10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2011

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM        TO       

COMMISSION FILE NUMBER 001-13111

DEPOMED, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA	94-3229046
(STATE OR OTHER JURISDICTION OF	(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)	IDENTIFICATION NUMBER)

1360 O’BRIEN DRIVE

MENLO PARK, CALIFORNIA 94025

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(650) 462-5900

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

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 o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

The number of issued and outstanding shares of the Registrant’s Common Stock, no par value, as of August 1, 2011 was 55,362,918.

DEPOMED, INC.

	PAGE
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Condensed Balance Sheets at June 30, 2011 (unaudited) and December 31, 2010	3
Condensed Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)	4
Condensed Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)	5
Notes to Condensed Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosure About Market Risk	25
Item 4. Controls and Procedures	25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3. Defaults upon Senior Securities	38
Item 4. Reserved	38
Item 5. Other Information	38
Item 6. Exhibits	38
Signatures	39

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PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

DEPOMED, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share amounts)

	June 30,			December 31,
	2011			2010
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	36,311		$	22,526
Marketable securities	77,522			47,825
Accounts receivable	7,360			6,094
Receivables from collaborative partners	584			253
Inventories	5,014			1,571
Prepaid and other current assets	2,918			1,330
Total current assets	129,709			79,599
Marketable securities, long-term	50,377			6,537
Property and equipment, net	994			698
Other assets	181			197
	$	181,261		$	87,031
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	23,522		$	18,473
Deferred product sales	420			1,041
Deferred license revenue	7,647			10,665
Other current liabilities	404			635
Current portion of long-term debt	121			2,170
Total current liabilities	32,114			32,984
Deferred license revenue, non-current portion	23,328			30,926
Other long-term liabilities	—			15
Commitments
Shareholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series A convertible preferred stock, 25,000 shares designated, 18,158 shares issued and surrendered, and zero shares outstanding at June 30, 2011 and December 31, 2010	—			—
Common stock, no par value, 100,000,000 shares authorized; 55,339,962 and 52,957,787 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	200,831			191,343
Accumulated deficit	(75,167		)	(168,306		)
Accumulated other comprehensive gain	155			69
Total shareholders’ equity	125,819			23,106
	$	181,261		$	87,031

(1) Derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

See accompanying notes to Condensed Financial Statements.

3

DEPOMED, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenues:
Product sales	$	16,153		$	11,657		$	31,464		$	24,257
Royalties	67			91			232			179
License and collaborative revenue	4,998			12,671			72,623			15,342
Total revenues	21,218			24,419			104,319			39,778
Costs and expenses:
Cost of sales	2,140			2,981			3,775			4,462
Research and development expense	4,043			4,570			9,197			9,758
Selling, general and administrative expense:
Promotion fee expense	11,055			8,099			21,317			16,978
Other selling, general and administrative expense	9,976			4,541			17,216			8,091
Total selling, general and administrative expense	21,031			12,640			38,533			25,069
Gain on settlement agreement	—			—			(40,000		)	—
Total costs and expenses	27,214			20,191			11,505			39,289
Income (loss) from operations	(5,996		)	4,228			92,814			489
Other income (expense):
Interest and other income	357			56			436			150
Interest expense	(39		)	(157		)	(109		)	(340		)
Total other income (expense)	318			(101		)	327			(190		)
Net income (loss) before income taxes	(5,678		)	4,127			93,141			299
Provision for income taxes	(1		)	(1		)	(3		)	(2		)
Net income (loss)	$	(5,679	)	$	4,126		$	93,138		$	297
Basic net income (loss) per common share	$	(0.11	)	$	0.08		$	1.73		$	0.01
Diluted net income (loss) per common share	$	(0.11	)	$	0.08		$	1.67		$	0.01
Shares used in computing basic net income (loss) per common share	54,056,064			52,436,681			53,706,617			52,368,085
Shares used in computing diluted net income (loss) per common share	54,056,064			53,103,623			55,883,346			52,918,507

See accompanying notes to Condensed Financial Statements.

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DEPOMED, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2011			2010
Operating Activities
Net income	$	93,138		$	297
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	123			210
Loss on disposal of property and equipment	—			46
Stock-based compensation	1,867			1,061
Changes in assets and liabilities:
Accounts receivable	(1,597		)	473
Inventories	(3,443		)	1,089
Prepaid and other assets	(1,572		)	(381		)
Accounts payable and other accrued liabilities	4,074			(58		)
Accrued compensation	729			(985		)
Deferred revenue	(11,235		)	(5,395		)
Net cash provided by (used in) operating activities	82,084			(3,643		)
Investing Activities
Purchases of property and equipment	(444		)	(58		)
Purchases of marketable securities	(94,777		)	(38,579		)
Maturities of marketable securities	21,399			34,490
Sales of marketable securities	—			4,482
Net cash provided by (used in) investing activities	(73,822		)	335
Financing Activities
Principal payments on long-term debt	(2,098		)	(1,867		)
Proceeds from issuance of common stock	7,621			599
Net cash provided by (used in) financing activities	5,523			(1,268		)
Net increase (decrease) in cash and cash equivalents	13,785			(4,576		)
Cash and cash equivalents at beginning of period	22,526			26,821
Cash and cash equivalents at end of period	$	36,311		$	22,245

See accompanying notes to Condensed Financial Statements.

5

DEPOMED, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed financial statements and the related footnote information of Depomed, Inc. (the Company or Depomed) have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the interim period ended June 30, 2011 are not necessarily indicative of results to be expected for the entire year ending December 31, 2011 or future operating periods.

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.

Reclassifications

Certain reclassifications have been made to the December 31, 2010 balance sheet in order to conform to the Company’s current presentation. The Company has now classified receivables from collaborative partners as a separate line-item on its balance sheet, which was previously included under accounts receivable.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of its products, royalties earned, and on payments received and services performed under contractual arrangements. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements met certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company’s customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that we remain obligated to perform services.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable.

·Product Sales:

·Glumetza®: The Company sells Glumetza® (metformin hydrochloride extended release tablets) to wholesalers and retail pharmacies subject to rights of return six months before product expiration and up to twelve months after product expiration. The Company recognizes revenue for Glumetza sales at the time title transfers to its customers, which occurs at the time product is delivered to its customers.

·Proquin®XR: Until the fourth quarter of 2010, the Company sold Proquin® XR (ciprofloxacin hydrochloride) to wholesalers and retail pharmacies subject to rights of return six months before product expiration and up to twelve months after product expiration.  Given the Company’s limited history of selling Proquin XR and declining prescription demand for Proquin XR, the Company was not able to reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of Proquin XR until the right of return no longer exists, which occurs at the earlier of the time Proquin XR units are dispensed through patient prescriptions or expiration of the right of return. The Company

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estimates patient prescriptions dispensed using an analysis of third-party information, including third-party market research data and information obtained from wholesalers with respect to inventory levels and inventory movement. As a result of this policy, the Company has a deferred revenue balance of $0.4 million at June 30, 2011 related to Proquin XR product shipments that have not been recognized as revenue, which is net of wholesaler fees, retail pharmacy discounts and prompt payment discounts. In addition, the costs of manufacturing Proquin XR associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

·Product Sales Allowances — The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company’s agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from the Company’s estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company’s product sales allowances include:

·Product Returns — The Company estimates product returns on sales of Glumetza. The Company allows customers to return product that is within six months before and up to twelve months after its product expiration date.  The shelf life of the 500mg Glumetza is currently 48 months from the date of tablet manufacture. On product launch in August 2006 and through the second quarter of 2008, the shelf life of 500mg Glumetza product shipped was 36 months from the date of tablet manufacture. The shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. The Company monitors actual return history on individual product lot basis since product launch, which provides it with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product, shipment and prescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products.

·Managed Care Rebates — The Company offers rebates under contracts with certain managed care organizations. The Company establishes an accrual equal to its estimates of future managed care rebates attributable to sales and recognizes the estimated rebates as a reduction of revenue in the same period the related revenue is recognized. The Company estimates its managed care rebates based on the terms of each agreement, estimated levels of inventory in the distribution channel, and historical and expected future utilization of product by the managed care organization.

·Wholesaler and Retail Pharmacy Discounts — The Company offers discounts to certain wholesale distributors and retail pharmacies based on contractually determined rates. The Company accrues the discount on shipment to the respective wholesale distributors and retail pharmacies and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

·Prompt Pay Discounts - The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on the Company’s experience, the Company expects its customers to comply with the payment terms to earn the cash discount. The Company accounts for cash discounts by reducing accounts receivable by the full amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

·Medicaid Rebates — The Company participates in Medicaid rebate programs, which provide assistance to certain eligible low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which the prescription is filled. The Company estimates and accrues Medicaid rebates based on product pricing, current rebates and changes in the level of discounts the Company offers that may affect the level of Medicaid discount, historical and estimated future percentages of product sold to Medicaid recipients and estimated levels of inventory in the distribution channel.

·Chargebacks — The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs.  These federal entities purchase products from wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the

7

federal entity paid for the product.  The Company estimates and accrues chargebacks based on estimated wholesaler inventory levels, current contract prices and historical chargeback activity.

