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Mergers and acquisitions are great for biotech companies when they're getting taken out for a premium. But when it's their partner that's being acquired, uncertainty and delays tend to be more prevalent than the popping of champagne corks.
Witness Depomed (Nasdaq: DEPO ) , which announced yesterday that Abbott Labs (NYSE: ABT ) doesn't want to launch its post-herpetic neuralgia (PHN) drug, DM-1796. Depomed's original partner, Solvay Pharmaceuticals, was purchased by Abbott.
It's not that surprising that a different management team would come to different conclusions about the economics of a drug. After Valeant Pharmaceuticals (NYSE: VRX ) merged with BioVail, it killed off half a dozen programs BioVail was working on.
But Abbott closed the Solvay deal nearly a year ago, so it's a little surprising that it would make the decision now. Especially because the duo is just a week and a half away from getting a response from the Food and Drug Administration for their marketing application for DM-1796.
Nothing material seems to have happened that would make you think DM-1796 is less valuable now than when Abbott took over. If anything, it's more valuable after GlaxoSmithKline (NYSE: GSK ) and XenoPort's (Nasdaq: XNPT ) Horizant failed to gain FDA approval for treating restless leg syndrome last year. Both DM-1796 and Horizant are extended-release formulas of Pfizer's (NYSE: PFE ) Neurontin, which is approved to treat PHN, the pain associated with having shingles.
It's possible this is just a ploy by Abbott to try to renegotiate the contract. Depomed has pretty nice terms, being due royalties of 14% to 20% on product sales, with Abbott required to spend $85 million to $135 million on marketing.
So where does this leave Depomed? At this point, Depomed plans to enter mediation, which management hopes won't take more than three to eight weeks.
It can't just take back DM-1796 and market it on its own; the small drugmaker doesn't have those kinds of resources. The most ideal outcome would be for Abbott to pay Depomed to take back DM-1796 and then for Depomed to out-license the drug again. It has experience negotiating the return of drugs, having taken back Glumetza from King Pharmaceuticals (NYSE: KG ) and ProQuin XR from Esprit Pharma. In the latter case, it was able to find another partner in Watson Pharmaceuticals to take over some marketing responsibilities for ProQuin.
Today's knocked-down price for Depomed could be a good entry point for investors, but only if you're confident that the drug will pass the FDA and that management will be able to negotiate a deal with Abbott and/or some other drugmaker. This isn't one to jump into with limited due diligence. Fortunately, you have a week before the FDA makes up its mind sometime around Jan. 30.
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