`Table of Contents
`
`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`FORM 10-K
`
`(Mark One)
`
`
`Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
`
`
`For the fiscal year ended December 31, 2008
`
`OR
`
`
`
`
`
`Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
`
`For the transition period from: to
`
`
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` (cid:3)
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`
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`
`
`Commission File Number: 001-13111
`
`DEPOMED, INC.
`(Exact Name of Registrant as Specified in its Charter)
`
`
`
`California
`(State or other jurisdiction of
`incorporation or organization)
`
`
`
`1360 O'Brien Drive, Menlo Park, California
`
`(Address of principal executive offices)
`
`94-3229046
`(I.R.S. Employer Identification No.)
`
`
`94025
`(Zip Code)
`
`Registrant's telephone number, including area code: (650) 462-5900
`
`Securities registered pursuant to Section 12(b) of the Act:
`
`Title of each class
`Common Stock, no par value
`
` Name of each exchange on which registered
` The NASDAQ Stock Market LLC
`
`Securities registered pursuant to Section 12(g) of the Act:
`None
`
` Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No (cid:3)
`
` Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
` No (cid:3)
`
` Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
`during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
`filing requirements for the past 90 days. Yes (cid:3) No
`
` Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
`contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
`Form 10-K or any amendment to this Form 10-K. (cid:3)
`
` Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
`
`

`

`company, as defined in Rule 12b-2 of the Exchange Act.
`
`Large accelerated filer
`
`Accelerated filer (cid:3)
`
`Non-accelerated filer
`
`
`(Do not check if a smaller
`reporting company)
`
`Smaller reporting company
`
` Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No (cid:3)
`
` The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing
`price of Common Stock on the Nasdaq Stock Market on June 30, 2008 was approximately $115,708,000. Shares of Common Stock held by
`each officer and director and by each person who owned 10% or more of the outstanding Common Stock as of June 30, 2008 have been
`excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
`for other purposes.
`
` The number of shares outstanding of the registrant's Common Stock, no par value, as of March 4, 2009 was 51,214,710.
`
`Documents Incorporated by Reference
`
` Portions of the registrant's Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to
`Regulation 14A in connection with the registrant's 2009 Annual Meeting of Shareholders, expected to be held on or about May 14, 2009, are
`incorporated by reference in Part III of this Form 10-K.
`
`

`

`Table of Contents
`
`
`DEPOMED, INC.
`
`2008 FORM 10-K REPORT
`
`TABLE OF CONTENTS
`
`
`
`
` PART I
`
`
`Business
`Item 1.
`Item 1A. Risk Factors
`Item 1B. Unresolved Staff Comments
`Item 2. Properties
`Item 3. Legal Proceedings
`Item 4. Submission of Matters to a Vote of Security Holders
`
`
`PART II
`
` PAGE
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`4
`27
`41
`41
`41
`42
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`45
`47
`48
`64
`64
`64
`65
`67
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`67
`67
`67
`67
`67
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`68
`72
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`Item 5.
`Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
`Item 6. Selected Financial Data
`
`Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
`
`Item 7A. Quantitative and Qualitative Disclosures about Market Risk
`
`Item 8. Financial Statements and Supplementary Data
`
`Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`
`Item 9A. Controls and Procedures
`
`Item 9B. Other Information
`
`
`
`
`PART III
`
`
`Directors, Executive Officers and Corporate Governance
`Item 10.
`Item 11. Executive Compensation
`Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
`Item 13. Certain Relationships and Related Transactions, and Director's Independence
`Item 14. Principal Accountant Fees and Services
`
`
`PART IV
`
`
`Exhibits and Financial Statement Schedules
`Item 15.