·Patient Discount Programs — The Company offers loyalty card programs to patients for Glumetza in which patients receive certain discounts at participating retail pharmacies that are reimbursed by the Company.  The Company estimates and accrues future redemptions based on historical redemption activity.

·Royalties — Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured. Royalties received under the Company’s agreements with Valeant Pharmaceuticals International, Inc. (Valeant) and LG Life Sciences (LG) are recognized when the royalty payments are received as they cannot reliably be estimated.

·License and Collaborative Arrangements - Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company’s remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement; (2) consideration earned relates to past performance, and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company’s performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company’s performance, the consideration earned relates solely to past performance, and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Recently Issued Accounting Standards

In June 2011, the FASB issued guidance amending the presentation requirements for comprehensive income. For public entities, this guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. Upon adoption, we will have the option to report total comprehensive income, including components of net income and components of other comprehensive income, as a single continuous statement or in two separate but consecutive statements. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In September 2009, the FASB revised the authoritative guidance for revenue arrangements with multiple deliverables. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. We elected to adopt this guidance prospectively, effective for the Company’s fiscal year beginning January 1, 2011. Upon adoption, the guidance did not have a material impact on the Company’s financial statements and is not expected to have a material impact on the Company’s future operating results.

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of June 30, 2011 and December 31, 2010 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	4,990	$	—	$	—		$	4,990
Money market funds	31,321		—		—			31,321
Total cash and cash equivalents	$	36,311	$	—	$	—		$	36,311
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
U.S. corporate debt securities	15,403		5		(1		)	15,407
U.S. government agency debt securities	16,191		7		—			16,198
U.S. Treasury securities	45,852		558		(493		)	45,917
Total maturing between 1 and 2 years and included in marketable securities:
U.S. corporate debt securities	—		—		—			—
U.S. government agency debt securities	20,101		21		(1		)	20,121
U.S. Treasury securities	30,197		59		—			30,256
Total available-for-sale securities	$	127,744	$	650	$	(495	)	$	127,899
Total cash, cash equivalents and marketable securities	$	164,055	$	650	$	(495	)	$	164,210

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December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	3,913	$	—	$	—		$	3,913
Money market funds	17,613		—		—			17,613
U.S. Treasury securities	1,000		—		—			1,000
Total cash and cash equivalents	$	22,526	$	—	$	—		$	22,526
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
U.S. corporate debt securities	12,099		4		(2		)	12,101
U.S. government agency debt securities	25,667		21		—			25,688
U.S. Treasury securities	10,015		21		—			10,036
Total maturing between 1 and 2 years and included in marketable securities:
U.S. corporate debt securities	—		—		—			—
U.S. government agency debt securities	—		—		—			—
U.S. Treasury securities	6,512		25		—			6,537
Total available-for-sale securities	$	54,293	$	71	$	(2	)	$	54,362
Total cash, cash equivalents and marketable securities	$	76,819	$	71	$	(2	)	$	76,888

The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality, U.S. financial institutions and, to date has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain within shareholders’ equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the condensed statement of operations.

At June 30, 2011, the Company had eight securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 (in thousands):

	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. corporate debt securities	$	4,067	$	(1	)	—		—		$	4,067	$	(1	)
U.S. government agency debt securities	11,032		(1		)	—		—		11,032		(1		)
U.S. Treasury securities	1,512		(493		)	—		—		1,512		(493		)
Total available-for-sale	$	16,611	$	(495	)	$	—	$	—	$	16,611	$	(495	)

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The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s securities. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until maturity, there were no material other-than-temporary impairments for these securities at June 30, 2011.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company utilizes the following fair value hierarchy based on three levels of inputs:

·Level 1: Quoted prices in active markets for identical assets or liabilities.

·Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of June 30, 2011 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	31,321	$	—	$	—	31,321
U.S. corporate debt securities	—		15,407		—		15,407
U.S. government agency debt securities	—		36,319		—		36,319
U.S. Treasury securities	—		76,173		—		76,173
Total	$	31,321	$	127,899	$	—	$	159,220

The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2010 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	17,613	$	—	$	—	$	17,613
U.S. corporate debt securities	—		12,101		—		12,101
U.S. government agency debt securities	—		25,688		—		25,688
U.S. Treasury securities	—		17,573		—		17,573
Total	$	17,613	$	55,362	$	—	$	72,975

There are no financial liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.

NOTE 3.  NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, plus dilutive common shares for the period determined using the treasury-stock method. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per share are calculated as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except for per share amounts)	2011			2010		2011		2010
Numerator:
Net income (loss)	$	(5,679	)	$	4,126	$	93,138	$	297
Denominator for basic net income (loss) per share	54,056			52,437		53,707		52,368
Net effect of dilutive common stock equivalents	—			667		2,176		550
Denominator for diluted net income (loss) per share:	54,056			53,104		55,883		52,918
Basic net income (loss) per share	$	(0.11	)	$	0.08	$	1.73	$	0.01
Diluted net income (loss) per share	$	(0.11	)	$	0.08	$	1.67	$	0.01

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For the three and six months ended June 30, 2011, the total number of antidilutive outstanding common stock equivalents excluded from the net income per share computation was 4.0 million and 0.8 million, respectively. For the three and six months ended June 30, 2010, 3.2 million and 3.7 million common stock equivalents, respectively, were not included in dilutive shares because their effect is anti-dilutive.

NOTE 4. LICENSE AND COLLABORATIVE ARRANGEMENTS

Ventiv Commercial Services, LLC

In June 2011, the Company entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), pursuant to which inVentiv Selling Solutions, Ventiv’s outsourced sales business, will provide sales force recruiting, training, deployment and ongoing operational support to the Company to promote Gralise. The agreement provides for a sales force of 164 full-time sales representatives dedicated to the Company, all of whom will be employees of Ventiv.  Members of sales management will be Company employees.

Under the terms of the agreement, the Company will pay Ventiv an upfront implementation fee and agreed upon fixed monthly management fee, which is subject to adjustment based on actual staffing levels.  During the term of the agreement, a portion of Ventiv’s monthly management fee will be subject to payment by the Company only to the extent that specified performance objectives are met.  The Company will also pay certain pass-through costs of Ventiv incurred in connection with the agreement, which primarily include bonuses, travel costs and certain administrative expenses. The Company incurred $0.9 million of expense associated with the upfront implementation fee during the three and six months ended June 30, 2011.

The agreement will expire on the second anniversary of the date on which sales representatives hired by Ventiv are deployed. The agreement is subject to early termination under certain circumstances and may be terminated by either party upon advance notice after the first anniversary of the deployment date.

Abbott Products Inc. (formerly Solvay Pharmaceuticals, Inc.)

In November 2008, the Company entered into an exclusive license agreement with Solvay Pharmaceuticals, Inc. (Solvay) granting Solvay exclusive rights to develop and commercialize GraliseTM (gabapentin) for pain indications in the United States, Canada and Mexico. In February 2010, Abbott Laboratories acquired the pharmaceutical business of Solvay and Abbott Products, a subsidiary of Abbott Laboratories, became responsible for the Gralise license agreement with the Company.

In March 2010, Abbott Products submitted an NDA for Gralise to the U.S. Food and Drug Administration (FDA) for the management of postherpetic neuralgia (PHN). In May 2010, the FDA accepted the NDA filing for Gralise, which triggered a $10.0 million milestone payment from Abbott Products which Depomed received in June 2010. As the nonrefundable milestone was substantive in nature, achievement of the milestone was not reasonably assured at the inception of the agreement and the milestone was related to past performance, the Company recognized the entire $10.0 million as revenue in the second quarter of 2010.

In January 2011, Abbott Products received FDA approval of Gralise for the management of PHN, which triggered a $48.0 million development milestone from Abbott Products to the Company, which the Company received in February 2011. As the nonrefundable milestone was substantive in nature, achievement of the milestone was not reasonably assured at the inception of the agreement and the milestone was related to past performance, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

In March 2011, the Company entered into a settlement agreement with Abbott Laboratories which provided for (i) the immediate termination of the Gralise license agreement; (ii) the transition of Gralise back to Depomed; and (iii) a $40.0 million payment to Depomed which the Company received in March 2011. The $40.0 million payment was recognized as a gain within operating income in the first quarter of 2011.

Pursuant to the exclusive license agreement originally entered into in November 2008, Solvay paid the Company a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time the Company’s development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, the Company no longer has continuing obligations to Abbott Products. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue.

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Boehringer Ingelheim International GMBH

In March 2011, the Company entered into a license and service agreement with Boehringer Ingelheim International GMBH (Boehringer Ingelheim) granting Boehringer Ingelheim a license to certain patents related to the Company’s Acuform drug delivery technology to be used in developing fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the terms of the agreement, Boehringer Ingelheim was also granted a right of reference to the New Drug Application covering the Company’s Glumetza product and associated data for use in potential regulatory submission processes.

In connection with the license and service agreement, the Company received an upfront payment of $10.0 million less applicable withholding taxes of approximately $1.5 million, for a net receipt of approximately $8.5 million in April 2011. The Company received the remaining $1.5 million of taxes previously withheld directly from German tax authorities in June 2011.

