
We feel confident that Glumetza will continue its sales growth and contribution to our operating capital. Now let me turn the call over to Dr.
Mike Sweeney who will discuss our clinical programs. Mike.
Mike Sweeney
Thank you, Carl. We remained well on track to achieve our major clinical goal in 2009.
The completion of clinical development of those DM-1796, in PHN and Serada in menopausal hot flashes. Both clinical programs are fully enrolled and we expect to announce top line data early in the fourth quarter this year.
Assuming positive trial data we would expect both NDAs to be filed in the first quarter of 2010. Draft of the NDA is already underway so we can drop in the clinical results quickly after the dates are available.
Again we feel confident with our file designs of both programs will succeed although of cost clinical risk remains. As we discussed in the past our new PHN study incorporates important plannings from our previous PHN trial that narrowly missed its primary endpoint.
They include first, we increased the power of our new trial by increasing number of patients from our previous 407 patients to 450 patients and reduced the number of treatment arms from previously three arms to two arms. Second, we diversified the study's geographic exposure by enrolling patients in Russia and Argentina in addition to the United States in order to include potentially more gabapentin-naïve patients.
And third we've adjusted the eligibility criteria by requiring patients to have recovered from shingles for at least six months prior to the norms on new study, and thus having stable disease while the cutoff cut off was three months in our previous study. As for Serada designed a post Phase III trials are based on the positive results of our Phase II trial completed in February 2008.
We were certainly encouraged by the level of interest in Non-Hormonal alternative for menopausal hot flashes that we observed in our rapid recruitment of patients for these studies. We feel the rapid enrollment in the study confirms that there is a significant unmet need existing in the marketplace.
Regarding our early stage pipeline we have recently completed our Phase I trial of DM-1992 in Parkinson's patients that we initiated in February. We're in the process of completing our analysis of the data and making related patent filings so we'll have more to say about results very soon.
As to our partnership with Covidien we remain on track to limit Covidien formulations to the first two products we're developing by the end of this year. While we haven't disclosed the active ingredients in the products utilizing our AcuForm delivery technology that, that will be developed with Covidien, they do include (inaudible) in combination with opioids.
In connection with concerns, consumers may interestingly take more than recommended daily dosage with Metformin potentially causing liver damage and FDA Advisory Committee recently recommended the prescription products containing Metformin in combination with prescription analgesics including the opioids should include about such warning or we remove from the markets. The FDAs evaluation recommendations had indicated that certain evaluation will take some time.
I should note that the FDA considers Metformin one of the nation’s most commonly used drugs and important drug due to its effectiveness in pain relief and fever. The FDA also considers Metformin to be safe when used according to direction on its label.
FDA has been addressing the safe use of Metformin since late 1990s now development work with Covidien are accordingly focused on product to support lower doses of Metformin in combination with opioids. The target formulations are designed to be used twice daily.
Both Covidien and DepoMed closely monitoring the situation and remain fully committed to develop to these products. I hand it back to Carl now.
Carl Pelzel
Thank you, Mike. Let me turn the call over to our Vice President of Finance, Tammy Cameron so she can take us through our financial results for the second quarter.
Tammy?
Tammy Cameron
Thank you, Carl. Revenue for the three months ended June 30, 2009, was $11.6 million compared to $6.3 million for the three months ended June 30, 2008.
This increase was driven by higher product sales and license revenue year over year. Product sales were $8.4 million in Q2 2009 versus $5.5 million in Q2 2008 and mainly consisted of Glumetza product sales.
The increase in product sales year over year was primarily due to increases in the 500-mg formulation of Glumetza, the introduction of the 1000-mg formulation of Glumetza which occurred in the middle of 2008 and the promotional effort of Santarus. License revenue was $2.7 million in Q2 2009 versus $363,000 for the same quarter in the prior year.
The increase in license revenue year over year was mainly driven by amortization of the $25 million upfront payment we received from Solvay in February 2009. We’re recognizing the $25 million upfront payment ratably over four years which is the estimated length of the time we have significant obligations under the arrangement.
SG&A expenses were 9.9 million in Q2 2009 versus 5.2 million in Q2 2008. The increase year over year was primarily driven by 5.6 million in promotion fee expenses related to the company promotion agreement for Glumetza with Santarus.
We began pain promotion fees of Santarus in the third quarter of 2008. R&D expenses were 10 million in Q2 2009 versus 4.7 million in Q2 2008.
The increase was due to cost associated with our life stage clinical program. Stock-based compensation expense was approximately 600,000 for each of the quarter ended June 30, 2009 and June 30, 2008.
Net loss for the three months ended June 30, 2009 was 9.6 million or $0.19 per share compared to net income of 3.5 million or $0.07 per share over the three months ended June 30, 2008. Net income in Q2 was primarily attributable to a one-time gain of 7.5 million on litigation related to the settlement of the patent infringement suit against Ivax Corporation.
