Revenues consisted of $2.1 million in product sales, of which $1.75 million was Gralise and $0.36 million was from Proquin XR. Gralise sales were just below our estimate of $2.0 million. For the week ending April 27, 2012, Gralise total prescriptions were 2,049, which annualizes to a run-rate of approximately $12 million. Gralise current holds 0.25% of the total gaba-molecule market. Approximately 17,000 prescriptions were written in the first quarter by 3,500 physicians.

Revenues also consisted of $9.4 million in royalties, of which $9.2 million was from Glumetza sales at Santarus and $0.2 million as from Janumet-XR sales at Merck. Santarus reported Glumetza revenues in the first quarter of $31.2 million, up 104% year-over-year. Total Glumetza prescriptions were up 36% year-over-year. The rest of the increase came from price increases. Merck reported Janumet sales of $392 million in the first quarter, up 29% year-over-year, but did not break out Janumet vs. Janumet XR revenues.

Finally, revenues also consisted of $5.3 million in licensing and collaborative payments. Depomed record a $2.5 million milestone payment from Boehringer Ingelheim during the first quarter relating to development and delivery of prototype formulations of candidates for the treatment of type 2 diabetes using Depomed’s Acuform technology. Depomed also earned a $1.0 million milestone payment from Ironwood Pharmaceuticals during the quarter 2012 for delivery of experimental batches of prototype formulations of drug candidates targeting gastrointestinal disorders.

Net loss for the first quarter 2012 was $8.8 million, or $0.16 per share. This was better than our expectations on higher total revenues and lower than expected SG&A. R&D expense was in-line with expectations. Depomed exited the first quarter 2012 with $128.6 million in cash, investments, and marketable securities and no debt. We find this level of cash to be sufficient to fund operations for the foreseeable future. Management has guided to cash flow positive operations by the end of 2013. We model Depomed burning approximately $45 million in 2012. Management has guided to cash at the end of 2012 between $88 and $100 million. We model Depomed holding $95 million at the end of the year.

However, we note our $95 million estimate assumes no business development activities in 2012, nor does it include potential royalty sale transactions. We remind investors that Depomed collects cash royalties on Glumetza sales from Santarus to the tune of 29.5% in 2012. The royalty rate will jump to 32% in 2013 and 2014, and then 34.5% in 2015 and 2016 before a generic Glumetza is expected on February 1, 2016. Based on our modeling, we see the remaining Glumetza royalties (after tax), starting in the second quarter 2012 to the end of 2015 with approximately $120 million. We expect that Depomed will continue to collect some royalties in 2016, albeit small.

That said, we would not be surprised to see the company look to monetize this royalty stream in an effort to secure additional cash in 2012. We believe if the company can secure north of $110 million, it would be wise to sell the royalty stream and look to acquire another late-stage or commercialized product in the pain / neurology market that Depomed can promote along with Gralise. We believe that shareholders would react favorably to such a move. On the first quarter conference call CEO Jim Schoeneck noted business development activities continue at the company, but we do not expect a deal anytime soon.

Gralise Update

Gralise total prescriptions remain on track, and in-line with our model. We modeled sales in the first quarter 2012 of $2.0 million based on total prescriptions of roughly 17K and a blended net price of approximately $135 per script. Sales were $1.75 million, meaning the blended price was more around $108 per script. We note the price of the titration starter pack is below that of a full prescription, and Depomed is currently offering a co-pay assistant card to reduce the out-of-pocket expense patients pay for Gralise.

…Pricing, Dosing, and Competition…

Depomed also noted on their first quarter conference call that the average Gralise patient is using less than the recommended 1800mg (3 pills per day). During the first quarter, Gralise was priced wholesale at $1.88 per pill. Based on the blended price of around $108 per script, we suspect that the average patient is taking 1200mg (2 pill per day), meaning that a Gralise script is lasting a patient 45 days instead of the modeled 30 days. Depomed believes that older patients are finding pain relief at lower doses and that neurologists have a history of prescribing lower doses of generic gabapentin due to tolerability issues. It will take some time before many are comfortable with Gralise. Management noted that the average “pills per day” number has been increasing each month, but we have adjusted our model to account for a script running slightly longer than 30 days for the remainder of 2012.

For the second quarter 2012, we are modeling approximately 29K total prescriptions with a blended price of $115 per script, with the average script lasting around 40 days. This puts Gralise sales at $2.7 million for the second quarter 2012. We note that Depomed increased the price of Gralise by 20% on May 1, 2012. Gralise now costs $2.25 per pill. This is still 15% below that of Pfizer’s Lyrica on a per pill basis. Although, we note the average patient takes 2.3 Lyrica pills per day, so Depomed’s price advantage on a daily basis is lower than we originally modeled.

We think pricing and dosing will remain a challenge for Depomed for the next few quarters. Depomed has done an excellent job in growing prescriptions and the prescriber base. But patients are not using the full daily dose strength and generic gabapentin and branded Lyrica remain an impediment for future price increases going forward. That said, 70% of the Gralise new prescriptions are from patients switching from generic gabapentin or Lyrica.

We are keeping an eye on Glaxo’s sNDA filing for Horizant, approved in July 2011 for RLS, for PHN. A decision from the FDA on Horizant (gabapentin enacarbil) is expected on June 8, 2012. Horizant sales at Glaxo were only $1.3 million in the first quarter 2012, but Glaxo is promoting the drug with some 500 sales representatives. If approved in PHN, we expect that Glaxo’s presence in the primary care market with Horizant will further intensify competition and put pressure on Depomed to step-up promotion with Gralise.

…But We’re Optimistic…

Depomed’s strategy is to do exactly that – step up the sales effort around Gralise. Pain specialists and neurologists are writing the majority of the Gralise prescriptions. When launched last October, management initially targeted only approximately 1,200 pain specialists. Realizing the important of this group, management has now expanded its efforts with pain specialists – now targeting 6,500 specialists. We think this will clearly help drive prescriptions in the coming months. Plus, to date, primary care has remained relatively untapped.

To begin to target the primary care market, Depomed plans to enhance its current 164 full-time sales staff with the addition of 75 flex sales representatives. These part-time reps will focus on the primary care market in areas where Depomed currently has specialist support and good managed care coverage for our drug. To pay for these new flex reps, which cost about one-third of a full-time rep, management will reallocate already budgeted marketing and sales promotion dollars for Gralise.

The plan is to substantially improve the coverage in primary care with a very limited increase in operating expense and very little disruption to the current rep physician relationships. We expect these reps to begin promotion in July, which should help drive a sales bump in the second half of the year. Depomed recently began a post-approval (phase IV) study looking at the real-world use of Gralise. The study should provide valuable information on Gralise titration and tolerability. This is the kind of data that could improve the dosing issues noted above.

For the full year 2012, we are modeling sales of Gralise at $15.1 million. Gralise remains the key value driver for Depomed in our view.

Additional information can be found in our REPORT available on the Zacks/SCR website.