Depomed released a statement that Actavis Group, a generic drug manufacturer filed a paragraph IV challenge against Gralise, Depomed’s once-daily gabapentin formulation.

NEUTRAL on Paragraph IV

We view this event as having no net impact.

Patent challenges are not unexpected in this pharmaceutical environment, especially in the drug delivery space. The current generic drug legislation rewards early challengers. Companies that are first to file receive 180 days of generic exclusivity. A challenge this early is expected and essentially insignificant for a number of reasons.

1. 3 year exclusivity – Depomed has 3 years of data exclusivity, which would delay a generic launch to 2014
2. 7 year exclusivity – Depomed is working with the FDA to secure Orphan Drug Status for Gralise, which would grant 7 years of marketing exclusivity
3. Patents – Depomed has patents listed in the Orange Book that last out to 2024

Given these points, we feel that Depomed will enjoy at least 7 years of exclusivity, if not more. Our prediction for at least 7 years of exclusivity comes from our knowledge of the medical literature and FDA precedent. We believe that the company could easily package 15 trials into a comparative study, in order to demonstrate Gralise’s tame adverse events profile versus other therapies. We feel that Depomed is likely to provide the FDA, in the near future, with this favorable systemic analysis that will support Gralise’s Orphan Drug Status. Moreover, granting Orphan Drug Status for PHN is not new or controversial, Neurogesx’s Qutenza received Orphan Drug Status. Likewise, Xenoport’s Horizant, also a gabapentin product, received Orphan Drug Status

More importantly, we are well aware the Depomed has successfully enforced its patents with successful settlement against Bristol Myers Squibb, Biovail (now Valeant), Esprit (now Allergan) and Ivax (now Teva Pharmaceuticals). We feel that Depomed’s patents are enforceable and have been sufficiently tested in the courts.

Also in recent news, Depomed announced that it initiated a Phase 2 trial for DM-1992, a novel, twice-daily levodopa-carbidopa formulation. We view this news as positive.

POSITIVE on DM-1992

We are positive on DM-1992, because we feel this product has the potential to be a best in class product. The current standard of care for Parkinson’s, Sinemet, is dosed several times a day. DM-1992 takes the main ingredients from Sinemet and allows for a twice daily dosing.

A new investigational formulation from Impax, IPX066, which is able to reduce the dosing of Sinemet to three times daily, was able to bring in decent milestones for that company. In December 2010, Impax entered into a $180 million dollar deal for IPX066 with GlaxoSmithKline, which included a $12 million upfront payment. Given that Depomed’s formulation appears superior to IPX066, we feel that Depomed should be able to bring in at least a similar deal. Currently, we do not value the DM-1992 franchise, but we believe it can stand as an incremental upside.

Overall, we view any negative pressure on the stock as an opportunity to go long.

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