Cash, cash equivalents, and marketable securities were $84 million as of June 30, 2009, compared to $82.1 million as of December 31, 2008. For 2009, we’d like to reaffirm our expense guidance provided in March.
We expect SG&A expenses to be in the range of $18 million to $20 million excluding any promotion fees paid to Santarus, which run through our income statement as a selling expense. We expect 2009 R&D expenses to be in the range of $34 million to $37 million.
Of that amount, approximately $18 million are related to external costs for our ongoing Phase III study. So we expect our total 2009 R&D and the SG&A expenses to be $52 million to $57 million.
With the 10 million from Merck we will receive next month and aggressive management of our expenses so far this year we currently expect to end 2009 with 69 million to 73 million in cash, which will include approximately 6.1 million in debt. Let me turn the call back to Carl.
Carl
Thanks very much, Tammy. I'd now like to open the call up for questions.
Operator
Scott Henry – Roth Capital
Thank you. Good afternoon.
Congratulations again, Carl, for finding another $10 million for shareholders that we were not expecting with the Merck deal, certainly give you a lot of credit for that. Just couple questions.
First, on the accounting for the Merck deal will that be a one-time benefit in Q3 or will that be amortized over multiple quarters?
Tammy Cameron
Scott, this is Tammy. That will be a one-time recognition when we receive payments we should even recognize that.
Again subject to our auditors review.
Scott Henry – Roth Capital
Okay, and then just a question on the Covidien, the pain programs, I guess it wasn’t really clear to me whether you viewed what’s going on with the FDA and Metformin to be a positive or negative. I just wanted to see -- I imagine they are positive or else you might well help the programs.
Just wanted to get a little more clarity if you view that as a threat or an opportunity.
Carl Pelzel
Yes, Scott. As you know that we have not been talking about the details related to that program.
And the reason we are talking about it now is because there is this conversation with the FDA in the public domain and we felt obliged then to inform shareholders within the context of what risk that may relate to the program. However we and Covidien are very committed to the program and feel very good about bringing these products that we're working on forward into this current environment.
Mike, did you wan to…
Mike Sweeney
We view this overall as a positive. The FDA's principal concerns are that people hydrate the opioid and don't tight (inaudible) willingly hydrate.
Its Metformin or they take another tyronol product when they are taking these combinations. Our combination to be twice daily combinations with relatively low doses of APA [ph], which will all being well immediately many of the FDA's concerns around APA absolutely and quite positive (inaudible).
Scott Henry – Roth Capital
Okay. Thank you.
And then just a couple more pipeline question. I know in the release you target top line results from all three products and I guess early Q4.
Because this is such an important event I would just want to press you. Do you said that as a target that you think you can beat or are you confirming that the results will impact happen in Q4?
I'm just trying to gauge whether there is any possibility that, that could slide forward into Q3.
Carl Pelzel
Scott, good question. I know there is a lot of interest in that.
It will be in Q4, but it will be very early in Q4.
Scott Henry – Roth Capital
That’s helpful. And then I don’t know if you talked about this.
But any updates on the timeline for partnerships for either the GERD compound or the Parkinson’s program, not that we're waiting on those, but just wanted to see if there is any update on that?
Carl Pelzel
No, we are not providing any guidance. Both programs are being discussed with potential partners and those discussions are going well.
But we don’t have any guidance as to when those might close.
Scott Henry – Roth Capital
Well, thanks again for taking the question.
Carl Pelzel
Thank you, Scott.
Operator
Next, we will hear from Jason Napodano with Zacks Investment Research.
Jason Napodano – Zacks Investment Research
Hi, guys, thanks for taking the question. In relation to the Merck deal were you talking with Merck about the opportunity before hand or was this something that Merck was pursuing and then realize it if they advance any further they would infringe on your intellectual property?
Carl Pelzel
We had talked publicly quite some time ago about what we thought was a wonderful opportunity to link the DPP-IV to a once a day Metformin combination. As you know most of the DPP-IVs are dose once a day, but because the generic Metformins that are out there are BIJ, at least the initial companies they were coming forward with a combination were forced to go forward with the BID product.
So we had been talking to virtually all the companies that have DPP-IVs and they're about 19 of them. And so Merck saw the value of our value proposition and the deal that we announced last week is the result of that.
Jason Napodano – Zacks Investment Research
Got you. And we do not know the status or Merck hasn't disclosed the status of where that potential combination product is?
Carl Pelzel
No, they haven’t. But as you might imagine being able to replace a BID Januvia and Metformin combination with once a day would be it significant increase in value in the marketplace, but we don’t have guidance on where that stands.
Jason Napodano – Zacks Investment Research
Okay. With respect to the Breeze program the top line data that you plan to release early in the fourth quarter will that just be frequency or will we see frequency and severity and what secondary end points do you think will be available at that point?
Carl Pelzel
Mike, do you want to address that?