` Signatures
`
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`Table of Contents
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`
`NOTE REGARDING FORWARD-LOOKING STATEMENTS
`
` Statements made in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements within the
`meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of
`1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. Our actual
`results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are
`identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any
`statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
`Forward-looking statements include, but are not necessarily limited to, those relating to:
`
`•
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`•
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`•
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`•
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`•
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`•
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`results and timing of our clinical trials, including the results of our DM-1796 and DM-5689 trials;
`
`the commercial success and market acceptance of DM-5689 if we receive approval to market DM-5689 in the United States;
`
`the commercial success and market acceptance of DM-1796 if it is approved for marketing in the United States, and the efforts
`of Solvay Pharmaceuticals, Inc. (Solvay) with respect to the commercialization of DM-1796;
`
`the commercial success of GLUMETZA® (metformin hydrochloride extended release tablets) in the United States, and the
`efforts of Santarus, Inc. (Santarus) with respect to the commercialization of GLUMETZA;
`
`the results of our internal research and development efforts;
`
`acceptance and approval of regulatory filings;
`
`our need for, and ability to raise, additional capital;
`
`our collaborative partners' compliance or non-compliance with their obligations under our agreements with them; and
`
`our plans to develop other product candidates.
`
` Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include
`those more fully described in the " ITEM 1A. RISK FACTORS " section and elsewhere in this Annual Report on Form 10-K. We disclaim
`any intent to update or revise these forward-looking statements to reflect new events or circumstances.
`
`
`CORPORATE INFORMATION
`
` The address of our Internet website is http://www.depomed.com . We make available, free of charge through our website or upon written
`request, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic SEC reports,
`along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC.
`
` Unless the context indicates otherwise, "Depomed", "the Company", "we", "our" and "us" refer to Depomed, Inc. Depomed was
`incorporated in the State of California on August 7, 1995. Our principal executive offices are located at 1360 O'Brien Drive, Menlo Park,
`California 94025, and our telephone number is (650) 462-5900.
`
` Depomed®, Proquin®, and Gabapentin GR® are registered trademarks of Depomed. AcuForm™ is a trademark of Depomed.
`GLUMETZA® is a registered trademark of Biovail Laboratories, s.r.l. exclusively licensed in the United States to Depomed. All other
`trademarks and trade names referenced in this Annual Report on Form 10-K are the property of their respective owners.
`
`3
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`Table of Contents
`
`ITEM 1. BUSINESS
`
`COMPANY OVERVIEW
`
`
`PART I
`
` Depomed is a specialty pharmaceutical company focused on the development and commercialization of differentiated products that
`address large and growing markets and are based on proprietary oral drug delivery technologies. We have two product candidates in Phase 3
`clinical trials. In March 2008, we initiated a Phase 3 clinical trial for DM-1796, an extended release formulation of gabapentin for the treatment
`of postherpetic neuralgia that we have licensed to Solvay Pharmaceuticals, Inc. In September and October 2008, we initiated Breeze 1 and
`Breeze 2, our Phase 3 clinical trials for DM-5689, an extended release formulation of gabapentin for the treatment of menopausal hot flashes.
`In February 2009, we completed enrollment of our Breeze 1 trial. In 2009, we expect to complete enrollment of our other Phase 3 clinical trials
`and report top-line results for all three trials.
`
` We seek to optimize the use and value of our product candidates and drug delivery technologies in three ways. First, we are seeking to
`assemble a number of pharmaceutical products that can be highly differentiated from immediate release versions of the compounds upon which
`they are based and may be promoted together to women's health care providers. Our development of DM-5689, and our retention of co-
`promotion rights within the obstetrics/gynecology field in our commercialization arrangements with Covidien, Ltd. and Santarus, Inc., are
`examples of this aspect of our business strategy. Second, we out-license product candidates after we have increased their value through our
`formulation and clinical development efforts. Our DM-1796 license and development arrangement with Solvay Pharmaceuticals is an example
`of this strategy. Third, we enter into collaborative partnerships with other companies where the unique capabilities of our technology can
`provide superior value to a partner's product candidate, resulting in greater value for Depomed than traditional fee-for-service arrangements.
`Our license and development arrangement with Covidien, Ltd. is an example of this strategy.
