Overview

Depomed (DEPO) is a specialty pharmaceutical company focused on neurology, orphan and specialty medicines. The company's current specialty pharmaceutical business includes the following three products which the company market in the United States (U.S.):

Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN), that the company launched in October 2011.CAMBIA® (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, that the company acquired in December 2013.Zipsor® (diclofenac potassium) liquid filled capsules, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, that the company acquired in June 2012.

In January 2018, pursuant to the terms of a Commercialization Agreement the company entered into with Collegium Pharmaceutical, Inc. (Collegium) in December 2017, the company granted Collegium the right to commercialize the NUCYNTA® franchise of pain products in the U.S. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The company will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018 and $135.0 million per year for the years ended December 31, 2019 to December 31, 2021, subject to certain conditions. Additionally, the company retained certain rights to co-promote NUCYNTA products, subject to providing advanced notice to Collegium. The NUCYNTA franchise includes two products currently marketed in the U.S. by Collegium:

NUCYNTA® ER (tapentadol extended release tablets), a product for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults, and for which alternate treatment options are inadequate; andNUCYNTA® IR (NUCYNTA) (tapentadol), an immediate release version of tapentadol for the management of moderate to severe acute pain in adults.

In November 2017, the company entered into definitive agreements with Slán Medicinal Holdings Limited and certain of its affiliates (Slán) pursuant to which the company acquired Slán’s rights to market the specialty drug cosyntropin depot (Synthetic ACTH Depot) in the U.S. and Canada, and Slán acquired its rights to Lazanda® (fentanyl) nasal spray. The company believe cosyntropin depot can be second-to-market behind Mallinckrodt plc's marketed product, H-P Acthar gel. The company expect Slán to file a New Drug Application (NDA) for cosyntropin depot by the end of 2018 with a goal of a potential launch in the second half of 2019 or early 2020, if the product is approved.

The company actively seek to expand its product portfolio through acquiring or in licensing commercially available products or late stage product candidates that may be marketed and sold effectively through its sales and marketing capability.

The company also have royalty and milestone producing license arrangements based on its proprietary Acuform® gastroretentive drug delivery technology, including with Ironwood Pharmaceuticals, Inc. (Ironwood).

In October 2013, the company sold its interests in royalty and milestone payments under its license agreements relating to its Acuform technology in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million.  On August 2, 2018, the company sold its remaining interest in such payments to PDL for $20.0 million, consisting of an upfront payment of $10.0 million in cash and an additional $10.0 million in cash upon the satisfaction of certain conditions.

Strategy

The company's commercial strategy is based on three pillars:  Maintain, Grow and Build.

The company intend to “Maintain” its NUCYNTA franchise of pain products through its Commercialization Agreement with Collegium. In January 2018, pursuant to the terms of a Commercialization Agreement the company entered into with Collegium in December 2017, the company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the U.S.  Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The company will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of  $132 million for the year ending December 31, 2018 and $135.0 million per year for the years ending December 31, 2019 to December 31, 2021, subject to certain conditions. Both the company and Collegium may terminate the agreement under certain circumstances. The company can terminate the agreement if aggregate net sales of the NUCYNTA products fall below certain thresholds or within the first year upon the payment of a termination fee. Collegium may terminate at any time after the first anniversary of the transaction by giving 12 months’ notice and, if the termination date is prior to the fourth anniversary of the transaction, by paying it a $25.0 million termination fee.

The company intend to “Grow” its neurology, orphan and specialty medicine business through organic and inorganic growth. The company intend to “Build” a portfolio of high-value products positioned to address the needs of patients, physicians and payers.  In November 2017 the company acquired the exclusive rights to market cosyntropin depot in the U.S. and Canada.  The company expect to file a New Drug Application with the U.S. Food and Drug Administration for cosyntropin depot by year end.  The Company intends to file for a 505(b)(2) application for a diagnostic indication for suspected adrenocortical insufficiency. As previously announced, Depomed and its development partner recently began enrolling and dosing the first pediatric patients in a new clinical trial evaluating cosyntropin depot (Synthetic ACTH Depot) for the treatment of infantile spasms, a specific seizure type present in infantile epilepsy syndrome, a rare pediatric disorder. Cosyntropin depot is a long-acting alcohol-free synthetic ACTH analogue that the Company believes, if approved, will offer patients, physicians and payers in the United States an important treatment alternative to the current standard of care. The company will also seek to bring additional specialty and orphan products into this portfolio.