Mike Sweeney
We will release the endpoints that on Monday through the FDA guidelines that is the frequency and severity of weeks four and 12 of stable dose together with the adverse approval.
Jason Napodano – Zacks Investment Research
And that will be for both (inaudible) results for both Breeze 1 and Breeze 2 at the same time?
Mike Sweeney
Both Breeze 1 and Breeze 2. There maybe a possibility of secondary end points was lot of numbers to be crunched, so I don’t want to promise anything of the endpoints at this point in time.
Jason Napodano – Zacks Investment Research
And as far as clinical program, do you think that is all you need before you can file in 2010, anything else that you will need to do prior to a filing?
Mike Sweeney
(inaudible) two meeting with FDA, this is what they require.
Jason Napodano – Zacks Investment Research
Okay. And as far as outside of the U.S.
will you need to conduct either an active comparative study or an additional study for an application potentially in Europe?
Carl Pelzel
Yes, let me take that one, Jason. We don’t have plans in place at this point to introduce the product in Europe.
The partner that we got the used patent from for the U.S. PharmaNova does have used patent in Europe.
But at the present time our focus is on the U.S. marketplace.
Jason Napodano – Zacks Investment Research
Okay. Thank you.
Do you have any idea which data you released were the PHN study or the Breeze results?
Carl Pelzel
Jason, we really don’t, frankly they are very close, one to the other, and as you know the assessment of the data sort of is independent one trial to the other so we're not exactly sure which one will be that, the one out first.
Jason Napodano – Zacks Investment Research
And the question about the endpoint in the PHN scale. That’s PHN trial.
You are going with the Likert scale, is that correct?
Mike Sweeney
The average daily pain scale recorded on a Likert scale between the scales between 0 and 10 in the morning when the patients went through.
Jason Napodano – Zacks Investment Research
Okay. Any thoughts on assessing pain on a daily basis versus a weekly basis, I am seeing some pain trials where assessing pain on the daily basis you often get a difficult separation from placebo or is it such pain on a weekly basis, you get a little bit more separation or any thoughts on that endpoint?
Mike Sweeney
We do have secondary endpoints which cope with that, unfortunately, the primary endpoint which FDA mandates is average day in the pain scale.
Jason Napodano – Zacks Investment Research
Got you. One more question.
When do you guys plan to file the Q?
Tammy Cameron
10-Q should be filed next week.
Jason Napodano – Zacks Investment Research
And one more question. What were actual Glumetza sales in the quarter?
Tammy Cameron
It was right around 8.4 million.
Jason Napodano – Zacks Investment Research
So that promotional expense is pretty consistent with what we have seen in the past.
Carl Pelzel
Right, that's the promotional fee that flows through the Santarus. So we're not sending any money in the promotion of Glumetza at this point.
Jason Napodano – Zacks Investment Research
That 67% it looks like is pretty consistent?
Tammy Cameron
Yes, correct.
Jason Napodano – Zacks Investment Research
Thank you for taking the question.
Carl Pelzel
Thank you, Jason.
Operator
We will hear next from Gary Hobbib with MultiTrade Securities.
Gary Hobbib – MultiTrade Securities
Hi, thank you. Carl, were you surprised at the ramp up with the Glumetza sales?
Carl Pelzel
I am pleased but not surprised. When Santarus came on board we are pretty excited about it because they have 350 reps that have really only had one product to talk about.
So they had agreed to expand their call coverage to cover physicians that were using Glumetza and so I think there we saw an immediate, but small increase in prescription, but then as the new physicians to Glumetza that Santarus have been calling on for some time got off to speed on the story then we have been seeing some very nice increases. So it's always easy to say that you weren’t surprised when you hear good news, but we had a lot of confidence in that, the increased number of reps actually delivering growth.
Gary Hobbib – MultiTrade Securities
Right. Great.
And you mentioned about the potential competitive arena surrounding Merck, the Merck transaction and Merck raising the bar now. Is it possible to give us any clarity on where you might be with any discussions around that?
Carl Pelzel
Do you mean beyond Merck?
Gary Hobbib – MultiTrade Securities
Yes.
Carl Pelzel
What I can just say is that we have been and are actively discussing the Metformin DPP-IV combination strategy with other companies. I wish I could give you more.
Gary Hobbib – MultiTrade Securities
Thank you.
Carl Pelzel
Thanks very much, Gary.
Operator
At this time, we have no further questions. I would like to turn the conference back over to Carl Pelzel for closing remarks.
Carl Pelzel
Well, thank you all very much for joining us on this call. I look forward to keeping you apprised of our progress in the coming months.
I like to remind you that we are going to present at the 11th Annual Rodman and Renshaw Global Investment Conference from September 9th through 11th in New York City. And the BioCentury NewsMakers in the Biotech Industry Conference on September 16th also in New York City.
Thank you very much.
Operator
Once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.