The $10.0 million upfront fee is being amortized ratably through October 2011, which is the estimated length of time Depomed is obligated to perform formulation work under the agreement. The Company recognized approximately $3.9 million and $4.9 million of revenue associated with this upfront license fee during the three and six months ended June 30, 2011, respectively. The remaining deferred revenue balance is $5.1 million at June 30, 2011.

Under the terms of the agreement, the Company may receive an additional $2.5 million upon delivery of experimental batches of prototype formulations that meet certain specification. The Company is also eligible to receive additional milestone payments based on regulatory filing and approval events, as well as royalties on worldwide net sales of products.

Depomed is responsible for providing certain initial formulation work associated with the fixed dose combination products. Work performed by the Company under the service agreement will be reimbursed by Boehringer Ingelheim on an agreed-upon FTE rate per hour plus out-of-pocket expenses. The Company recognized approximately $0.5 million and $0.6 million of revenue associated with the reimbursement of formulation work under the service agreement during the three and six months ended June 30, 2011, respectively.

Santarus, Inc.

Under the Company’s promotion agreement with Santarus, Inc. (Santarus) originally entered into in July 2008, Santarus has exclusive rights to promote Glumetza in the United States. Santarus began promotion of Glumetza in October 2008. Santarus is required to meet certain minimum promotion obligations during the term of the agreement, and is required to make certain minimum marketing, advertising, medical affairs and other commercial support expenditures. The Company continues to record revenue from the sales of Glumetza product, and starting in October 2008, began paying Santarus a promotion fee equal to 80% of the gross margin earned from net sales of Glumetza product in the United States. The promotion fee was reduced to 75% of gross margin beginning in the fourth quarter of 2010. For the three and six months ended June 30, 2011, the Company recognized $11.1 million and $21.3 million, respectively, in promotion fee expense under the agreement, which is classified within selling, general and administrative expense. For the three and six months ended June 30, 2010, the Company recognized $8.1 million and $17.0 million, respectively, in promotion fee expense under the agreement.

The Company is also entitled to receive sales milestones payments from Santarus totaling up to $16.0 million, based on achieving certain levels of net product sales of Glumetza. In January 2011, the Company achieved the first of these sales milestones related to net sales of Glumetza reaching $50.0 million for the 13 month period ending January 31, 2011. As the milestone was achieved and related to past performance the entire $3.0 million was recognized in its entirety as milestone revenue in the first quarter of 2011.

NOTE 5.  LONG-TERM DEBT

In June 2008, the Company entered into a loan and security agreement with General Electric Capital Corporation, as agent (GECC), and Oxford Finance Corporation (Oxford) that provided the Company with a $15.0 million credit facility. The credit facility was available in up to three tranches.  The first tranche of $3.8 million was advanced to the Company upon the closing of the loan agreement.  The second tranche of $5.6 million was advanced to the Company in July 2008. The third tranche of $5.6 million was not drawn and is no longer available to the Company, and GECC and Oxford waived the 2% unused line fee related to the unused portion of the credit facility.

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The Company paid interest only on the first tranche for the first six months at an interest rate of 11.59%.  Beginning in January 2009, the Company began principal payments on the first tranche, plus interest at such rate, which will be paid in 30 equal monthly installments. The second tranche was interest-only through December 31, 2008, with principal and interest payable thereafter in 30 equal monthly installments at an interest rate of 11.59%. Interest expense, which includes amortization of debt issuance costs, was approximately $25,000  and $81,000 for the three and six months ended June 30, 2011, respectively.

As of June 30, 2011, the outstanding balance under the facility was approximately $147,000, and the unamortized portion of the debt issuance costs was approximately $33,000. The credit facility was fully repaid in July 2011.

The obligations of the Company under the loan agreement was secured by interests in all of the Company’s personal property, and proceeds from any intellectual property, but not by the Company’s intellectual property.

The credit facility contained affirmative and negative covenants with which the Company was required to comply with, and imposed restrictions with regards to additional indebtedness, liens, various fundamental changes (including mergers and acquisitions), payments, investments, transactions with affiliates, and other limitations customary in secured credit facilities. The Company was in compliance with such covenants as of June 30, 2011.

NOTE 6.  STOCK-BASED COMPENSATION

The following table presents stock-based compensation expense recognized for stock options, stock awards and the Company’s employee stock purchase program (ESPP) in the Company’s statements of operations (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of sales	$	14	$	3	$	33	$	6
Research and development expense	156		143		311		309
Selling, general and administrative expense	995		371		1,523		746
Total	$	1,165	$	517	$	1,867	$	1,061

For the three and six months ended June 30, 2011, the Company recognized approximately $0.4 million in stock-compensation expense associated with the accelerated vesting of stock options in connection with a separation agreement and release with Carl A. Pelzel, the Company’s former President and Chief Executive Officer. See Note 11 for further information with regards to the separation agreement and release.

At June 30, 2011, the Company had $5.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants that will be recognized over an average vesting period of 2.3years.

NOTE 7.  COMPREHENSIVE INCOME (LOSS)

The following table summarizes components of total comprehensive income (loss) (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011		2010
Net income (loss)	$	(5,679	)	$	4,126	$	93,138	$	297
Unrealized gain on available-for-sale securities	97			46		86		47
Total comprehensive income (loss)	$	(5,582	)	$	4,172	$	93,224	$	344

NOTE 8.  INVENTORIES

Inventories relate to the manufacture of the Company’s Glumetza, Gralise and Proquin XR products. Inventories are stated at the lower of cost or market and consist of the following (in thousands):

	June 30, 2011		December 31, 2010
Raw materials	$	1,082	$	74
Work-in-process	137		202
Finished goods	3,778		1,254
Deferred costs	17		41
Total	$	5,014	$	1,571

Deferred costs represent the costs of Proquin XR product shipped for which recognition of revenue has been deferred.

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NOTE 9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following (in thousands):

	June 30, 2011		December 31, 2010
Accounts payable	$	2,246	$	1,655
Accrued compensation	3,367		2,638
Accrued clinical trial expense	793		307
Accrued rebates and sales discounts	2,823		2,625
Allowance for product returns	6,410		5,355
Accrued promotion fee	4,269		2,490
Other accrued liabilities	3,614		3,403
Total accounts payable and accrued liabilities	$	23,522	$	18,473

NOTE 10.  SHAREHOLDERS’ EQUITY

Option Exercises

For the three and six months ended June 30, 2011, employees and consultants exercised options to purchase 1,617,010 and 2,312,253 shares of the Company’s common stock with net proceeds to the Company of approximately $5.0 million and $7.3 million, respectively.

Employee Stock Purchase Plan

In May 2011, the Company sold 69,922 shares under the ESPP. The shares were purchased at a weighted average purchase price of $4.37 per share with proceeds of approximately $0.3 million.

NOTE 11.  RELATED PARTY TRANSACTIONS

Carl A. Pelzel

In April 2011, the Company entered into a separation agreement and release with Carl A. Pelzel, the Company’s former President and Chief Executive Officer. Pursuant to the separation agreement, Mr. Pelzel is being paid $520,000, which is equivalent to one year of his base salary.  Payments are being made over one year, and will be reduced dollar-for-dollar by any compensation Mr. Pelzel receives in connection with employment (or full-time consulting) by another employer (or third party).  The Company is also paying Mr. Pelzel’s health and dental insurance COBRA premiums for up to 18 months following his separation from the Company.  The separation agreement further provides for three months’ accelerated vesting of Mr. Pelzel’s options to purchase the Company’s common stock, and a release of claims in favor of the Company.  The Company incurred a one-time severance charge of approximately $1.0 million in the second quarter of 2011 with respect to this separation agreement, consisting of approximately $0.4 million in stock-based compensation related to the accelerated vesting of Mr. Pelzel’s awards and approximately $0.6 million of severance expense related to future payments and health care benefits.

NOTE 12.  INCOME TAXES

As of December 31, 2010 and June 30, 2011, the Company had $3.4 million and $3.5 million of unrecognized tax benefits, respectively. All tax years since inception remain open to examination by the Internal Revenue Service and the California Franchise Tax Board until such time the Company’s net operating losses and credits are either utilized or expire. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense by the Company. The Company does not have any accrued interest or penalties associated with unrecognized tax benefits.  The Company does not foresee any material changes to unrecognized tax benefits within the next twelve months except as related to any new items impacting the current year operations.

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NOTE 13. LEASE AMENDMENTS

In June 2011, the Company entered into amendments to its existing leases for the Company’s premises located at 1330 and 1360 O’Brien Drive, Menlo Park, California, consisting of approximately 46,000 rentable square feet.  The lease amendments extend the term of the existing leases for twelve months, from February 1, 2012 through January 31, 2013.  All material provisions of the leases remain the same, except that the Company may not extend either of the lease terms. The lease for the Company’s premises located at 1430 O’Brien Drive, consisting of approximately 9,000 rentable square feet, was not amended by the lease amendments, and has a term through January 31, 2012.

NOTE 14. SUBSEQUENT EVENTS

Ironwood Pharmaceuticals, Inc.

