| DEPOMED INC Item 1A Risk Factors In addition to other information in this report, the following factors should be considered carefully in evaluating our company |
| We believe the following risks, along with the risks described elsewhere in this Form 10-K, including the risks described above under “BUSINESS – Competition, – Patents and Proprietary Rights, – Manufacturing, – Marketing and Sales, – Government Regulation, – Product Liability, and –Employees”, are the material risks we face at the present time |
| If any of the risks or uncertainties described in this Form 10-K actually occurs, our business, results of operations or financial condition could be materially adversely affected |
| The risks and uncertainties described in this Form 10-K are not the only ones facing the company |
| Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business |
| 13 ______________________________________________________________________ We depend heavily on our marketing partners for the successful commercialization of our lead products, ProQuin XR and Glumetza |
| Our two lead products, ProQuin XR and the 500mg strength Glumetza, have been approved by the FDA Our other product candidates are in earlier stages of clinical or preclinical development |
| We anticipate that in the near term our success will depend on royalties generated from sales of ProQuin XR and sales of Glumetza |
| We have licensed exclusive marketing rights to ProQuin XR in the United States to Esprit Pharma, Inc |
| Esprit launched ProQuin XR in November 2005 |
| If Esprit fails to successfully commercialize ProQuin XR, our business, financial condition and results of operations will be materially and adversely affected |
| We have licensed exclusive marketing rights to the 500mg Glumetza in Canada to Biovail |
| Biovail launched the 500mg Glumetza in Canada in November 2005 |
| If Biovail fails to successfully commercialize Glumetza, our business and future revenues will be materially and adversely affected |
| If we fail to enhance our marketing, sales and distribution capabilities, or fail to enter into arrangements with third parties, we will not be able to create a market for Glumetza in the United States |
| Currently, we have limited sales and marketing staff, and no distribution capabilities |
| In order to generate sales of Glumetza or any other product candidates that receive regulatory approval that we choose to market or co-market, we must substantially enhance our internal marketing and sales force with technical expertise and with supporting distribution capabilities, or make arrangements with third parties to perform these services for us |
| The development of a sales and distribution infrastructure requires substantial resources, which may divert the attention of our management and key personnel |
| To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others |
| These efforts may not be successful |
| If we fail to fully develop sales, marketing and distribution channels, or enter into arrangements with third parties, we will experience delays in product sales and incur increased costs |
| To date, we have had limited revenues from license fees, product sales, collaborative research and development arrangements and feasibility studies, although we have received dlra55 million in license fees from Biovail and Esprit in 2005 |
| For the year ended December 31, 2005, we had total revenues of dlra4dtta4 million and for the years ended December 31, 2004 and 2003, we had total revenues of dlra200cmam000 and dlra1dtta0 million, respectively |
| For the year ended December 31, 2005, we incurred net losses of dlra24dtta5 million and for the years ended December 31, 2004 and 2003, we incurred net losses of dlra26dtta9 million and dlra30dtta0 million, respectively |
| As we continue our research and development efforts, preclinical testing and clinical trial activities, and expand our sales and marketing organization, we anticipate that we will continue to incur substantial operating losses for at least the next year |
| Therefore, we expect our cumulative losses to increase |
| These losses, among other things, have had, and we expect that they will continue to have, an adverse impact on our total assets, shareholders’ equity and working capital |
| Our product candidates are at early stages of development and may not be successful or achieve market acceptance |
| We are preparing for a Phase III clinical trial of Gabapentin GR, and we have another product candidate in earlier stages of development |
| In addition, Biovail is assisting us with the preparation of a supplemental NDA filing for the new 1000mg formulation of Glumetza, and we expect to begin performing feasibility studies by the second quarter of 2006 with another compound in combination with the AcuForm technology for a collaborative partner |
| Our own product candidates and those of our collaborative partners are subject to the risk that any or all of them are found to be ineffective or unsafe, or otherwise may fail to receive necessary regulatory clearances |
| We are unable to predict whether any of these other product candidates will receive regulatory clearances or be successfully manufactured or marketed |
| Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the time frames for commercialization of any products are long and uncertain |
| Even if these other product candidates receive regulatory clearance, our products may not achieve or maintain market acceptance |
| Also, all of our product candidates, other than the 1000mg formulation of Glumetza, use the AcuForm technology |