In connection with its entry into the Commercialization Agreement with Collegium, the company eliminated its pain sales force and announced its intent to relocate its headquarters and reduce its headquarters’ staff.  Excluding restructuring charges the company expect these actions will significantly reduce its operating expenses in future periods, further enabling it to implement its strategy.

Business Operations

As of June 30, 2018, its revenues were generated primarily from the following commercialized products.

Gralise (Gabapentin)

Gralise is its proprietary, once daily formulation of gabapentin indicated for management of PHN, a persistent pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. The company made Gralise commercially available in October 2011, following its U.S. Food and Drug Administration (FDA) approval in January 2011. The FDA has granted Orphan Drug exclusivity for PHN. Gralise product sales were $13.8 million and $18.1 million for the three months ended June 30, 2018 and 2017, respectively. Gralise product sales were $28.6 million and $35.7 million for the six months ended June 30, 2018 and 2017, respectively.

CAMBIA (Diclofenac Potassium for Oral Solution)

CAMBIA is a non-steroidal anti-inflammatory drug (NSAID) indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. The company acquired CAMBIA in December 2013 from Nautilus Neurosciences, Inc.

The company began shipping and recognizing product sales on CAMBIA in December 2013. The company's CAMBIA product sales were $8.1 million and $8.5 million for the three months ended June 30, 2018 and 2017, respectively. CAMBIA product sales were $14.5 million and $15.7 million for the six months ended June 30, 2018 and 2017, respectively.

Zipsor (Diclofenac Potassium) Liquid Filled Capsules

Zipsor is an NSAID indicated for relief of mild to moderate acute pain in adults. Zipsor uses proprietary ProSorb® delivery technology to deliver a finely dispersed, rapidly absorbed formulation of diclofenac. The company acquired Zipsor in June 2012 from Xanodyne Pharmaceuticals, Inc.

The company's Zipsor® product sales were $4.0 million and $4.4 million for the three months ended June 30, 2018 and 2017, respectively, and Zipsor® product sales were $8.7 million and $9.1 million for the six months ended June 30, 2018 and 2017, respectively.

NUCYNTA ER (Tapentadol Extended Release Tablets)

NUCYNTA ER is an extended release version of tapentadol that is indicated for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with DPN in adults, and for which alternate treatment options are inadequate. The company acquired the U.S. rights to NUCYNTA ER from Janssen Pharmaceuticals, Inc. (Janssen Pharma) and began shipping and recognizing product sales on NUCYNTA ER in April 2015. The company began commercial promotion of NUCYNTA ER in June 2015.

NUCYNTA (Tapentadol)

NUCYNTA is an immediate release version of tapentadol that is indicated for the management of moderate to severe acute pain in adults. The company acquired the U.S. rights to NUCYNTA from Janssen Pharma and began shipping and recognizing product sales on NUCYNTA in April 2015. The company began commercial promotion of NUCYNTA in June 2015.

In January 2018, pursuant to the terms of a Commercialization Agreement the company entered into with Collegium in December 2017, the company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the U.S.  Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The company will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018 and $135.0 million per year for the years ended December 31, 2019 to December 31, 2021, subject to certain conditions. Both the company and Collegium may terminate the agreement under certain circumstances. The company may terminate the agreement if aggregate net sales of the NUCYNTA products fall below certain thresholds or within the first year upon the payment of a termination fee. Collegium may terminate at any time after the first anniversary of the transaction by giving 12 months’ notice and, if the termination date is prior to fourth anniversary of the transaction, by paying it a $25.0 million termination fee.

Lazanda (Fentanyl) Nasal Spray

Lazanda nasal spray is an intranasal fentanyl drug used to manage breakthrough pain in adults (18 years of age and older) who are already routinely taking other opioid pain medicines around the clock for cancer pain. The company acquired Lazanda in July 2013 from Archimedes Pharma US Inc. and its affiliated companies (collectively, Archimedes). In November 2017, the company entered into agreements with Slán pursuant to which Slán acquired its rights to Lazanda. Lazanda product sales for the three and six months ended June 30, 2017 were $5.3 million and $9.2 million, respectively.

