DEPO Depomed, Inc. (delisted)

- Third Quarter Net Sales of $95 Million-

Depomed, Inc. (Nasdaq:DEPO) today reported financial results for the quarter ended September 30, 2017 and provided an update to the business.

“During the third quarter, we made progress in stabilizing our business despite the declines in the opioid market. We would have expected to have made further progress in the fourth quarter if not for the negative impact of NUCYNTA supply issues following Hurricanes Irma and Maria,” said Arthur Higgins, President and CEO of Depomed. “With September’s expansion of the neurology salesforce and today’s exciting transaction with Slán Medicinal Holdings, we see our go forward growth based on three pillars comprised of maintaining a strong NUCYNTA franchise, growing our neurology franchise and building a new specialty business. At the core of this strategy is delivering value to our stakeholders while always putting the patient first.”

Business and Financial Highlights

• Third quarter 2017 revenues were $95 million
• Third quarter ending cash and marketable securities was $113 million
• Quarterly GAAP net loss of ($16) million or ($0.25) per share
• Quarterly non-GAAP adjusted earnings of $10 million, or $0.14 per share
• Quarterly non-GAAP adjusted EBITDA of $30 million
• Neurology Salesforce increased to 90 representatives effective September 1
• Acquisition of rights to Cosyntropin (Synthetic ACTH Depot) creates new specialty business
• Lazanda Sale to Slán Medicinal Holdings reduces our concentration in the opioid market

REVENUES (GAAP BASIS)
(in thousands, unaudited)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
			2017			2016			2017				2016
Product sales, net:
Nucynta products		$	58,665		$	65,287		$	183,299			$	206,568
Gralise			21,103			20,640			57,777				63,451
Cambia			8,164			9,110			23,862				22,900
Lazanda			4,040			8,181			13,239				19,093
Zipsor			3,232			7,085			12,286				19,379
Pharmacy benefit manager dispute reserve			-			-			(4,742	)			-
Total product sales, net			95,204			110,303			285,721				331,391
Royalties			209			221			596				595
Total revenues (GAAP Basis)		$	95,413		$	110,524		$	286,317			$	331,986

Transformational Transaction Creates New Specialty Business

This afternoon the Company announced that it has entered into an agreement with Slán Medicinal Holdings. (“Slán”), pursuant to which the Company acquired from Slán the rights to market the specialty drug, Cosyntropin (Synthetic ACTH Depot), in the United States and divested its Lazanda® (nasal fentanyl) to Slán. The Company expects Slán to submit a New Drug Application with the U.S. Food and Drug Administration for the first indication for Cosyntropin (Synthetic ACTH Depot) in late 2018.

Executed Expansion of Neurology Salesforce

As of September 1st, the Company completed the growth of its Neurology salesforce to 90 representatives who are focused on Gralise® and CAMBIA®. The Company believes that the increased salesforce, with smaller and more targeted territories, will benefit these highly promotionally sensitive products. The Company also believes that the increased salesforce provides a platform that allows for the potential addition of neurology-based product acquisitions.

Puerto Rico Product Supply Update

Based on the information available to the Company at this time, the Company will experience temporary outages of certain strengths of NUCYNTA ER in the fourth quarter. The Company expects that based on our current inventory and our manufacturer’s potential ability to produce new drug supply that the magnitude of the outages will be less than $10 million.

NUCYNTA IR recently transitioned to a new third party manufacturer in the United States, and based on currently available information, the Company does not anticipate any material disruption to this supply. In addition, based on the information available at this time, the Company believes it has an adequate inventory of Gralise, which is manufactured in Puerto Rico. 

Updated 2017 Financial Outlook The Company is updating its 2017 financial guidance as a result of third quarter performance, the impact of Hurricanes Irma and Maria to the supply of NUCYNTA®, continuing contraction in the long-acting and short-acting opioid markets and the transfer of Lazanda to Slán Medicinal Holdings.

	Updated Guidance	Prior Guidance
Total Revenue (GAAP)	$375 to $380 million	$395 to $410 million
Total Revenue (Non-GAAP)	$380 to $385 million	$400 to $415 million
Non-GAAP SG&A Expense	$190 to $194 million	$195 to $201 million
Non-GAAP R&D Expense	$14 to $16 million	$18 to $23 million
Non-GAAP Adjusted EBITDA	$104 to $109 million	$107 to $117 million