`
` We developed two additional products which have been approved by the FDA and are currently marketed. GLUMETZA® (metformin
`hydrochloride extended release tablets) is a once-daily treatment for adults with type 2 diabetes that we commercialize in the United States with
`Santarus, Inc. Proquin® XR (ciprofloxacin hydrochloride extended release tablets) is a once-daily treatment for uncomplicated urinary tract
`infections that we commercialize in the United States with Watson Pharma, Inc.
`
`4
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`Table of Contents
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` The following table summarizes our marketed products and product pipeline.
`
`Product Pipeline
`
`Product
`
`DM-5689
`Formerly referred to as
`Gabapentin GR®
`
`DM-1796
`
`Formerly referred to as
`Gabapentin GR®
`
`DM-3458
`
`Omeprazole
`
`DM-1992
`
`Levodopa/Carbidopa
`
`One undisclosed compound
`
`Marketed Products
`
`GLUMETZA®
`
`
`
`
`Proquin® XR
`
`
`
`
`
`
`Indication
`
` Menopausal hot flashes
`
`
`
`
`Status
`
` Phase 3 studies underway (Breeze 1 and Breeze 2).
`
`
`
`
`
`
`
`
`Postherpetic neuralgia
`
`
`
`
`
`
`
`Gastroesophageal reflux
`disease
`
`
`
`
`Parkinson's disease
`
`
`
`
`
`
`
`Confidential
`
`
`
`
`Type 2 diabetes
`
`
`
`
`
`
`
`
`
`
`Uncomplicated urinary tract
`infection
`
`
`
`
`
`
`
`
`
`
`
`
`Second Phase 3 study underway.
`
`Licensed by Solvay in the United States, Mexico and Canada.
`
`
`Proof of concept studies completed.
`
`
`
`
`
`Phase 1 study underway.
`
`
`
`
`
`
`
`Preclinical development ongoing.
`
`
`
`
`Currently sold in the United States, Canada and Korea.
` Co-promoted in the United States with Santarus.
` Canadian rights held by Biovail.
`Korean rights held by LG Life Sciences.
`
`Currently sold in the United States.
`Co-promoted in the United States with Watson Pharma.
`
`Regulatory application approved in Sweden.
`European rights held by Rottapharm/Madaus.
`
`
`
`
`
`
`
`SIGNIFICANT DEVELOPMENTS DURING 2008
`
` Among the significant developments in our business during 2008 were the following:
`
`•
`
`•
`
`•
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`In February 2008, we announced positive results of our Phase 2 trial for DM-5689 for the treatment of women with moderate-to-
`severe menopausal hot flashes.
`
`In March 2008, we initiated dosing of the first patient in a Phase 3 clinical trial for DM-1796 for PHN.
`
`In April 2008, we entered into a settlement and license agreement with Teva Pharmaceuticals USA, Inc. (Teva) related to our
`patent infringement lawsuit against Teva affiliates IVAX Corporation and IVAX Pharmaceuticals, Inc. (IVAX). In connection
`with the agreement, we received a $7.5 million payment and are entitled to receive up to $2.5 million in future royalties on
`Teva's generic Glucophage® XR (metformin hydrochloride extended release tablets) product in the United States.
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`In June 2008, we entered into a $15.0 million credit facility with General Electric Credit Company and Oxford Finance
`Corporation. We drew a total of $9.4 million under the facility during 2008.
`
`In June 2008, we held an end-of-Phase 2 meeting with the FDA related to our Phase 3 registration program for DM-5689 in
`menopausal hot flashes.
`
`In June 2008, we received a Notice of Allowance from the United States Patent and Trademark Office for an additional patent
`application covering both DM-5689 and DM-1796.
`
`In July 2008, we entered into a promotion agreement with Santarus granting Santarus exclusive rights to promote GLUMETZA
`in the United States, and we received a $12 million upfront fee from Santarus.
`
`In July 2008, we were awarded a modest preclinical grant by The Michael J. Fox Foundation under the foundation's
`Therapeutics Development Initiative 2008 Program related to our DM-1992 program in Parkinson's disease.
`
`In July 2008, the Medical Products Agency in Sweden approved the Marketing Authorization for Proquin XR, which is licensed
`in Europe by Madaus S.r.l. (Madaus), a company that was acquired by Rottapharm (Rottapharm/Madaus) in June 2007.