| If it is discovered that the AcuForm technology could have adverse 14 ______________________________________________________________________ effects or other characteristics that indicate it is unlikely to be effective as a delivery system for drugs or therapeutics, our product development efforts and our business would be significantly harmed |
| Our quarterly operating results may fluctuate and affect our stock price |
| The following factors will affect our quarterly operating results and may result in a material adverse effect on our stock price: • the timing of the commercial launch of Glumetza in the United States; • the degree of commercial success of ProQuin XR and Glumetza; • variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues; • decisions by collaborative partners to proceed or not to proceed with subsequent phases of a collaboration or program; • market acceptance of the AcuForm technology; • regulatory actions; • adoption of new technologies; • developments concerning proprietary rights, including patents, infringement allegations and litigation matters; • the introduction of new products by our competitors; • manufacturing costs and difficulties; • results of clinical trials for our products; • changes in government funding; • third-party reimbursement policies; and • the status of our compliance with the provisions of the Sarbanes-Oxley Act of 2002 |
| Our collaborative arrangements may give rise to disputes over commercial terms, contract interpretation and ownership of our intellectual property and may adversely affect the commercial success of our products |
| We currently have a collaboration agreement for development of product candidates through the feasibility phase with New River Pharmaceuticals |
| In addition, we have in the past and may in the future enter into other collaborative arrangements, some of which have been based on less definitive agreements, such as memoranda of understanding, material transfer agreements, options or feasibility agreements |
| We may not execute definitive agreements formalizing these arrangements |
| Collaborative relationships are generally complex and may give rise to disputes regarding the relative rights, obligations and revenues of the parties, including the ownership of intellectual property and associated rights and obligations, especially when the applicable collaborative provisions have not been fully negotiated and documented |
| Such disputes can delay collaborative research, development or commercialization of potential products, and can lead to lengthy, expensive litigation or arbitration |
| The terms of collaborative arrangements may also limit or preclude us from developing products or technologies developed pursuant to such collaborations |
| Additionally, the collaborators under these arrangements might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties |
| Moreover, negotiating collaborative arrangements often takes considerably longer to conclude than the parties initially anticipate, which could cause us to agree to less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs |
| We may not be able to enter into future collaborative arrangements on acceptable terms, which would harm our ability to develop and commercialize our current and potential future products |
| Further, even if we do enter into collaboration arrangements, it is possible that our collaborative partners may not choose to develop and commercialize products using the AcuForm technology |
| Other factors relating to collaborations that may adversely affect the commercial success of our products include: • any parallel development by a collaborative partner of competitive technologies or products; 15 ______________________________________________________________________ • arrangements with collaborative partners that limit or preclude us from developing products or technologies; • premature termination of a collaboration agreement; or • failure by a collaborative partner to devote sufficient resources to the development and commercial sales of products using the AcuForm technology |
| Generally, our collaborative arrangements do not restrict our collaborative partners from competing with us or restrict their ability to market or sell competitive products |
| Our current and any future collaborative partners may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us |
| Our collaborative partners may also terminate their collaborative relationships with us or otherwise decide not to proceed with development and commercialization of our products |
| It is difficult to develop a successful product |
| If we do not develop a successful product we may not be able to raise additional funds |
| The drug development process is costly, time-consuming and subject to unpredictable delays and failures |
| Before we or others make commercial sales of products using the AcuForm technology, other than Glumetza and ProQuin XR, we, our current and any future collaborative partners will need to: • conduct preclinical and clinical tests showing that these products are safe and effective; and • obtain regulatory approval from the FDA or foreign regulatory authorities |
| We will have to curtail, redirect or eliminate our product development programs if we or our collaborative partners find that: • the AcuForm technology has unintended or undesirable side effects; or • products that appear promising in preclinical or early-stage clinical studies do not demonstrate efficacy in later-stage, larger scale clinical trials |
| Even when or if our products obtain regulatory approval, successful commercialization requires: • market acceptance; • cost-effective commercial scale production; and • reimbursement under private or governmental health plans |