In July 2011, the Company entered into an agreement with Ironwood Pharmaceuticals, Inc. (Ironwood) granting Ironwood a license for worldwide rights to the Company’s Acuform drug delivery technology for an undisclosed Ironwood early stage development program. Under the terms of the agreement, the Company will assist with initial product formulation and Ironwood will be responsible for all development and commercialization of the product. The Company received an upfront license fee of $0.9 million and will receive additional payments pending achievement of certain development and regulatory milestones, as well as royalties on product sales.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

Statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q 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:

·our ability to successfully prepare for and launch GraliseTM (gabapentin), our product for the management of postherpetic neuralgia that was transferred to us in March 2011 from our former licensee, Abbott Products Inc. (a wholly-owned subsidiary of Abbott Laboratories, or Abbott Products);

·the commercial success and market acceptance of Gralise and our own efforts, or those of Ventiv or of any future commercialization partner, with respect to the commercialization of Gralise;

·results and timing of our clinical trials, including the results of Breeze 3, our Phase 3 trial evaluating Serada® for menopausal hot flashes;

·the commercial success and market acceptance of Serada if we receive approval to market Serada in the United States;

·any patent infringement or other litigation that may be instituted related to Serada or Gralise under the Hatch-Waxman Act;

·the commercial success of Glumetza® (metformin hydrochloride extended-release tablets) in the United States, and the efforts of our Glumetza commercial partner, Santarus, Inc. (Santarus);

·the results of our ongoing litigation against Lupin Limited (Lupin)  and Sun Pharmaceuticals related to their respective abbreviated New Drug Applications (ANDAs) to market generic Glumetza in the United States;

·our and our collaborative partners’ compliance or non-compliance with legal and regulatory requirements related to the promotion of pharmaceutical products in the United States;

·the results of our research and development efforts;

·submission, acceptance and approval of regulatory filings;

·our need for, and ability to raise, additional capital;

·our collaborative partners’ compliance or non-compliance with obligations under our collaboration agreements; 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 “RISK FACTORS” section and elsewhere in this Quarterly Report on Form 10-Q. We disclaim any intent to update or revise these forward-looking statements to reflect new events or circumstances.

ABOUT DEPOMED

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. In January 2011, the U.S. Food and Drug Administration (FDA) approved Gralise (gabapentin) once-daily tablets for the management of postherpetic neuralgia. In March 2011, we and our former licensee, Abbott Products, terminated our Gralise exclusive license agreement and the rights to Gralise reverted back to us. We intend to commercialize Gralise on our own or with the assistance of a promotion partner or licensee.

In October 2009, we announced the results of our Breeze 1 and Breeze 2 clinical trials for Serada, our proprietary extended release formulation of gabapentin for the treatment of menopausal hot flashes. The higher dose formulation of Serada evaluated in the studies met five of eight co-primary endpoints across the two studies, while the lower dose formulation evaluated met four of eight co primary endpoints. In August 2010, we commenced one additional Phase 3 clinical trial evaluating Serada for menopausal hot flashes, known as Breeze 3, after reaching an agreement with the FDA regarding a Special Protocol Assessment (SPA) on the design and analysis of Breeze 3. In March 2011, we completed enrollment in Breeze 3.

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

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compounds upon which they are based and may be promoted together within a specialty pharmaceutical field, such as women’s health care providers. Our development of Serada, and our retention of co-promotion rights within the obstetrics/gynecology field in our commercialization arrangements with Covidien, Ltd. (Covidien) and Santarus, Inc. (Santarus), 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. Third, we enter into collaborative partnerships with other companies where our technology can add value to a partner’s product candidate. Our license and development arrangements with Covidien, Janssen Pharmaceutica N.V. (Janssen), and Boehringer Ingelheim International GMBH (Boehringer Ingelheim) and our license agreement with Merck & Co., Inc. (Merck) are examples of this strategy.

In addition to Gralise, we have developed two other products which have been approved by the FDA. 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. Proquin® XR (ciprofloxacin hydrochloride) is a once-daily treatment for uncomplicated urinary tract infections that we no longer manufacture or market.

The following table summarizes our product pipeline and marketed products.

Product Pipeline

Product	Indication	Status
Serada®	Menopausal hot flashes	Two Phase 3 studies completed (Breeze 1 and Breeze 2). One additional Phase 3 study (Breeze 3) initiated in August 2010. Enrollment completed in March 2011. Top-Line results expected in the fourth quarter of 2011.
DM-1992	Parkinson’s disease	Second Phase 1 study completed in February 2011.

Commercialized Products*

Product	Indication	Status
Glumetza®	Type 2 diabetes	Currently sold in the United States and Canada. Co-promoted in the United States with Santarus. Canadian rights held by Valeant.
GraliseTM	Postherpetic neuralgia	Approved by the FDA in January 2011. Commercial launch currently expected in October 2011.

Significant Developments and Highlights for the Quarter Ended June 30, 2011

·In April 2011, James A. Schoeneck was appointed as our President and Chief Executive Officer, following the resignation of Carl A. Pelzel, our former President and Chief Executive Officer.

·In May 2011, Steve Greco was appointed as our Vice President, Sales.

·In June 2011, Kevin Weber was appointed as our Vice President, Marketing.

·In June 2011, we entered into a service agreement with Ventiv Commercial Services, LLC to provide 164 full-time sales representatives dedicated to us to promote Gralise.

·Revenue for the three months ended June 30, 2011 was $21.2 million, compared to $24.4 million for the three months ended June 30, 2010. Revenue for the three months ended June 30, 2010 included recognition of the $10.0 million milestone payment received from Abbott Products.

·Cash, cash equivalents and marketable securities were $164.2 million as of June 30, 2011, compared to $76.9 million as of December 31, 2010.

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PRODUCT DEVELOPMENTS AND TRANSACTIONS

GraliseTM (gabapentin) tablets for the Management of Postherpetic Neuralgia

We are currently engaged in preparation, commercial manufacturing and a build-up of our commercial infrastructure in order to launch Gralise in October 2011, subject to unanticipated delays in commercialization activities.

Ventiv Commercial Services, LLC.In June 2011, we entered in to a service agreement with Ventiv Commercial Services, LLC (Ventiv), pursuant to which inVentiv Selling Solutions, Ventiv’s outsourced sales business, will provide us with sales force recruiting, training, deployment and ongoing operational support to the Company to promote Gralise. The agreement provides for a sales force of 164 full-time sales representatives dedicated to the Company, all of whom will be employees of Ventiv. Members of sales management will be our employees.

Under the terms of the agreement, we will incur an upfront implementation fee, and agreed upon fixed monthly management fees, which are subject to adjustment based on actual staffing levels. During the term of the agreement, a portion of Ventiv’s monthly management fee will be subject to payment by us only to the extent that specified performance objectives are met. We will also pay certain pass-through costs of Ventiv incurred in connection with the Agreement.

The Agreement will expire on the second anniversary of the date on which sales representatives hired by Ventiv are deployed. The Agreement is subject to early termination under certain circumstances and may be terminated by either party upon advance notice after the first anniversary of the deployment date.

Abbott Products.  In November 2008, we entered into an exclusive license agreement with Solvay Pharmaceuticals, Inc. (Solvay) granting Solvay exclusive rights to develop and commercialize Gralise in the United States, Canada and Mexico for pain indications. The agreement became effective in January 2009. In February 2010, Abbott Laboratories completed its acquisition of the pharmaceutical business of Solvay. Abbott Products, a subsidiary of Abbott Laboratories, assumed responsibility for the Gralise license agreement with us in connection with the acquisition.

Pursuant to the license agreement with Solvay, we received a $25.0 million upfront fee in February 2009. In March 2010, Abbott Products submitted an NDA for Gralise to the FDA for the management of postherpetic neuralgia. In May 2010, the FDA accepted the NDA for Gralise for the management of postherpetic neuralgia, which triggered a $10.0 million milestone payment from Abbott Products to us in June 2010.

In January 2011, the FDA approved Gralise for once-daily management of postherpetic neuralgia. The approval triggered a $48.0 million milestone from Abbott Products to us, which we received in February 2011.

Pursuant to a settlement agreement entered into in March 2011, we and Abbott Products terminated our license agreement for Gralise. The settlement agreement provided for (i) the transition of Gralise back to Depomed and (ii) a $40.0 million payment to Depomed which we received in March 2011. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in the first quarter of 2011, resulting in immediate recognition of approximately $11.3 million of license revenue.

Serada®for Menopausal Hot Flashes

Phase 3 Study-Breeze 3 Clinical Trial.   In August 2010, we reached agreement with the FDA regarding a Special Protocol Assessment (SPA) on the design and analysis of Breeze 3, our ongoing Phase 3 clinical trial evaluating Serada for menopausal hot flashes. An SPA is an agreement with the FDA that a proposed trial protocol design, clinical endpoints and statistical analyses are acceptable to support a product candidate’s regulatory approval.

We began enrollment in Breeze 3 in August 2010 and completed enrollment in March 2011. Breeze 3 is expected to be completed by the end of the third quarter of 2011, with top-line results expected to be reported in the fourth quarter of 2011.