Non-GAAP Financial Measures

To supplement our financial results presented on a U.S. generally accepted accounting principles, or GAAP, basis, we have included information about non‑GAAP adjusted earnings, non‑GAAP adjusted earnings per share and non-GAAP adjusted EBITDA, non‑GAAP financial measures, as useful operating metrics. We believe that the presentation of these non‑GAAP financial measures, when viewed with our results under GAAP and the accompanying reconciliation, provides supplementary information to analysts, investors, lenders, and our management in assessing the Company’s performance and results from period to period. We use these non‑GAAP measures internally to understand, manage and evaluate the Company’s performance, and in part, in the determination of bonuses for executive officers and employees. These non‑GAAP financial measures should be considered in addition to, and not a substitute for, or superior to, net income or other financial measures calculated in accordance with GAAP. Non‑GAAP adjusted earnings and non‑GAAP adjusted earnings per share are not based on any standardized methodology prescribed by GAAP and represent GAAP net income (loss) and GAAP earnings (loss) per share adjusted to exclude amortization, IPR&D and non‑cash adjustments related to product acquisitions, stock‑based compensation expense, non‑cash interest expense related to debt,  costs associated with the special meeting requests made by an activist investor and CEO transition, costs associated with an attempted debt refinancing, restructuring costs, adjustments associated with non-recurring legal settlements and disputes, and to adjust for the tax effect related to each of the non-GAAP adjustments. Non‑GAAP adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and represents GAAP net income (loss) adjusted to exclude interest income, interest expense, amortization, IPR&D and non‑cash adjustments related to product acquisitions, stock‑based compensation expense, depreciation, taxes, restructuring costs, adjustments related to non-recurring legal settlements and disputes, costs associated with an attempted debt refinancing, the special meeting requests made by an activist investor, and CEO transition. Non‑GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, non‑GAAP measures used by other companies.

Conference Call and Webcast  

Depomed will host a conference call today, Tuesday, November 7th beginning at 4:30 p.m. EST (1:30 p.m. PST) to discuss its results. This event can be accessed in three ways:

• From the Depomed website: http://investor.depomedinc.com/  Please access the website 15 minutes prior to the start of the call to download and install any necessary audio software. 
• By telephone: Participants can access the call by dialing (866) 643-3010 (United States) or (857) 270-6032 (International) referencing Conference ID 8996849.  
• By replay: A replay of the webcast will be located under the Investor Relations section of Depomed's website approximately two hours after the conclusion of the live call and will be available for three months.    

About Depomed

Depomed is a leading specialty pharmaceutical company focused on enhancing the lives of the patients, families, physicians, providers and payors we serve through commercializing innovative products for pain and neurology related disorders. Depomed markets five medicines with areas of focus that include mild to severe acute pain, moderate to severe chronic pain, neuropathic pain and migraine. Depomed is headquartered in Newark, California. To learn more about Depomed, visit www.depomed.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this release are forward-looking statements that involve risks and uncertainties including, but not limited to, those related to the commercialization of NUCYNTA ER, NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda, Depomed's financial outlook for 2017 and expectations regarding financial results and potential business opportunities and other risks detailed in the Company's Securities and Exchange Commission filings, including the Company's most recent Annual Report on Form 10-K and most recent Quarterly Report on Form 10-Q. The achievement of 2017 financial guidance is significantly dependent upon the success of NUCYNTA ER and NUCYNTA, and the continuing public focus on the opioid markets and the decline in the short-acting and long-acting opioid markets present risk to achievement of financial guidance. The inclusion of forward-looking statements should not be regarded as a representation that any of the Company's plans or objectives will be achieved. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

INVESTOR AND MEDIA CONTACT:

Christopher Keenan VP, Investor Relations and Corporate Communications 510-744-8000 ckeenan@depomed.com

CONSOLIDATED STATEMENTS OF OPERATIONS (GAAP BASIS)
(in thousands, except per share amounts)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2017				2016				2017				2016
		(unaudited)								(unaudited)
Revenues:
Product sales, net		$	95,204			$	110,303			$	285,721			$	331,391
Royalties			209				221				596				595
Total revenues			95,413				110,524				286,317				331,986
Costs and expenses:
Cost of sales			17,396				20,243				54,895				64,757
Research and development expense			1,761				10,412				12,459				23,477
Selling, general and administrative expense			48,850				51,574				147,379				156,036
Amortization of intangible assets			25,734				27,037				77,204				81,111
Restructuring charges			434				-				3,875				-
Total costs and expenses			94,175				109,266				295,812				325,381
Loss from operations			1,238				1,258				(9,495	)			6,605
Interest and other income			72				113				604				310
Loss on prepayment of senior notes			-				-				(5,364	)			(5,777	)
Interest expense			(17,815	)			(20,307	)			(55,697	)			(63,182	)
(Provision for)/Benefit from income taxes			513				6,042				560				17,692
Net loss		$	(15,992	)		$	(12,894	)		$	(69,392	)		$	(44,352	)
Basic and diluted net loss per share		$	(0.25	)		$	(0.21	)		$	(1.11	)		$	(0.73	)
Shares used in calculating basic and diluted net loss per share			62,997				61,422				62,556				61,163

 

CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
		September 30,			December 31,
			2017			2016
Cash, cash equivalents and marketable securities		$	113,457		$	177,420
Accounts receivable			77,698			102,589
Inventories			10,415			13,033
Property and equipment, net			13,943			15,526
Intangible assets, net			824,944			902,149
Prepaid and other assets			19,050			14,620
Total assets		$	1,059,507		$	1,225,337
Accounts payable			7,033			14,855
Income tax payable			28			59
Interest payable			11,308			15,924
Accrued liabilities			47,599			59,398
Accrued rebates, returns and discounts			136,998			131,536
Senior notes			369,226			466,051
Convertible notes			265,163			252,725
Contingent consideration liability			5,636			14,825
Other liabilities			17,869			19,176
Shareholders’ equity			198,647			250,788
Total liabilities and shareholders’ equity			1,059,507		$	1,225,337

 

RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EARNINGS
(in thousands, except per share amounts)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2017				2016				2017				2016
		(unaudited)								(unaudited)
GAAP net loss		$	(15,992	)		$	(12,894	)		$	(69,392	)		$	(44,352	)
Non-cash interest expense on debt			4,839				4,460				15,613				13,861
Managed care dispute reserve			-				-				4,742				-
Intangible amortization related to product acquisitions			25,734				27,037				77,204				81,111
Inventory step-up related to product acquisitions			-				-				-				16
Contingent consideration related to product acquisitions			(1,194	)			686				(6,525	)			1,593
Stock based compensation			2,911				4,364				9,870				12,602
Other costs (1)			612				2,015				3,142				2,942
Restructuring charges			434				-				3,875				-
Valuation allowance on deferred tax assets			4,172				-				19,274				-
Income tax effect of non-GAAP adjustments (3)			(11,846	)			(13,479	)			(38,249	)			(39,211	)
Non-GAAP adjusted earnings		$	9,670			$	12,189			$	19,554			$	28,562
Add interest expense of convertible debt, net of tax (2)			1,348				1,348				2,695				2,695
Numerator		$	11,018			$	13,537			$	22,249			$	31,257
Shares used in calculation (2)			81,376				81,940				81,607				81,370
Non-GAAP adjusted earnings per share		$	0.14			$	0.17			$	0.27			$	0.38
(1) Other costs represents non-recurring costs associated with the special meeting requests of an activist investor, CEO transition and an attempted debt refinancing.
(2) The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt.
(3) Calculated by taking the pre-tax non-GAAP adjustments and applying the statutory tax rate.  Expected cash taxes were zero for the three months ended September 30, 2017 and $(1,303) for the three months ended September 30, 2016. Expected cash taxes were zero for the nine months ended September 30, 2017 and $1,509 for the nine months ended September 30, 2016.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EBITDA
(in thousands)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2017				2016				2017				2016
		(unaudited)								(unaudited)
GAAP net loss		$	(15,992	)		$	(12,894	)		$	(69,392	)		$	(44,352	)
Pharmacy benefit manager dispute reserve			-				-				4,742				-
Intangible amortization related to product acquisitions			25,734				27,037				77,204				81,111
Inventory step-up related to product acquisitions			-				-				-				16
Contingent consideration related to product acquisitions			(1,194	)			686				(6,525	)			1,593
Stock based compensation			2,911				4,364				9,870				12,602
Interest income			(72	)			(113	)			(332	)			(310	)
Interest expense			17,584				19,666				59,829				67,001
Depreciation			605				646				1,839				1,908
Benefit from income taxes			(513	)			(6,042	)			(560	)			(17,692	)
Other costs (1)			612				2,015				3,142				2,942
Restructuring charges			434				-				3,875				-
Transaction costs			-				-				-				45
Non-GAAP adjusted EBITDA		$	30,109			$	35,365			$	83,692			$	104,864
(1) Other costs represents non-recurring costs associated with the special meeting requests of an activist investor, CEO transition and an attempted debt refinancing.

 

RECONCILATIONS OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
For the three months ended September 30, 2017
(in thousands)
(unaudited)
		Cost of sales			Research and development expense			Selling, general and administrative expense			Restructuring Charges			Amortization of intangible assets			Interest expense			Benefit from (provision for) income taxes
GAAP as reported		$	17,396		$	1,761		$	48,850		$	434		$	25,734		$	(17,815	)	$	513
Non-cash interest expense on debt			-			-			-			-			-			4,839			-
Intangible amortization related to product acquisitions			-			-			-			-			(25,734	)		-			-
Contingent consideration related to product acquisitions			-			-			1,415			-			-			221			-
Stock based compensation			(9	)		(45	)		(2,857	)		-			-			-			-
Other costs			-			-			(612	)		-			-			-			-
Restructuring charges			-			-			-			(434	)		-			-			-
Valuation allowance on deferred tax assets			-			-			-			-			-			-			4,172
Income tax effect of non-GAAP adjustments			-			-			-			-			-			-			(11,846	)
Non-GAAP adjusted		$	17,387		$	1,716		$	46,796		$	-		$	-		$	(12,755	)	$	(7,161	)

RECONCILATIONS OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
For the three months ended September 30, 2016
(in thousands)
(unaudited)
	Cost of sales			Research and development expense			Selling, general and administrative expense			Amortization of intangible assets			Interest expense			Benefit from (provision for) income taxes
GAAP as reported	$	20,243		$	10,412		$	51,574		$	27,037		$	(20,307	)	$	6,042
Non-cash interest expense on debt		-			-			-			-			4,460			-
Intangible amortization related to product acquisitions		-			-			-			(27,037	)		-			-
Contingent consideration related to product acquisitions		-			-			(78	)		-			608			-
Stock based compensation		(11	)		(121	)		(4,232	)		-			-			-
Other costs		-			-			(2,015	)		-			-			-
Income tax effect of non-GAAP adjustments		-			-			-			-			-			(13,479	)
Non-GAAP adjusted	$	20,232		$	10,291		$	45,249		$	-		$	(15,239	)	$	(7,437	)

RECONCILATIONS OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
For the nine months ended September 30, 2017
(in thousands)
(unaudited)
	Product Sales		Cost of sales			Research and development expense			Selling, general and administrative expense			Restructuring Charges			Amortization of intangible assets			Interest expense			Benefit from (provision for) income taxes
GAAP as reported	$	286,317	$	54,895		$	12,459		$	147,379		$	3,875		$	77,204		$	(55,697	)	$	560
Non-cash interest expense on debt		-		-			-			-			-			-			15,613			-
Managed care dispute reserve		4,742		-			-			-			-			-			-			-
Intangible amortization related to product acquisitions		-		-			-			-			-			(77,204	)		-			-
Contingent consideration related to product acquisitions		-		-			-			7,542			-			-			1,017			-
Stock based compensation		-		(84	)		(652	)		(9,134	)		-			-			-			-
Other costs		-		-			-			(3,142	)		-			-			-			-
Restructuring charges		-		-			-			-			(3,875	)		-			-			-
Valuation allowance on deferred tax assets		-		-			-			-			-			-			-			19,274
Income tax effect of non-GAAP adjustments		-		-			-			-			-			-			-			(38,249	)
Non-GAAP adjusted	$	291,059	$	54,811		$	11,807		$	142,645		$	-		$	-		$	(39,067	)	$	(18,415	)

RECONCILATIONS OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
For the nine months ended September 30, 2016
(in thousands)
(unaudited)
		Cost of sales			Research and development expense			Selling, general and administrative expense			Amortization of intangible assets			Interest expense			Benefit from (provision for) income taxes
GAAP as reported		$	64,757		$	23,477		$	156,036		$	81,111		$	(63,182	)	$	17,692
Non-cash interest expense on debt			-			-			-			-			13,861			-
Intangible amortization related to product acquisitions			-			-			-			(81,111	)		-			-
Inventory step-up related to product acquisitions			(16	)		-			-			-			-			-
Contingent consideration related to product acquisitions			-			-			209			-			1,802			-
Stock based compensation			(27	)		(329	)		(12,246	)		-			-			-
Other costs			-			-			(2,942	)		-			-			-
Income tax effect of non-GAAP adjustments			-			-			-			-			-			(39,211	)
Non-GAAP adjusted		$	64,714		$	23,148		$	141,057		$	-		$	(47,519	)	$	(21,519	)

RECONCILIATION OF GAAP NET LOSS PER SHARE TO NON-GAAP ADJUSTED EARNINGS PER SHARE
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2017				2016				2017				2016
		(unaudited)								(unaudited)
GAAP net loss per share		$	(0.25	)		$	(0.21	)		$	(1.11	)		$	(0.73	)
Conversion from basic shares to diluted shares			0.06				0.05				0.26				0.18
Non-cash interest expense on debt			0.06				0.05				0.19				0.17
Managed care dispute reserve			-				-				0.06				-
Intangible amortization related to product acquisitions			0.32				0.33				0.95				1.00
Inventory step-up related to product acquisitions			-				-				-				0.00
Contingent consideration related to product acquisitions			(0.01	)			0.01				(0.08	)			0.02
Stock based compensation			0.04				0.05				0.12				0.15
Other costs			0.01				0.02				0.04				0.04
Restructuring charges			0.01				-				0.05				-
Valuation allowance on deferred tax assets			0.05				-				0.24				-
Income tax effect of non-GAAP adjustments			(0.15	)			(0.16	)			(0.47	)			(0.48	)
Add interest expense of convertible debt, net of tax (2)			0.02				0.02				0.03				0.03
Non-GAAP adjusted earnings per share		$	0.14			$	0.17			$	0.27			$	0.38