| Any material delay or failure in the governmental approval process and/or the commercialization of our potential products, particularly Glumetza or ProQuin XR, would adversely impact our financial position and liquidity and would make it difficult for us to raise financing on favorable terms, if at all |
| If we do not achieve our projected development and commercialization goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and our business will be harmed |
| For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development and commercialization goals |
| These milestones may include our expectations regarding the commercial launch of our products by us or our licensees, and the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings |
| From time to time, we may publicly announce the expected timing of some of these milestones, such as the commercial launch of the 500mg strength of Glumetza in the United States or the commencement of the Phase III clinical trial of Gabapentin GR All of these milestones are based on a variety of assumptions |
| The actual timing of these milestones can vary considerably from our estimates depending on numerous factors, some of which are beyond our control, including: • our available capital resources; • the efforts of our licensees with respect to the commercialization of our products; 16 ______________________________________________________________________ • the rate of progress, costs and results of our clinical trial and research and development activities, including the extent of scheduling conflicts with participating clinicians and clinical institutions and our ability to identify and enroll patients who meet clinical trial eligibility criteria; • our receipt of approvals by the FDA and other regulatory agencies and the timing thereof; • other actions by regulators; • our ability to access sufficient, reliable and affordable supplies of components used in the manufacture of our product candidates, including insulin and materials for our GR System; and • the costs of ramping up and maintaining manufacturing operations, as necessary |
| If we fail to achieve our announced milestones in the timeframes we announce and expect, our business and results of operations may be harmed and the price of our stock may decline |
| If we are unable to obtain or maintain regulatory approval, we will be limited in our ability to commercialize our products, and our business will be harmed |
| The regulatory process is expensive and time consuming |
| Even after investing significant time and expenditures on clinical trials, we may not obtain regulatory approval of our product candidates |
| Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval |
| Significant clinical trial delays would impair our ability to commercialize our products and could allow our competitors to bring products to market before we do |
| In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application may cause delays or rejections |
| Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product |
| Further, with respect to our approved products, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review |
| The discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market |
| Manufacturers of approved products are also subject to ongoing regulation, including compliance with FDA regulations governing current Good Manufacturing Practices (cGMP) |
| Failure to comply with manufacturing regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution |
| The approval process outside the United States is uncertain and may limit our ability to develop, manufacture and sell our products internationally |
| To market any of our products outside of the United States, we and our collaborative partners, including Madaus and LG Life Sciences, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for drug products |
| The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval |
| The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA If we or our licensees are unable to obtain acceptable prices or adequate reimbursement for our products from third-party payers, we will be unable to generate significant revenues |
| In both domestic and foreign markets, sales of our product candidates will depend in part on the availability of adequate reimbursement from third-party payers such as: • government health administration authorities; • private health insurers; • health maintenance organizations; • pharmacy benefit management companies; and 17 ______________________________________________________________________ • other healthcare-related organizations |
| If reimbursement is not available for our products or product candidates, demand for these products may be limited |
| Further, any delay in receiving approval for reimbursement from third-party payers would have an adverse effect on our future revenues |
| Third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services |
| Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, including pharmaceuticals |
| Our products may not be considered cost effective, and adequate third-party reimbursement may be unavailable to enable us to maintain price levels sufficient to realize an acceptable return on our investment |
| Federal and state governments in the United States and foreign governments continue to propose and pass new legislation designed to contain or reduce the cost of healthcare |
| Existing regulations affecting pricing may also change before many of our product candidates are approved for marketing |
| Cost control initiatives could decrease the price that we receive for any product we may develop |