Study Design.  Breeze 3 is a randomized, double-blind, placebo-controlled study of up to 600 patients. Patients are randomized into one of two treatment arms, with patients receiving either placebo or a total dose of 1800mg of Serada dosed 600mg in the morning and 1200mg in the evening. The co-primary efficacy endpoints in the study are reductions in the mean frequency of moderate-to-severe hot flashes, and the average severity of hot flashes, measured after four and 12 weeks of stable treatment. As in the prior Breeze 1 trial, the treatment duration of the study is 24 weeks, to address the FDA’s view that an effective drug should also show statistically significant persistence of efficacy at 24 weeks. The trial also includes a responder analysis to assess the clinical meaningfulness of any reduction in the frequency of hot flashes in the active arm relative to the placebo arm.

Modifications to the design of Breeze 3 relative to Breeze 1 and 2 include: (i) a single active arm rather than two arms, and therefore a required statistical p value of .05 rather than .025 to achieve statistical significance; (ii) up to 65% more patients in the active treatment arm than in Breeze 1 and 2 (iii) a two-week run in period prior to randomization, rather than one week, which is

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designed to reduce the regression to the mean observed in Breeze 1 and 2, resulting in a more stable baseline, and thereby potentially reducing the placebo effect; and (iv) an alternative statistical analysis method, known as a non-parametric analysis, that is designed to reduce the influence significant outliers can have on the achievement of efficacy endpoints.

Glumetza for Type 2 Diabetes

500mg Glumetza Recall. In June 2010, we conducted a voluntary class 2 recall of fifty-two lots of 500mg Glumetza product from wholesalers due to the presence of trace amounts of a chemical called 2,4,6-tribromoanisole (TBA) in bottles containing 500mg Glumetza tablets. In June 2010, we temporarily suspended product shipments of 500mg Glumetza product to our customers. We resumed shipments of the 500mg Glumetza to customers in January 2011. The 1000mg Glumetza product was not subject to the recall.

Boehringer Ingelheim

In March 2011, we entered into a license and service agreement with Boehringer Ingelheim granting Boehringer Ingelheim a license to certain patents related our Acuform drug delivery technology to be used in developing fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes.

In connection with the license and service agreement, we received the upfront license payment of $10.0 million less applicable withholding taxes of approximately $1.5 million, for a net receipt of approximately $8.5 million in April 2011. We received the remaining $1.5 million of taxes previously withheld directly from German tax authorities in June 2011.

We are also eligible to receive an additional $2.5 million upon delivery of experimental batches of prototype formulations that meet certain specifications, and may receive additional milestone payments based on regulatory filings and approval events, as well as royalties on worldwide net sales of products.

We are responsible for providing certain initial formulation work associated with the fixed dose combination products. Services performed by us under the agreement will be reimbursed by Boehringer Ingelheim on an agreed-upon rate, and out-of-pocket expenses will be reimbursed.

Santarus, Inc.

Pursuant to our promotion agreement with Santarus in July 2008 and letter agreement with Santarus in October 2010, we received a $3.0 million sales milestone payment from Santarus in March 2011, as we achieved the first sales milestone under the agreement with Santarus related to net sales of Glumetza reaching $50.0 million for the 13 months ended January 31, 2011.

DM-1992 for Parkinson’s Disease

In September 2010, we initiated our second pharmacokinetic-pharmacodynamic Phase 1 study for the DM-1992 program. The second Phase 1 trial in DM-1992 was a randomized, open-label crossover study that enrolled 16 patients with stable Parkinson’s disease at two leading neurology centers in Russia. The objective of the study was to compare the pharmacokinetics-pharmacodynamics of two distinct twice-daily formulations of DM-1992 and a generic version of Sinemet CR sustained-release levodopa/carbidopa dosed three-times daily, as well as the safety and tolerability of the formulations. Patients in the trial received a full day’s dose of each of the three treatments being studied, two doses of each DM-1992 (460mg levodopa and 150mg carbidopa per dose) twelve hours apart, and three doses of generic levodopa/carbidopa over a 12 hour period (200mg of levodopa and 50mg of carbidopa per dose). During the 24 hour period following administration of each treatment, blood samples were drawn and a standard finger tapping test was given to assess efficacy.

In February 2011, we completed the second Phase 1 study. Both formulations are projected at steady state to consistently maintain levodopa blood levels above the efficacious threshold of 300ng/mL for 24 hours, as mean levodopa blood levels after 24 hours exceeded 300ng/mL.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies related to revenue recognition, accrued liabilities and stock-based compensation to be critical policies. There have been no changes to our critical accounting policies since we filed our 2010 Annual Report on Form 10-K with the Securities and Exchange Commission on March 16, 2011. For a description of our critical accounting policies, please refer to our 2010 Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Three and six Months Ended June 30, 2011 and 2010

Revenue

Total revenues are summarized in the following table (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Product sales:
Glumetza	$	16,153	$	11,625	$	31,452	$	24,169
Proquin XR	—		32		12		88
Total product sales	16,153		11,657		31,464		24,257
Royalties:
Glumetza	67		91		232		179
License and collaborative revenue:
Gralise	—		11,561		60,592		13,123
Glumetza	626		626		4,261		1,251
Boehringer Ingelheim	4,372		—		5,466		—
Covidien	—		458		—		917
Janssen	—		—		2,250		—
Proquin XR (EU)	—		26		—		51
DM-1992	—		—		54		—
Total license and collaborative revenue:	4,998		12,671		72,623		15,342
Total revenues	$	21,218	$	24,419	$	104,319	$	39,778

Product sales

Glumetza. The increase in Glumetza product sales in the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 is primarily driven by price increases as well as increased penetration of the 1000mg Glumetza in the branded metformin prescription market. This was partially offset by lower shipments of the 500mg Glumetza resulting from the 500mg Glumetza recall in 2010. We temporarily suspended product shipments of 500mg Glumetza product in June 2010 and did not resume shipments until January 2011.  The 1000mg Glumetza product was not subject to the recall.

Product sales for Glumetza relative to its current runrate will depend in part on the success of product promotion efforts and any price adjustments.

Royalties

Glumetza. Glumetza royalties relate to royalties we received from Valeant Pharmaceuticals International, Inc. (Valeant), based on net sales of Glumetza in Canada and royalties we received from LG based on net sales of LG’s version of Glumetza, Novamet GR, in Korea. We began receiving royalties from Valeant in the first quarter of 2006 and from LG in the first quarter of 2007.

License and collaborative revenue

Gralise. In January 2011, Abbott Products received FDA approval of Gralise for the management of postherpetic neuralgia, which triggered a $48.0 million development milestone from Abbott to us, which we received in February 2011. Because the milestone was substantive in nature, achieved and based on past performance, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

Pursuant to the exclusive license agreement originally entered into in November 2008, Solvay paid us a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time our development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, we no longer have continuing obligations to Abbott Products.

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Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue.

Glumetza. Glumetza license revenue decreased during the three months ended June 30, 2011 as a result of recognition of a $3.0 million sales milestone under the Santarus agreement in the first quarter of 2011. In January 2011, we achieved the first sales milestone under its agreement with Santarus related to net sales of Glumetza reaching $50.0 million for the 13 month period ending January 31, 2011, which triggered a milestone payment of $3.0 million, which we received in March 2011.  As the milestone was achieved and related to past performance the entire $3.0 million was recognized as milestone revenue in the first quarter of 2011.

Glumetza license revenue for the three and six months ended June 2011 and 2010 also consisted of license revenue recognized from the $25.0 million upfront license fee received from Biovail in July 2005 and the $12.0 million upfront fee received from Santarus in July 2008.

We are recognizing the $25.0 million upfront license fee payment from Biovail as revenue ratably until October 2021, which represents the estimated length of time our obligations exist under the arrangement related to royalties we are obligated to pay Biovail on net sales of Glumetza in the United States and for our obligation to use Biovail as our sole supplier of the 1000mg Glumetza. We are recognizing the $12.0 million upfront payment from Santarus as revenue ratably until October 2021, which represents the estimated length of time our obligations exist under the arrangement related to promotion fees we are obligated to pay Santarus on gross margin of Glumetza in the United States.

Boehringer Ingelheim.  Under our license and services agreement with Boehringer Ingelheim entered into in March 2011, Boehringer Ingelheim paid us a $10.0 million upfront license fee which we received in April 2011, less applicable withholding taxes of approximately $1.5 million, for a net receipt of approximately $8.5 million. We received the remaining $1.5 million of taxes previously withheld directly from German tax authorities in June 2011.

The $10.0 million is being amortized ratably through October 2011, which is the estimated length of time we are obligated to perform formulation work under the agreements. We recognized approximately $3.9 million and $4.9 million of revenue associated with this upfront license fee for the three and six months ended June 30, 2011, respectively. The remaining deferred revenue balance is $5.1 million at June 30, 2011.

We are also responsible for providing certain initial formulation work associated with the fixed dose combination products. Work performed by us under the service agreement will be reimbursed by Boehringer Ingelheim on an agreed-upon FTE rate per hour plus out-of-pocket expenses. We recognized approximately $0.5 million and $0.6 million of revenue associated with the reimbursement of formulation work under the service agreement during the three and six months ended June 30, 2011.

