Model Portfolio jackweyland:VALUE

What if you could improve existing generic drugs risk/benefit profile?  What if there are unmet medical needs in the areas you are targeting?  What if you are doing that and have a perfect balance sheet and a skilled management team?  what if you are doing this and your stock is undervalued?

Depomed (NASDAQ: DEPO) is a drug delivery company based in Menlo Park, CA that improves the bio-availability of generic drugs by using polymers usually used in the food and cosmetic industry to improve the side effect profile and reduce dosing of oral medications.  Once the drug using Depomed's Acuform Technology is swallowed, it enlarges and becomes a gel-like substance that prevents it from passing through the stomach too quickly.

An example of Depomed's Acuform Technology being used in the real world is Glumetza®.  Glumetza is generic metformin with Depomed's unique and not obvious drug delivery technology that improves the tolerability and adherence of patients that are starting diabetes treatment.  Glumetza has grown to become the number one branded generic metformin drug with a continued slope towards further penetration.

When talking about taking generic drugs and adding a drug delivery technology, the most significant risk is patent protection.  Instead of talking about patent expiration dates in the distant future, lets talk about prior challenges to Depomed's intellectual property.  In January of 2006, IVAX (later acquired by large generic company Teva Pharmaceutical Industries, Ltd (ADR) (NASDAQ: TEVA), tried to introduce a generic Glumetza product.  In April of 2008, the challenge would become another Depomed victory as Teva settled to make a one time payment of $7.5 million to Depomed, while Teva would also pay up to $2.5 million in royalties, and both companies would go their seperate ways with their own metformin products.  Depomed has had other patent challenge victories, including Biovail Corporation of Canada (NYSE: BVF).  The company is now in the beginning stages of a 30 month stay against one patent challenge from a small company from India.

The company's best asset is it's PHN product that is in the process of approval with a possible PDUFA date in Q1, 2011.  This market has over 35 million annual prescriptions.  Depomed's product is taken once a day versus 2 to 4 times a day for the competition.  While comparing side effect profiles from different trials is not considered statistically prudent, the improvement in the side effect profile from Depomed's product is so significant, that it deserves to be mentioned.  Daytime sleepiness was 4.5% with a once a day pill in Depomed's Phase III trial versus the competitions range of 15-24%.  The product is partnered with Abbott Laboratories (NYSE: ABT) in the U.S. and has yet to be partnered worldwide.  Abbott could pay up to $60 million upon a U.S. approval.  For those of you that are familiar with recent gabapentin/drug delivery concerns from the FDA (e.g. Xenoport (NASDAQ: XNPT), Depomed will be referencing Pfizer's 2002 toxicology package and generic gabapentin has 20 years of real world experience. 

The value proposition going forward as a stock investor is the patent protection (e.g. not obviousness and real world settlements in Depomed's favor), a market capitalization of $200 million, net cash of more than $50 million, a pending NDA for a PHN product that is partnered with Abbott Labs and entering a multi-billion dollar market, cash generated from a world-wide partner for that same gabapentin product, and a phase III product that is aiming to become the first FDA approved product for hot flashes.  The company has said they intend to be profitable in 2011 and there isn't any reason for me to doubt that assessment at the time that this article was written.

Disclosure:  I own this stock in my personal account and it is a top holding in my Marketocracy account.

About the Author:  Jack Weyland is a member of Marketocracy, Inc. and has outperformed the S&P 500 by 145% over the past 5 years.