Product Candidates

In November 2017, the company entered into agreements with Slán pursuant to which the company obtained the marketing rights to cosyntropin depot. The company believe cosyntropin depot can be second-to-market behind Mallinckrodt plc's marketed product, H-P Acthar gel. The company expect Slán to file an NDA for cosyntropin depot by the end of 2018.

In December 2015, the company entered into a license agreement with Grünenthal GmbH (Grünenthal) pursuant to which the company acquired the U.S. and Canadian rights to cebranopadol, a product candidate for the treatment of moderate to severe chronic nociceptive and neuropathic pain. In January 2018, the company gave Grünenthal 120 days’ written notice of termination of the cebranopadol license agreement.

Segment and Customer Information

The company operate in one operating segment and have operations solely in the United States. To date, all of its revenues from product sales are related to sales in the United States. DepoMed has recognized license and royalty revenue from license agreements in the territories of the United States, Canada, and South Korea.

Collaboration and License Agreement with Ironwood Pharmaceuticals, Inc.

In July 2011, the company entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to its Acuform drug delivery technology for IW 3718, an Ironwood product candidate under evaluation for refractory GERD. DepoMed has received $3.4 million under the agreement, including a contingent milestone payment of $1.0 million in March 2014 as a result of the initiation of clinical trials relating to IW 3718 by Ironwood.  During the three months ended June 30, 2018, Depomed recognized a $5.0 million milestone payment related to the dosing of the first patient in a Phase 3 trial.  The dosing of the patient was considered probable at the commencement of the trial.  The company will receive additional contingent milestone payments upon the occurrence of certain development milestones and royalties on net sales of the product if approved.

PDL Royalty Sale

In October 2013, pursuant to the terms and conditions of a Royalty Purchase and Sale Agreement with PDL (Royalty Purchase Agreement), the company sold to PDL its right to receive royalty, milestone and other specified payments arising on and after October 2013 under each of the following license agreements relating to its Acuform technology in the Type 2 diabetes therapeutic area:  the License and Services Agreement, effective as of March 4, 2011, with Boehringer Ingelheim International GMBH (BI) relating to potential future development milestones and sales of BI’s investigational fixed-dose combinations of drugs and extended-release metformin worldwide; (ii) the License Agreement, effective as of August 5, 2010, with Janssen Pharmaceutica N.V. (Janssen) relating to potential future development milestones and sales of Janssen’s investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin worldwide; (iii) the Non-Exclusive License, Covenant Not to Sue and Right of Reference Agreement, effective as of July 21, 2009, with Merck & Co., Inc. relating to sales of Janumet XR® (sitagliptin and metformin HCL extended-release) worldwide; (iv) the Commercialization Agreement, effective as of August 22, 2011, with Santarus, Inc. relating to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (v) the Amended License Agreement, effective as of January 9, 2007, with LG Life Sciences Ltd. relating to sales of extended-release metformin in Korea; and (vi) the Amended and Restated License Agreement (Extended Release Metformin Formulations — Canada), dated as of December 13, 2005, with Biovail Laboratories International SRL relating to sales of extended-release metformin in Canada.

Under the Royalty Purchase Agreement, PDL is entitled to receive all payments due under such license agreements until PDL received $481 million, after which all net payments received are shared evenly between the company and PDL.  In August 2018, pursuant to the terms and conditions of an amendment to the Royalty Purchase Agreement, the company sold its remaining interest in such payments to PDL for $20.0 million, consisting of an upfront payment of $10.0 million in cash and an additional $10.0 million in cash upon the satisfaction of certain conditions.

Restructuring

In June 2017, the company announced a limited reduction-in-force in order to streamline operations and achieve operating efficiencies.  In December 2017, the company continued its restructuring plans by initiating a company-wide restructuring designed to help position the Company for sustainable, long-term growth that the company believe will align its staff and office locations to fit its commercial strategy. Pursuant to its restructuring plans, in February 2018 the company eliminated its pain sales force, consisting of approximately 230 sales representative and 25 manager positions, and began the process of relocating its corporate headquarters from Newark, California to Lake Forest, Illinois. In connection with the relocation of the headquarters, the company will significantly reduce its office staff and reduce its headquarters office space by approximately 50%.  See Note 15 to the unaudited condensed consolidated financial statements for further information about its restructuring costs.