`
`In September 2008, we initiated dosing of the first patient in Breeze 1, the first of two pivotal Phase 3 clinical trials in our
`registration program for DM-5689 for the treatment of menopausal hot flashes.
`
`In October 2008, we initiated dosing of the first patient in Breeze 2, the second of two pivotal Phase 3 clinical trials in our
`registration program for DM-5689 for the treatment of menopausal hot flashes.
`
`In November 2008, we entered into a license agreement with Solvay granting Solvay exclusive rights to develop and
`commercialize DM-1796 in the United States, Canada and Mexico for pain indications. We received $25 million in upfront fees
`related to this agreement in February 2009.
`
`In November 2008, we entered into a license agreement with Mallinckrodt Inc., a subsidiary of Covidien Ltd. (Covidien),
`granting Covidien worldwide rights to utilize Depomed's AcuForm technology for the exclusive development of four
`undisclosed products.
`
`Total revenues for the year ended December 31, 2008 were $34.8 million, as compared to $65.6 million for the year ended
`December 31, 2007. Revenue for the year ended December 31, 2007 included $48.6 million associated with our license, supply
`and termination agreements with Esprit Pharma, Inc. (Esprit).
`
`Operating expenses for the year ended December 31, 2008 were $46.2 million, compared to operating expenses of $15.4 million
`for the year ended December 31, 2007. Operating expenses for 2008 included a $7.5 million gain on litigation related to the
`IVAX settlement. Operating expenses for 2007 included a $29.6 million gain on termination of our promotion agreement with
`King Pharmaceuticals, Inc. (King) and a $5.0 million gain on termination of our license and supply agreements with Esprit.
`
`Cash, cash equivalents and marketable securities were $82.1 million as of December 31, 2008, compared to $69.5 million as of
`December 31, 2007.
`
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`Table of Contents
`
`PRODUCT CANDIDATES
`
`DM-5689 (formerly known as Gabapentin GR) for Menopausal Hot Flashes
`
`General
`
` We have an exclusive sublicense from PharmaNova, Inc. (PharmaNova) under United States Patent No. 6,310,098, held by the University
`of Rochester, to develop and commercialize in the United States a product that contains gabapentin as its active pharmaceutical ingredient, and
`is indicated for the treatment of menopausal hot flashes. We believe that DM-5689 is an excellent non-hormonal product candidate for this
`indication, because our Phase 2 clinical study and numerous academic studies have demonstrated that gabapentin may be effective in treating
`hot flashes, and gabapentin has a long history of use in other indications.
`
`Hot Flashes
`
` A hot flash is a sudden flushing and sensation of heat caused by dilation of skin capillaries. Hot flashes are often associated with
`menopausal endocrine imbalance. The occurrence and frequency of hot flashes are unpredictable. Symptoms often associated with hot flashes
`include sweating, irritability and frustration.
`
` Hot flashes can begin early in menopause and are most common during the first few years after menopause begins. There are over
`40 million postmenopausal women more than 55 years old and about 2 million women enter menopause every year in the United States.
`Approximately 80% of those women suffer from hot flashes.
`
`Current Treatments; Target Market
`
` Currently, the leading prescription drug product for the treatment of hot flashes associated with menopause is hormone replacement
`therapy, or HRT, which involves the administration of the hormone estrogen, either alone or in combination with the hormone progestin. In
`2001, the HRT market represented more than $2 billion and in excess of 90 million prescriptions. In 2003, the Women's Health Initiative
`released the results of a clinical study that revealed an increased risk of blood clots, stroke, and breast cancer associated with HRT.
`Subsequently, in 2003, the HRT market decreased by more than $850 million and 34 million prescriptions relative to 2001. HRT prescriptions
`declined to 44 million prescriptions in 2006.
`
` Existing non-hormonal pharmaceutical alternatives to HRT for the treatment of hot flashes include off-label administration of anti-
`depressants. There is also a considerable market for dietary and herbal supplements for the treatment of hot flashes, although we are not aware
`of any clinical study demonstrating the safety and efficacy of any such treatment.