Janssen.  In August 2010, we entered into a non-exclusive license agreement with Janssen granting Janssen a license to certain patents related to our Acuform drug delivery technology to be used in developing fixed dose combinations of canagliflozin and extended release metformin. Janssen paid us a $5.0 million upfront license fee associated with the license agreement. The $5.0 million was amortized ratably through March 2011, which is the estimated length of time Depomed is obligated to perform formulation work under the agreements. We recognized approximately $1.9 million of revenue associated with this upfront license fee during the first quarter of 2011.

We also entered into a service agreement with Janssen under which we provide formulation work for Janssen and are reimbursed by Janssen on an agreed-upon FTE rate per hour plus out-of-pocket expenses. We recognized approximately $0.3 million of revenue associated with the reimbursement of formulation work under the service agreement during the first quarter of 2011.

All formulation work under the agreement was completed at March 31, 2011 and there is no remaining deferred revenue.

Cost of Sales

Cost of sales consists of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs, inventory write-downs, product quality testing, internal employee costs related to the manufacturing process, distribution costs and shipping costs related to our product sales of Glumetza, Gralise and Proquin XR. Total cost of sales for the three and six months ended June 30, 2011, as compared to the prior year, was as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of sales	$	2,140	$	2,981	$	3,775	$	4,462

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Cost of sales decreased in 2011 mainly as a result of approximately $1.4 million in inventory write-offs for unsalable inventory related to the 500mg GLUMETZA product recall in June 2010 offset by an increase in 1000mg Glumetza product sales.

The costs of manufacturing associated with deferred revenue on Proquin XR product shipments are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

Gain on Settlement with Abbott Products

In March 2011, we entered into a settlement agreement with Abbott Products to which provided for (i) the immediate termination of the parties’ license agreement; (ii) the transition of Gralise back to us; and (iii) a $40.0 million payment from Abbott to us made in March 2011. The $40.0 million payment was recognized as a gain within operating income in the first quarter of 2011.

Research and Development Expense

Our research and development expenses currently include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities, consultants, depreciation, facilities and utilities. The scope and magnitude of future research and development expenses cannot be predicted at this time for our product candidates in the early phases of research and development, as it is not possible to determine the nature, timing and extent of clinical trials and studies, the FDA’s requirements for a particular drug and the requirements and level of participation, if any, by potential partners. As potential products proceed through the development process, each step is typically more extensive, and therefore more expensive, than the previous step. Success in development therefore, generally results in increasing expenditures until actual product launch.

Total research and development expense for the three and six months ended June 30, 2011 as compared to the prior year, was as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Research and development expense	$	4,043		$	4,570	$	9,197		$	9,758
Dollar change from prior year	(527		)			(561		)
Percentage change from prior year	(11.5		)%			(5.7		)%

The decrease in research and development expense for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 was primarily due to reductions in research and development expense for Gralise, which received FDA approval in the first quarter of 2011 partially offset by higher clinical research organization costs associated with our ongoing Breeze 3 Phase 3 clinical trial for Serada.

We expect to continue to incur significant research and development expenses resulting from the progress of Breeze 3, which is expected to be completed in the fourth quarter of 2011.

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We categorize our research and development expense by project. The table below shows research and development costs for our major clinical development programs, as well as the expenses associated with all other projects:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2011		2010		2011		2010
Gralise	$	—	$	869	$	—	$	2,246
Serada	2,486		2,062		5,739		2,062
Other projects	1,557		1,639		3,458		1,639
Total research and development expense	$	4,043	$	4,570	$	9,197	$	9,758

Selling, General and Administrative Expense

Selling, general and administrative expense primarily consists of personnel expenses to support our administrative and operating activities, marketing and promotion expenses associated with Gralise, Glumetza and Proquin XR, facility costs and professional expenses, such as legal and accounting fees. Total selling, general and administrative expense, as compared to the prior year, were as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Selling, general and administrative expense:
Promotion fee expense	$	11,055		$	8,099	$	21,317		$	16,978
Other selling, general and administrative expense	9,976			4,541		17,216			8,091
Total selling, general and administrative expense	$	21,031		$	12,640	$	38,533		$	25,069
Dollar change from prior year	8,391					13,464
Percentage change from prior year	66.4		%			53.7		%

The increase in selling, general and administrative expense was primarily due to increased market research costs and commercial infrastructure costs related to the currently anticipated launch of Gralise in October 2011, an increase in Glumetza promotion fees to Santarus which was driven by an increase in Glumetza product sales, and increased legal expenses due to our mediation and settlement with Abbott Products and ongoing Lupin litigation with respect to Glumetza. We expect selling, general and administrative expense to increase as we continue to build out our commercial infrastructure costs in anticipation for a product launch of Gralise.

Interest Income and Expense

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2011			2010			2011			2010
Interest and other income	$	357		$	56		$	436		$	150
Interest expense	(39		)	(157		)	(109		)	(340		)
Net interest income (expense)	$	318		$	(101	)	$	327		$	(190	)

Interest and other income increased during the three and six months ended June 30, 2011 as compared to the corresponding period in 2010 as a result of higher investment balance as well as higher interest rates on our investments.

Interest expense relates to interest on the credit facility we entered into in June 2008 with General Electric Capital Corporation and Oxford Finance Corporation.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands)	June 30,2011		December 31, 2010
Cash, cash equivalents and marketable securities	$	164,210	$	76,888

In the second quarter of 2011, we received a $10.0 million upfront license payment from Boehringer Ingelheim for granting them a license to certain patents related our Acuform drug delivery technology.

Since inception through June 30, 2011, we have financed our product development efforts and operations primarily from private and public sales of equity securities, upfront license, milestone and termination fees from collaborative and license partners, and product sales.

In June 2008, we entered into a credit facility with GECC and Oxford. The credit facility was available in up to three tranches.  The first tranche of $3.8 million was advanced to us upon the closing of the loan agreement.  In July 2008, we received the second tranche of $5.6 million. The third tranche of $5.6 million was not drawn and it is no longer available to us, and GECC and Oxford waived the 2% unused line fee related to the third tranche.

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We paid interest only on the first tranche for the first six months at an interest rate of 11.59%.  Thereafter we are required to pay principal on the first tranche, plus interest at such rate, in 30 equal monthly installments. The second tranche was interest-only through December 31, 2008, with principal and interest payable thereafter in 30 equal monthly installments with an interest rate of 11.59%. As of June 30, 2011, the entire outstanding balance on the credit facility was $0.1 million at an interest rate of 11.59%. The credit facility was fully repaid in July 2011.

As of June 30, 2011, we have accumulated net losses of $75.2 million. We may incur operating losses for the remainder of 2011. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of 2012. We base this expectation on our current operating plan, which may change as a result of many factors.

Our cash needs may also vary materially from our current expectations because of numerous factors, including:

·sales of our marketed products;

·expenditures related to our commercialization of Gralise, including our contractual obligations to Ventiv and other arrangements we make for the commercialization of Gralise;

·expenditures related to our commercialization and development efforts, including arrangements we make for the commercialization of Serada, if the product is approved for marketing;

·financial terms of definitive license agreements or other commercial agreements we enter into;

·results of research and development efforts;

·changes in the focus and direction of our business strategy and/or research and development programs;

·technological advances;

·results of clinical testing, requirements of the FDA and comparable foreign regulatory agencies; and

·acquisitions or investment in complementary businesses, products or technologies.

We will need substantial funds of our own or from third parties to:

·conduct research and development programs;

·commercialize any products we market;

·conduct preclinical and clinical testing; and

·manufacture (or have manufactured) and market (or have marketed) our marketed products and product candidates.

Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. We currently do not have any other committed sources of capital. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds through the sale of our equity securities or from development and licensing arrangements to continue our development programs. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. If adequate funds are not available we may have to:

·delay, postpone or terminate clinical trials;

·significantly curtail commercialization of our marketed products or other operations; and/or

·obtain funds through entering into collaboration agreements on unattractive terms.

The inability to raise any additional capital required to fund our operations could have a material adverse effect on our company.

Cash Flows from Operating Activities

Cash provided by operating activities during the six months ended June 30, 2011 was approximately $82.1 million, compared to cash used in operating activities of approximately $3.6 million during the six months ended June 30, 2010. Cash provided by operating activities during the six months ended June 30, 2011 was primarily as a result of the $48.0 million milestone payment and $40 million termination fee received from Abbott Products during the first quarter of 2011. Cash used in operating activities during the six months ended June 30, 2010 was primarily due to our net income adjusted for movements in working capital, stock-based compensation and depreciation expense.

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Cash Flows from Investing Activities

Net cash used in investing activities during the six months ended June 30, 2011 was approximately $73.8 million. Net cash provided by investing activities during the six months ended June 30, 2010 was approximately $0.3 million. The increase in net cash used in investing activities in 2011 reflected increased marketable securities resulting from a partial investment of the milestone payment and settlement fee received from Abbott during the first quarter of 2011.

Cash Flows from Financing Activities

Cash provided by financing activities during the six months ended June 30, 2011 was approximately $5.5 million and consisted of proceeds from employee and consultant option exercises offset by repayments of principal on our credit facility. Cash used in financing activities during the six months ended June 30, 2010 was approximately $1.3 million, and consisted of repayments of principal on our credit facility offset by proceeds from employee and consultant option exercises.