| We depend on third parties who are single source suppliers to manufacture ProQuin XR, Glumetza and our later stage product candidates |
| If these suppliers are unable to manufacture ProQuin XR, Glumetza or our product candidates, our business will be harmed |
| We are responsible for supplying commercial quantities of ProQuin XR to Esprit |
| For the manufacturer of ProQuin XR tablets, we have entered into an agreement with MOVA Pharmaceuticals, as our sole supplier |
| Uquifa Mexico, SA, our supplier of the active pharmaceutical ingredient to ProQuin XR, is also a sole supplier to us |
| We obtain the active pharmaceutical ingredient to ProQuin XR on a purchase order basis only |
| If we are unable, for whatever reason, to obtain the active pharmaceutical ingredient or ProQuin XR tablets from our contract manufacturers, we may not be able to manufacture ProQuin XR in a timely manner, if at all |
| We are currently negotiating a supply arrangement with a tablet manufacturer for the 500mg strength of Glumetza, and we plan to purchase the active ingredient for the 500mg Glumetza on a purchase order basis |
| If the new formulation of 1000mg Glumetza is approved, we will rely on Biovail as our sole supplier |
| We will be unable to manufacture Glumetza in a timely manner if we are unable to obtain Glumetza 500mg tablets from contract manufacturers or active pharmaceutical ingredient from suppliers, or Glumetza 1000mg tablets from Biovail |
| Although we have obtained clinical batches of Gabapentin GR from a contract manufacturer, we currently have no long-term supply arrangement with respect to Gabapentin GR If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate them in a cost effective and non-disruptive manner |
| Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies |
| Accordingly, we may in the future pursue the acquisition of complementary businesses, products or technologies instead of developing them ourselves |
| We have no current commitments with respect to any acquisition or such investment |
| We do not know if we would be able to successfully complete any acquisitions, or whether we would be able to successfully integrate any acquired business, product or technology or retain any key employees |
| Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management |
| If we were to be unable to integrate any acquired businesses, products or technologies effectively, our business would suffer |
| In addition, any amortization or charges resulting from the costs of acquisitions could harm our operating results |
| We have implemented certain anti-takeover provisions |
| Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors |
| These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock |
| 18 ______________________________________________________________________ We are also subject to the provisions of Section 1203 of the California General Corporation Law which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction |
| We have adopted a shareholder rights plan, commonly known as a “poison pill” |
| The provisions described above, our poison pill and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us |
| Increased costs associated with corporate governance compliance may significantly impact our results of operations |
| Changing laws, regulations and standards relating to corporate governance, public disclosure and compliance practices, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules, are creating uncertainty for companies such as ours in understanding and complying with these laws, regulations and standards |
| As a result of this uncertainty and other factors, devoting the necessary resources to comply with evolving corporate governance and public disclosure standards has resulted in and may in the future result in increased general and administrative expenses and a diversion of management time and attention to compliance activities |
| We also expect these developments to increase our legal compliance and financial reporting costs |
| In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| Moreover, we may not be able to comply with these new rules and regulations on a timely basis |
| These developments could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers |
| We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result |
| To the extent these costs are significant, our general and administrative expenses are likely to increase |
| If we are unable to satisfy regulatory requirements relating to internal controls, our stock price could suffer |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive evaluation of their internal control over financial reporting |
| At the end of each fiscal year, we must perform an evaluation of our internal control over financial reporting, include in our annual report the results of the evaluation, and have our external auditors publicly attest to such evaluation |
| If we fail to complete future evaluations on time, or if our external auditors cannot attest to our future evaluations, we could fail to meet our regulatory reporting requirements and be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our stock price |
| Business interruptions could limit our ability to operate our business |
| Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events |
| In particular, our corporate headquarters are located in the San Francisco Bay area, which has a history of seismic activity |
| We have not established a formal disaster recovery plan, and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses that occur |
| A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations |