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Gralise IP Solid
By Jason Napodano, CFA
On January 23, 2012, Depomed, Inc. (DEPO), $6.17 / share) announced that it has received a Paragraph IV certification notice from Actavis Elizabeth LLC advising Depomed that Actavis has filed an Abbreviated New Drug Application (ANDA) with the U.S. FDA seeking approval to market a generic version of Gralise (gabapentin), 300 mg and 600 mg tablets. Actavis' certification notice alleges that Depomed's six US patents for Gralise listed in the FDA Orange Book, the latest of which expires in 2024, will not be infringed by Actavis' proposed product, or are invalid and/or are unenforceable.
Depomed intends to vigorously enforce its intellectual property (IP). We expect that Depomed will file a patent infringement lawsuit in the next 45 days against Actavis seeking to stay the FDA from approving Actavis' ANDA for 30 months or until a district court renders a decision that is adverse to Depomed, whichever is earlier.
Depomed currently has six Orange Book listed patents for Gralise and more than 10 patent applications in prosecution. Also, we remind investors that Gralise has received Orphan Drug designation, and management continues to pursue Orphan Drug exclusivity for the product. This would provide 7 years of exclusivity for Gralise once granted by the FDA.
We believe this is simply Actavis Elizabeth LLC attempting to be the "first-to-file" for approval of generic Gralise. Benefits of being first-to-file include 180 days or exclusivity upon generic launch and the ability to settle or sub-license those rights in the future. We do not believe Actavis Elizabeth LLC will be successful in bringing a generic Gralise product to the market before 2020.
Depomed has successful defended its IP in the past.
* In December 2007, Apotex, Inc. filed the Canadian equivalent of a U.S. ANDA seeking approval for a generic version of 500mg Glumetza in Canada. Depomed file an infringement complaint against Apotex, Inc. and to date there has been no generic 500mg Glumetza available in Canada.
* In November 2009, Depomed filed a lawsuit against Lupin Pharmaceuticals for infringement of four U.S. patents on Glumetza. Lupin was attempting to bring a generic 500mg and 1000mg Glumetza product to the market in the U.S. through an ANDA. The 30-month stay is set to expire in May 2012, but we do not believe Lupin will launch. A Markman hearing was held in January 2011, which resulted in all 10 claim terms at issue in the lawsuit construed in Depomed's favor. A bench trial is currently scheduled for August 2012. We think Lupin will settle before the trial ends.
* In June, 2011, Depomed filed a lawsuit against Sun Pharma for infringement of five U.S. patents for Glumetza in response to an ANDA filed by Sun. Sun was attempting to bring a 500mg and 1000mg Glumetza product to the market in the U.S. The lawsuit will stay an FDA decision on Sun's application until February 2015.
Unfortunately, this is just part of doing business for a drug-delivery company like Depomed. Generic companies will challenge patents, even when they have little chance to succeed (see Lupin above). We find it comforting that large pharmaceutical companies understand and respect Depomed's IP. In March 2011, Depomed entered into a license agreement with Boehringer Ingelheim that netted $10 million upfront. In August 2010, a Depomed entered into a license agreement with Janssen that netted $5 million upfront and $5 million in formulation work. In July 2009, Depomed entered into a license agreement with Merck that netted $10 million upfront. These deals centered around Depomed's Acform drug delivery technology.
Merck licensed the rights to the technology to create a once-daily Janumet-XR (Januvia + extended release metformin) product we believe has peak sales over $1 billion (Janumet currently sells about $1.1 billion worldwide). We do not think Merck would be willing to pay Depomed $10 million upfront and then 2% of a potential blockbuster unless the IP was solid.
We continue to be positive on the Depomed story. As outlined in this report (DEPO/Jan2012), we see the shares fairly-valued at $9. This includes $1.75 per share in cash, $2.75 per share in net present value of royalties on Glumetza, $4.00 per share in value for Gralise, and $0.50 for the acuform technology. We would be buyers of the stock on today's pullback.
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