`
`Clinical Program
`
` Phase 2 Study. In June 2007, we randomized the first patient in a Phase 2 double-blind, placebo-controlled, multi-center trial evaluating
`DM-5689 for the treatment of women with moderate-to-severe menopausal hot flashes. The 124 patient study was fully enrolled in September
`2007. In February 2008, we announced positive results of our Phase 2 trial for DM-5689 for moderate-to-severe menopausal hot flashes.
`
` Study Design. The study included 124 menopausal women (approximately 30 per group) with recurrent, moderate to severe hot flashes
`and was conducted at eight sites in the United States. The total study treatment duration after screening and baseline was 13 weeks. The
`primary objective of the study was to investigate the relationship between blood plasma concentrations of gabapentin observed in menopausal
`women after administration of DM-5689 and the frequency of hot flashes in those
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`Table of Contents
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`women. The plasma concentration data (pharmacokinetics) and the hot flash frequency and severity data (pharmacodynamics) are being used to
`construct a PK/PD dose response model designed to identify the dosing regimen to utilize in the Phase 3 program.
`
` In order to facilitate the generation of an optimal dose response model, patients in each of the three active treatment arms remained on a
`stable DM-5689 dose for five weeks at an initial dose, followed by five weeks on a stable, incrementally higher dose, as follows.
`
`
`
`Treatment Group
`A ("1800mg group")
`B ("2400mg group")
`C ("3000mg group")
`D ("placebo group")
`
`
`
`Weeks 2 - 6
`
`600mg PM
`600mg AM + 600mg PM
`1200mg PM
`
`placebo
`
`
`Weeks 8 - 12
`600mg AM + 1200mg PM
`600mg AM + 1800mg PM
`1200mg AM + 1800mg PM
`placebo
`
` Each stable dosing regimen was preceded by a one-week titration period.
`
` Efficacy. DM-5689 demonstrated a reduction in the mean frequency of moderate to severe hot flashes, and in the mean total daily
`severity of hot flashes, in all active treatment groups. Statistical significance relative to placebo from baseline to the end of the study was
`observed in the 1800mg and 2400mg treatment groups with regard to frequency, and statistical significance was observed in the 1800mg
`treatment group with regard to severity. The severity of hot flashes is based on a mean daily composite score, where a moderate hot flash is
`assigned a score of "2" and a severe hot flash is assigned a score of "3". The primary efficacy outcomes observed in the study are set forth in
`the table below.
`
`
`Treatment Group
`1800mg
`
`2400mg
`
`3000mg
`
`placebo
`
`
`Mean Daily Frequency (#)
`
` Baseline
` End of treatment
`10.1
`2.7 (p=0.016)
`11.8
`3.0 (p=0.03)
`11.6
`3.9 (p=0.229)
`10.6
`5.1
`
`
`Mean Daily Severity Score
`
`End of treatment
` Baseline
`
`24.0
`6.9 (p=0.044)
`29.6
`6.8 (p=0.041)
`27.8
`10.1 (p=0.426)
`26.7
`12.2
`
` Safety. DM-5689 was generally well tolerated in the study, with one, two, one and three patients, respectively, withdrawing due to
`adverse events from the placebo, 1800mg, 2400mg and 3000mg groups. The most common side effects observed in the study were headache,
`somnolence, dizziness and nausea. The incidence of those side effects in each of the treatment groups is set forth in the table below.
`
`
`
`Treatment Group
`1800mg
`
`2400mg
`
`3000mg
`
`placebo
`
`
`Somnolence (%)
`16
`
`16
`
`16
`
`3
`
`
` Dizziness (%)
`10
`
`39
`
`9
`
`10
`
`
` Headache (%)
`32
`
`32
`
`25
`
`10
`
`
` Nausea (%)
`16
`3
`3
`7
`
` Phase 3 Registration Program. Our Phase 3 registration program for DM-5689 in menopausal hot flashes includes two randomized,
`double-blind, placebo-controlled studies of approximately 540 patients per study, Breeze 1 and Breeze 2. In September 2008, we enrolled and
`dosed the first patient in Breeze 1, and in October 2008, we enrolled and dosed the first patient in Breeze 2. In each study, patients will be
`randomized into three treatment arms: (i) placebo; (ii) 1200mg of DM-5689 dosed once daily; or (iii) a total dose of 1800mg of DM-5689
`dosed 600mg in the morning and 1200mg in the evening.
