Depomed, Inc. Reports Second Quarter 2014 Financial Results

Second Quarter 2014 Summary

• Total product sales of $28.2 million increased 100% compared to $14.1 million for the second quarter of 2013, and increased 31% from $21.5 million for the first quarter of 2014
  • Gralise^® (gabapentin) product sales of $15.1 million increased 39% from $10.9 million for the first quarter of 2014 and 76% compared to $8.6 million for the second quarter of 2013
  • Zipsor^® (diclofenac potassium) product sales of $6.8 million increased 28% from $5.3 million for the first quarter of 2014 and 21% compared to $5.6 million for the second quarter of 2013
  • Cambia^® (diclofenac potassium for oral solution) product sales of $5.0 million increased 9% from $4.6 million for the first quarter of 2014
  • Lazanda^® (fentanyl) Nasal Spray product sales of $1.4 million increased 100% from $0.7 million for the first quarter of 2014
• Gralise added to tier 2 formulary at Catamaran, the 3^rd largest PBM. Gralise is now tier 2 with the top 3 PBMs
• Received a total of $15 million in milestone payments from Mallinckrodt during the quarter, which included a $10 million FDA approval milestone for Xartemis XR^® (recognized as revenue in the first quarter of 2014) and a $5 million milestone upon FDA acceptance of the NDA filing for MNK-155 (recognized as revenue in the second quarter of 2014)
• Generated second quarter 2014 GAAP net income of $12.7 million or $0.21 per diluted share
• Generated second quarter 2014 non-GAAP adjusted earnings of $0.3 million or $0.01 per diluted share
• $223.7 million of cash and marketable securities and no debt outstanding as of June 30, 2014, an increase of $10.6 million for the quarter
• Completed bench trial in ANDA litigation related to Gralise with a ruling expected in short order
• Srinivas G. Rao, MD, PhD, joined Depomed in July as Chief Medical Officer and announced that R. Scott Shively will join the company as Chief Commercial Officer in September

"Gralise and our recent acquisitions, CAMBIA and Lazanda, led the way to a strong quarter, doubling our net product sales over the same period last year.  All four of our products showed prescription growth in Q2 compared to Q1 2014," said Jim Schoeneck, President and Chief Executive Officer of Depomed.  "We believe the growth of our product revenues in Q2 and the integration of new products into our commercial organization demonstrate our ability to build a growth-oriented specialty pharmaceutical company focused on pain and central nervous system disorders. We are also thrilled to add Srini and Scott to our leadership team, increasing our depth and expertise in the pain and CNS markets.  For the remainder of 2014, we are focused on growing product revenues, acquiring additional assets that will enhance our product portfolio and managing expenses to continue to operate at positive cash flow."

Accounting Treatment for the Sale of Type 2 Diabetes Royalty and Milestone Interests to PDL

In October 2013, Depomed sold interests in future royalty and milestone payments in the Type 2 diabetes therapeutic area to PDL Biopharma, Inc. (PDL) for $240.5 million. As a result of ongoing supply order obligations with respect to the underlying royalties, Depomed is accounting for this transaction under the debt accounting method. Although the royalty and milestone payments were sold to PDL, debt accounting requires the Company to continue to recognize the underlying royalties and milestones as revenue and record the proceeds of $240.5 million as a liability. As royalties and milestones are recognized under this arrangement, the liability is reduced and an implied non-cash interest expense is recognized.

During the three and six months ended June 30, 2014, Depomed recognized $33.3 million and $76.1 million, respectively, of non-cash revenues, $4.9 million and $10.3 million, respectively, in non-cash interest expense and $8.3 million and  $20.1 million, respectively, in non-cash tax expense related to this arrangement.

Second Quarter 2014 Financial Results

Total revenues for the second quarter of 2014 increased to $67.7 million from $30.0 million for the second quarter of 2013. A summary of total revenues for the first quarter of 2014 as compared to the corresponding prior period is as follows:

Selling, general and administrative expense was $32.6 million for the second quarter of 2014 as compared to $25.4 million for the second quarter of 2013. The increase in 2014 is primarily due to increased sales and marketing expenses associated with the Cambia and Lazanda^® product acquisitions which occurred in the second half of 2013 and increased legal expense related to ongoing patent infringement litigation.

Research and development expense was $1.4 million for the second quarter of 2014 as compared to $1.4 million for the second quarter of 2013.

GAAP net income for the second quarter of 2014 was $12.7 million, or $0.21 per diluted share, compared to GAAP net income of $0.5 million, or $0.01 per diluted share for the second quarter of 2013.  The increase in GAAP net income resulted primarily from increased product sales and the recognition of non-cash revenue relating to the royalties sold to PDL as described above under the caption "Accounting Treatment for the Sale of Type 2 Diabetes Royalties and Milestones to PDL."

Cash and marketable securities were $223.7 million as of June 30, 2014 as compared to $213.1 million as of March 31, 2014.

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