Contractual Obligations

As of June 30, 2011, our aggregate contractual obligations are as shown in the following table (in thousands):

	Less than 1 year		1-3 years		Total
Operating leases	$	1,707	$	1,049	$	2,756
Principal on debt	145		—		145
Interest on debt	1		—		1
Related parties	433		—		433
Ventiv contractual obligation	17,220		6,190		23,410
Purchase commitments	1,933		—		1,933
	$	21,439	$	7,239	$	28,678

At June 30, 2011, we had non-cancelable purchase orders and minimum purchase obligations of approximately $1.0 million under our manufacturing agreement with Patheon Puerto Rico, Inc. for the manufacture of 500mg Glumetza, and $0.9 million under our supply agreement with Valeant for the supply of 1000mg Glumetza. The amounts disclosed only represent minimum purchase requirements. Actual purchases are expected to exceed these amounts.

Pursuant to the separation agreement and release entered into with Carl A. Pelzel, our former President and Chief Executive Officer, we are obligated to pay Mr. Pelzel $43,333 per month through April 2012.

In June 2011, we entered in to a service agreement with Ventiv, who will provide us with sales force recruiting, training, deployment and ongoing operational support to promote Gralise in the U.S. through 164 full-time sales representatives. Each month we are required to pay Ventiv a monthly fixed fee during the term of the Ventiv Agreement. We may terminate the service agreement on the one year anniversary of the deployment date of the sales representatives. We have included an estimate of our expected contractual obligations to Ventiv based upon this fee and expected one year anniversary of deployment date of the sales representatives.

The contractual obligations reflected in this table exclude $3.0 million of contingent milestone payments we may be obligated to pay in the future under our sublicense agreement with PharmaNova related to the development of Serada. The payments relate to various milestones for the product candidate under the sublicense agreement, including submission to the FDA of an NDA, and FDA approval of an NDA. The above table also excludes any future royalty payments we may be required to pay on products we have licensed or any promotion fees associated with our promotion agreement with Santarus.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President, Finance, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our Chief Executive Officer and Vice President, Finance, concluded that our disclosure controls and procedures were effective.

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We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Depomed v. Sun Pharmaceutical (U.S. Generic Glumetza Litigation)

In June, 2011 we filed a lawsuit in the United States District Court for the District of New Jersey against Sun Pharmaceutical Industries Inc., Sun Pharma Global FZE and Sun Pharmaceuticals Industries Ltd. (Sun), for infringement of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an Abbreviated New Drug Application filed by Sun with the FDA regarding Sun’s intent to market generic versions of 500mg and 1000mg strengths of Glumetza prior to the expiration of the five listed U.S. patents (U.S. Patent Nos. 6,340,475; 6,488,962; 6,635,280; 6,723,340 and 7,780,987). We are also asserting U.S. Patent No.7,736,667 in the lawsuit. We commenced the lawsuit within the 45 days required to automatically stay, or bar, the FDA from approving Sun’s ANDA for 30 months or until a district court decision that is adverse to the patents, whichever may occur earlier.

Depomed v. Lupin (U.S. Generic Glumetza Litigation)

In November 2009, we filed a lawsuit in the United States District Court for the Northern District of California against Lupin Limited and its wholly-owned subsidiary, Lupin Pharmaceutical, Inc. (Lupin), for infringement of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an Abbreviated New Drug Application filed by Lupin with the FDA regarding Lupin’s intent to market generic versions of 500mg and 1000mg dosage strengths of Glumetza prior to the expiration of the four listed patents (U.S. Patent Nos. 6,340,475; 6,488,962; 6,635,280; and 6,723,340). We subsequently removed, without prejudice, U.S. Patent No. 6,723,340 from the litigation proceedings. We commenced the lawsuit within the 45 days required to automatically stay, or bar, the FDA from approving Lupin’s ANDA for 30 months or until a district court decision that is adverse to the patents, whichever may occur earlier. Absent a court decision, the 30-month stay is expected to expire in May 2012. Lupin has prepared and filed an answer in the case, principally asserting non-infringement and invalidity of the Orange Book patents, and has also filed counterclaims. Discovery is currently underway and a hearing for claim construction, or Markman hearing, was held in January 2011. An adverse outcome in this matter could substantially weaken our U.S. intellectual property.

Biovail and Depomed v. Apotex (Canadian Generic Glumetza Litigation)

In December 2007, Apotex, Inc. (Apotex) filed the Canadian equivalent of an Abbreviated New Drug Application in Canada seeking approval to market a generic version of the 500mg formulation of Glumetza in Canada.

In February 2010, Apotex received clearance from the Minister of Health in Canada to market the generic version of the 500mg formulation of Glumetza. However, to date, Apotex has not launched a generic version of Glumetza in Canada.

Also in February 2010, Valeant and Depomed filed a complaint in the Federal Court in Canada against Apotex for infringement of our Canadian Patent No. 2,290,624.

An adverse outcome in this matter could substantially weaken our Canadian intellectual property.

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ITEM 1A. RISK FACTORS

The risk factors presented below amend and restate the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

The following factors, along with those described above under “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — LIQUIDITY AND CAPITAL RESOURCES” should be reviewed carefully, in conjunction with the other information contained in this Report and our financial statements. These factors, among others, could cause actual results to differ materially from those currently anticipated and contained in forward-looking statements made in this Form 10-Q and presented elsewhere by our management from time to time. See “Part I, Item 2—Forward-Looking Information.”

We may not successfully launch and commercialize Gralise, which would harm our business.

Although Gralise has been approved for marketing, our ability to generate significant revenue from Gralise requires that we successfully commercialize the product on our own or with the assistance of a collaborative co-promotion or licensing partner. We reacquired marketing rights to Gralise in March 2011 in connection with the termination of our Gralise exclusive license agreement with Abbott Products. Other than Ventiv, with whom we have contracted to provide sales force recruiting, training, deployment and operational support for this product, we do not currently have other partners assisting us with the commercialization of Gralise. We are a small organization with limited experience selling and marketing pharmaceutical products, and have had little time to build capabilities necessary to commercialize the product. We may not be able to adequately or timely build or maintain the necessary sales, marketing, manufacturing, managed markets or other capabilities on our own that are required to successfully commercialize Gralise, and we may not enter into arrangements with other collaborative partners or other third parties to perform those functions for us. Ventiv and other contract parties and partners may not perform as required under their contracts with us or as expected. Also, the establishment and maintenance of those capabilities may require us to divert capital from other intended purposes.

Given the small size of our company and the limited experience and expertise of our current staff in selling and marketing pharmaceutical products, effectively managing a significant number of collaborative partners and third-party contractors may be challenging. If our management of collaborative partners and third-party contractors is not effective, the launch of Gralise may be delayed and its commercial acceptance and success may be limited.

If we enter into a collaborative co-promotion or licensing arrangement related to Gralise, some or all of the revenues we receive will depend upon the efforts of one or more third parties, which may not be successful.

We may not be able to obtain orphan drug exclusivity for Gralise in PHN.

The FDA has granted Gralise Orphan Drug designation for the management of PHN based on the size of the PHN population and the reduced incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Subsequent to the FDA’s approval of Gralise, we were informed additional submissions or evidence to demonstrate the clinical superiority of Gralise based on improved safety will be required to be provided to the FDA in order to obtain a seven-year period of orphan exclusivity in PHN.

If we obtain the orphan exclusivity, the FDA may not approve another application to market the same drug for the same indication until January 2018, except in very limited circumstances.

We cannot be certain that the FDA will grant Gralise orphan exclusivity in PHN. If we do not obtain orphan exclusivity for Gralise, the period of market exclusivity in the United States for Gralise may be reduced, which would adversely affect our revenues.

If generic manufacturers use litigation and regulatory means to obtain approval for generic versions of our products, our business will suffer.

Under the Federal Food, Drug and Cosmetics Act (FDCA), the FDA can approve an Abbreviated New Drug Application (ANDA), for a generic version of a branded drug without the ANDA applicant undertaking the clinical testing necessary to obtain approval to market a new drug. In place of such clinical studies, an ANDA applicant usually needs only to submit data demonstrating that its product has the same active ingredient(s) and is bioequivalent to the branded product, in addition to any data necessary to establish that any difference in strength, dosage form, inactive ingredients, or delivery mechanism does not result in different safety or efficacy profiles, as compared to the reference drug.

The FDCA requires an applicant for a drug that relies, at least in part, on the patent of one of our branded drugs to notify us of their application and potential infringement of our patent rights. Upon receipt of this notice we have 45 days to bring a patent infringement suit in federal district court against the company seeking approval of a product covered by one of our patents. The discovery, trial and appeals process in such suits can take several years. If such a suit is commenced, the FDCA provides a 30-month stay on the FDA’s approval of the competitor’s application. Such litigation is often time-consuming and quite costly and may result in generic competition if such patent(s) are not upheld or if the generic competitor is found not to infringe such patent(s). If the litigation is resolved in favor of the applicant or the challenged patent expires during the 30-month stay period, the stay is lifted and the FDA may thereafter approve the application based on the standards for approval of ANDAs.