`
` The treatment duration of the Breeze 1 study will be six months, with primary efficacy endpoints assessed at 4 and 12 weeks. Persistence
`of efficacy will be assessed at six months as one of the
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`secondary endpoints. The treatment duration in the second study, Breeze 2, will be three months, with assessment of efficacy at 4 and 12 weeks
`only.
`
` The primary efficacy endpoints in both studies will be reductions in the mean frequency of moderate to severe hot flashes, and the average
`severity of hot flashes. Various secondary efficacy endpoints will be measured as well.
`
` Enrollment in Breeze 1 was completed in February 2009. We expect Breeze 2 to be fully enrolled by the end of the second quarter of
`2009, and we expect that preliminary top-line results of the studies will be available in the fourth quarter of 2009.
`
`Collaboration and License Arrangements
`
` PharmaNova. In October 2006, we entered into a sublicense agreement with PharmaNova, Inc. Pursuant to the agreement, PharmaNova
`has granted us an exclusive sublicense, under United States Patent No. 6,310,098, held by the University of Rochester, to develop and
`commercialize in the United States a product that contains gabapentin as its active pharmaceutical ingredient, and is indicated for the treatment
`of hot flashes associated with menopause.
`
` We paid PharmaNova an upfront license fee of $0.5 million upon signing of the agreement and paid an additional $0.5 million upon
`dosing of the first patient in our Phase 3 trials for the product. We are required to pay PharmaNova $1.0 million upon submission to the FDA of
`a New Drug Application, or NDA, for the product, and $2.0 million upon FDA approval of an NDA. The agreement provides for royalty
`payments to PharmaNova on net sales of the product, and for milestone payments upon achievement of annual net sales in excess of certain
`thresholds. We also paid PharmaNova consultancy fees of $0.3 million over approximately ten months beginning in November 2006.
`
`DM-1796 (formerly known as Gabapentin GR) for Postherpetic Neuralgia
`
`General
`
` DM-1796 is our internally developed, extended release formulation of the compound gabapentin. Gabapentin is marketed by Pfizer Inc.
`for adjunctive therapy for epileptic seizures and postherpetic pain under the trade name Neurontin. It is also marketed by a number of other
`companies as a generic, immediate release drug.
`
` In November 2008, we entered into an Exclusive License Agreement with Solvay Pharmaceuticals, Inc. granting Solvay exclusive rights
`to develop and commercialize DM-1796 in the United States, Canada and Mexico for pain indications.
`
` Postherpetic Neuralgia. Postherpetic neuralgia, or PHN, is a persistent pain condition caused by nerve damage during a shingles, or
`herpes zoster, viral infection. There are an estimated 600,000 to 1 million cases of shingles each year, according to the Centers for Disease
`Control and Prevention. The incidence of PHN increases in elderly shingles patients, in whom the incidence of PHN in shingles patients 50 to
`69 years old is 50 percent and increases to 75 percent in patients over 70 years old, according to WWMR, Inc., a pharmaceutical market
`research firm. Pain associated with PHN reportedly can be so severe that patients are unable to resume normal activities for months. Since there
`is no cure for PHN, treatments are focused on relieving pain.
`
` Diabetic Peripheral Neuropathy. Diabetic peripheral neuropathy, or DPN, is a peripheral nerve disorder caused by diabetes.
`Approximately 60 to 70 percent of the more than 20 million diabetics in the United States have mild to severe forms of nervous system
`damage, according to the National Institutes of Health. After a period of inadequate glycemic control, nerve damage may occur and may lead to
`a number of health problems, including indigestion, diarrhea or constipation, dizziness, bladder infections and impotence. DPN is often
`associated with numbness, pain, or tingling in the feet or legs and may lead to weakness in the muscles of the feet. Current treatment
`approaches for DPN involve providing options for pain relief and implementing glycemic control measures, including diet, exercise and
`medication, to prevent further tissue damage by bringing blood sugar levels under control.
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`Target Market
`
` Approximately 2.6 million people are estimated to have suffered from moderate to severe neuropathic pain in 2004. The overall
`neuropathic pain market is expected to reach $5 billion in 2010, according to Datamonitor.
`
`Clinical Program
`
` 2008 Phase 3 Postherpetic Neuralgia Study. In March 2008, we initiated dosing of the first patient in a Phase 3 clinical trial for DM-
`1796 for PHN. The study is a randomized, double-blind, placebo-controlled study of approximately 450 PHN patients. Patients in the study are
`randomized into two treatment arms: placebo, or 1800mg of DM-1796 dosed once daily. The study is being conducted at sites in the United
`States, Russia and Argentina.
`
` The primary objective of the study is to assess the efficacy of DM-1796 in reducing the pain associated with PHN, measured from
`baseline pain scores to the end of a ten-week treatment period on the basis of the Likert pain scale. Secondary objectives include an assessment
`of changes from baseline in sleep interference, and additional patient and clinician assessments of pain and quality of life.
`
` The primary differences in the ongoing study relative to the Phase 3 PHN study we concluded in 2007 are: (a) there is only one active
`treatment arm (1800 mg once daily) rather than two; and (b) patients enrolled in the study must have "stable PHN disease" for at least six
`months, rather than three months, following healing of the shingles rash.
`
` In November 2007, we submitted to the FDA a protocol for a Phase 3 registration trial for DM-1796 to the FDA for a special protocol
`assessment, or SPA, pursuant to which we requested that the FDA assess whether the protocol is adequate to meet the scientific and regulatory
`requirements necessary to support marketing approval of DM-1796 for PHN. The FDA did provide us with guidance and comments on our
`proposed protocol, but indicated that the protocol was not eligible for an SPA.
`
` We expect the Phase 3 PHN study to be fully enrolled by the end of August 2009. We expect preliminary top-line results from the study
`will be available in the fourth quarter of 2009.
`
` 2006/2007 Postherpetic Neuralgia Study. In May 2006, we initiated a Phase 3 clinical trial for Gabapentin GR for the treatment of
`PHN. The study was a randomized, double-blind, placebo-controlled study of approximately 400 PHN patients. The study was fully enrolled in
`early March 2007. Patients in the study were randomized into three treatment arms: placebo, a total daily dose of 1800mg of Gabapentin GR
`dosed once daily, and a total daily dose of 1800mg of Gabapentin GR dosed twice daily.
`
` The primary objective of the study was to assess the efficacy of Gabapentin GR in reducing the pain associated with PHN, measured from
`baseline pain scores to the end of a ten-week treatment period on the basis of the Likert pain scale. Secondary objectives include an assessment
`of changes from baseline in sleep interference, and additional patient and clinician assessments of pain and quality of life.
`
` In July 2007, we announced the primary endpoint was not achieved with statistical significance for either active treatment regimen, as
`compared to placebo, over the ten-week treatment period. The mean reductions in average daily pain scores from baseline to end of study were
`1.83 (once-daily), 1.72 (twice-daily) and 1.43 (placebo). However, statistical significance relative to placebo was achieved in each of the first
`seven weeks for the once-daily treatment arm and in each of the first four weeks for the twice-daily treatment arm.
`
` The secondary endpoints of sleep interference, Clinical Global Impression of Change (CGIC), a scale used by physicians for overall
`assessment of patient improvement, and Patient Global Impression
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`
`of Change (PGIC), a scale used by patients to report their overall assessment of change, were all statistically significant for the once-daily
`treatment compared to placebo over the ten week study period. Sleep interference scores were reduced by 2.01 points with Gabapentin GR
`compared to -1.39 with placebo (p=0.01