DepoMed – The Serada Conundrum

“Should I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
So come on and let me know
Should I stay or should I go?”

The Clash – Should I Stay or Should I Go

That pretty much sums up the issue facing DepoMed with Serada, their drug delivery enhanced product (DDEP) version of gabapentin, following disappointing Phase III results. Serada, an oral sustained release formulation of gabapentin being developed for the treatment of menopausal hot flashes, failed to meet all of its clinical trial endpoints in the Breeze 3 trial.

This latest trial was a follow up to two earlier Phase III trials, Breeze 1 and Breeze 2, that provided evidence of efficacy, and reasonable tolerability, but failed to hit all of the pre-specified endpoints. Breeze 3 used a trial design intended to minimize or eliminate the issues of outliers and placebo responders that plagued the two earlier trials. Altogether some 1,700 subjects have been studied in the Phase III trials for Serada.

Serada is a sibling of DepoMed’s Gralise, a lower dose sustained release oral formulation of gabapentin. Serada and Gralise both use the same AcuForm Diffusional technology, but in different strengths. Gralise was approved earlier this year, and more recently launched in the US, for the treatment of post-herpetic neuralgia. The treatment of post-herpetic neuralgia is a well known, and approved indication for immediate release gabapentin. The menopausal hot flash indication being pursued with Serada is a relatively novel indication for which no other gabapentin formulation is approved. The hot flash indication is attractive; there is a definite need for non-hormonal treatments. Unfortunately there is no established path for development and approval for this indication.

DepoMed is facing a major decision with the inconclusive outcome of the Breeze 3 trail for Serada. Should they try once again to prove Serada is safe and effective for menopausal hot flashes or should they move on?

A little background. As a sibling of Gralise, much if not all of the preclinical and formulation development work for Serada was complete when the decision was made to pursue the hot flash indication. This has limited non-clinical development expenses. Nonetheless, DepoMed has still invested more than $40 million (2011 dollars) in Serada, including $15 million for the most recent Breeze 3 trial. Conducting another trial, presumably Breeze 4, would cost another $15 million and take at least another one and a half years.

Another trial presents risks. Breeze 3 was designed to address the outlier and higher than expected placebo response issues that confounded the two earlier trials. But rather than solve the problem the new design seems to have introduced additional issues. Is there a ‘proper’ design? How will the FDA, or an advisory panel, respond to a product that was able to demonstrate efficacy only with a fourth pivotal trial? Do the other three count? If they do, do they prove the product doesn’t work? A fourth trial would not only need to nail the efficacy issue it would need to eliminate any doubts about the other three trial results.

Money isn’t an issue for DepoMed; the company has its house in order and manages its bottom line well. With $150 million in the bank they can easily afford another trial. But can they afford the distraction of another trial, and the possibility of another trial failure that will hammer their stock?

DepoMed’s near term prospects are defined by the commercial performance of Gralise. After some wrangling with Abbott and a very handsome buyout of the Gralise rights, DepoMed recently launched commercialization activities with a contract sales force. The prospects for Gralise are questionable, as Abbott presumably felt. The major benefits offered by Gralise versus generic gabapentin are dosing convenience and better tolerability. It remains to be seen if these benefits will offset generic pricing for the immediate release formulation and its Tier 1 status.

Gralise may be a success, but it will be expensive in the near term. Most, if not all, of DepoMed’s $150 million cash stash will be necessary to support the product’s introduction. All belts will need to be tightened until the product provides a positive cash flow.

So does DepoMed stay or does it go? My guess is that they stay with Serada and gamble with another Phase III trial. They are almost there, and they presumably have a good idea of what type of trial design should work. It’s hard to imagine that management has the courage to walk away from their $40 million investment. Perhaps the new CEO, Jim Schoeneck, has less invested personally in the product. But he was on the Board when it made a decided to pursue the hot flashes indication, and the Breeze 3 trial.

Art Levinson, former CEO and current chairman of Genentech, in a 2001 presentation suggested that smaller companies, unlike Genentech, were too reluctant to kill products after Phase II or even Phase III trial failures. Can DepoMed afford to follow his suggestion? Companies that struggle in the present like to point to their pipeline and future, but without Serada there is no obvious pipeline or future.

“Should I stay or should I go now”? We’ll see what DepoMed decides. I think it’s time to go.