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In November 2009, we filed a lawsuit in the United States District Court for the Northern District of California against Lupin for infringement of U.S. Patent Nos. 6,340,475; 6,488,962; 6,635,280; and 6,723,340 listed in the Orange Book for Glumetza. The lawsuit is in response to an ANDA filed by Lupin with the FDA regarding Lupin’s intent to market generic versions of the 500mg and 1000mg strengths of Glumetza prior to the expiration date of the asserted patents. We commenced the lawsuit against Lupin within the applicable 45 day period required to automatically stay, or bar, the FDA from approving Lupin’s ANDA for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. The 30-month stay expires in May 2012. If the litigation is still ongoing after expiration of the applicable 30-month stay, the termination of the stay could result in the introduction of one or more products generic to Glumetza prior to resolution of the litigation.

In June 2011, we filed a lawsuit in the United States District Court for the District of New Jersey against Sun Pharmaceutical Industries Inc., Sun Pharma Global FZE and Sun Pharmaceuticals Industries Ltd. (Sun), for infringement of the patents listed in the Orange Book for Glumetza. The lawsuit is in response to an Abbreviated New Drug Application filed by Sun with the FDA regarding Sun’s intent to market generic versions of 500mg and 1000mg strengths of Glumetza prior to the expiration of the five listed U.S. patents (U.S. Patent Nos. 6,340,475; 6,488,962; 6,635,280; 6,723,340 and 7,780,987). We also are asserting U.S. Patent 7,736,667 in the lawsuit.  We commenced the lawsuit within the 45 days required to automatically stay, or bar, the FDA from approving Sun’s ANDA for 30 months or until a district court decision that is adverse to the patents, whichever may occur earlier.

In December 2007, Apotex, Inc. (Apotex) filed the Canadian equivalent of an Abbreviated New Drug Application in Canada seeking approval to market a generic version of the 500mg formulation of Glumetza in Canada.  In February 2010, Apotex received clearance from the Minister of Health in Canada to market the generic version of the 500mg formulation of Glumetza. However, to date, Apotex has not launched a generic version of Glumetza in Canada.  Also in February 2010, Valeant and Depomed filed a complaint in the Federal Court in Canada against Apotex for infringement of our Canadian Patent No. 2,290,624.  If we are not able to successfully enforce our patent and prevent the launch of Apotex’s product, the resulting competition would reduce our sales and revenue for Glumetza.

The filing of the Lupin and Sun ANDAs described above, Apotex’s generic Glumetza, or any other ANDA or similar application in respect to any of our products could have an adverse impact on our stock price. Moreover, if the patents covering our products were not upheld in litigation or if a generic competitor is found not to infringe these patents, the resulting generic competition would have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our prior clinical trials evaluating Serada for menopausal hot flashes failed to meet all of their primary endpoints and there can be no assurance this product will be approved for marketing.

In October 2009, our Phase 3 trials evaluating Serada for menopausal hot flashes failed to meet all of their primary endpoints. In December 2009, we met and discussed with the FDA the results of the trials and any additional clinical development that may be required to complete the program and obtain regulatory approval to market Serada in the United States. We initiated an additional Phase 3 trial for Serada in August 2010, known as Breeze 3. There can be no assurance the results of the Breeze 3 trial will demonstrate the product candidate is sufficiently safe and effective to obtain approval for marketing.

We will incur significant additional expenses and may not know for at least another 6 to 9 months whether a New Drug Application could be submitted to the FDA to be approved for marketing. Clinical development is a long, expensive and uncertain process and is subject to delays. Positive or encouraging results of prior clinical trial are not necessarily indicative of the results we will obtain in later clinical trials. Accordingly, our additional Phase 3 trial may not demonstrate that Serada is effective for menopausal hot flashes. In addition, data obtained from pivotal clinical trials are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

Many other factors could delay or result in termination of our clinical trials, including:

·negative or inconclusive results;

·patient noncompliance with the protocol;

·adverse medical events or side effects among patients during the clinical trials;

·FDA inspections of our clinical operations; and

·real or perceived lack of effectiveness or safety of the product candidate.

We depend heavily on Santarus, Inc. for the successful commercialization of Glumetza in the United States.

In July 2008, we entered into a promotion agreement with Santarus, Inc. pursuant to which Santarus will promote Glumetza in the United States through its sales force beginning in the fourth quarter of 2008. Under the agreement, in exchange for promotion fees,

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Santarus is required to market and promote Glumetza to physicians in the United States, to deliver annual detail calls to potential Glumetza prescribers, and to maintain a sales force of a minimum size. Although we have retained rights to promote Glumetza to obstetricians/gynecologists, or ob/gyns, and to retain a significant portion of the revenues from incremental sales generated by ob/gyns we call upon, ob/gyns generally do not prescribe significant amounts of metformin products. In addition, we do not have any immediate plans to establish a sales force, or contract with a third party to act as our sales force, for the purpose of exercising our Glumetza co-promotion rights. Accordingly, the success of the commercialization of Glumetza will depend in large part on Santarus’ marketing and promotion efforts. Other factors that may affect the success of our promotion arrangement with Santarus include the following:

·Santarus may acquire or develop alternative products (as it did in the third quarter of 2010);

·Santarus may pursue higher-priority programs, or change the focus of its marketing programs;

·Santarus may in the future choose to devote fewer resources to Glumetza;

·Glumetza may fail to achieve greater market acceptance;

·The outcome of our ongoing litigation against Lupin Limited seeking to prevent Lupin from marketing a generic version of Glumetza in the United States;

·The outcome of our ongoing litigation against Sun Pharmaceuticals Industries Ltd. seeking to prevent Sun from marketing a generic version of Glumetza in the United States;

·Santarus may experience financial difficulties; and

·Santarus may fail to comply with its obligations under our promotion agreement.

In addition to the factors described above, Santarus’ business and product revenue have been adversely affected by the introduction of a generic version of its Zegerid® (omeprazole/sodium bicarbonate) prescription products in the third quarter of 2010. Any of the preceding factors could affect Santarus’ commitment to the collaboration, which, in turn, could adversely affect the commercial success of Glumetza. Any failure to successfully commercialize Glumetza could have a material adverse effect on our business, financial conditions, results of operations and cash flows.

We cannot be certain of the extent to which commercialization of Glumetza will continue to be negatively impacted by the 2010 recall of Glumetza.

In June 2010, we initiated a voluntary, wholesaler-level recall of 500mg Glumetza product due to the presence of trace amounts of a chemical called 2,4,6-tribromoanisole, or TBA, in bottles containing 500mg Glumetza tablets.  In connection with the recall, we temporarily suspended product shipments of the 500mg Glumetza.  We resumed supply of the 500mg Glumetza in January 2011.

The supply disruption of the 500mg Glumetza has adversely impacted our product revenue and profitability of Glumetza.  In addition, other pharmaceutical companies have encountered complex TBA-related supply issues and the issues may be difficult to remediate.  Many of the patients who were previously prescribed Glumetza may be taking other prescription metformin products, and we may not be able to ever regain the lost share of the business.  We may also suffer damage to our reputation and face product liability claims.

The development of drug candidates is inherently uncertain and we cannot be certain that any of our product candidates will be approved for marketing or, if approved, will achieve market acceptance.

We have the following programs in clinical development: Serada for menopausal hot flashes and DM-1992 for Parkinson’s.  We also have other product candidates in earlier stages of development.

Our own product candidates and those of our collaborative partners are subject to the risk that any or all of them may be found to be ineffective or unsafe, or otherwise may fail to receive necessary regulatory clearances.  Additionally, clinical trial results in earlier trials may not be indicative of results that will be obtained in subsequent larger trials, as was the case with the Phase 3 trial for Gralise for the management of postherpetic neuralgia that we completed in 2007, and with the Phase 3 trials evaluating Serada for menopausal hot flashes we completed in October 2009.

We are unable to predict whether any of these 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, substantially all of our product candidates use the Acuform technology.  If it is discovered that the Acuform technology could have adverse 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 could be significantly harmed.

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We may incur operating losses in the future.

To date, we have recorded revenues from license fees, product sales, royalties, collaborative research and development arrangements and feasibility studies. For the six months ended June 30, 2011, we recorded total revenues of $104.3 million and for the years ended December 31, 2010, 2009 and 2008, we recorded total revenues of $80.8 million, $57.7 million, and $34.8 million, respectively. Collaborative milestones and settlement fees received from Abbott Products, Janssen and Merck resulted in the Company reaching profitability for the six months ended June 30, 2011 and the year ended December 31, 2010. For the years ended December 31, 2009 and 2008, we incurred net losses of $22.0 million and $15.3 million, respectively. We may incur operating losses for the remainder of 2011. Any such losses may have an adverse impact on our total assets, shareholders’ equity and working capital.

Our operating results may fluctuate and affect our stock price.

The following factors will affect our operating results and may result in a material adverse effect on our stock price:

·the timing of the launch and degree of commercial success of Gralise;

·our efforts to secure a commercialization partner for Gralise;

·announcements and results regarding clinical trial results and plans for our drug candidates, including Serada;

·filings and other regulatory actions related to Serada and our other product candidates;

·developments concerning proprietary rights, including patents, infringement allegations and litigation matters;

·decisions by collaborative partners to proceed or not to proceed with subsequent phases of a collaboration or program;

·the degree of commercial success of Glumetza;

·adverse events related to our products, including recalls;

·interruptions of manufacturing or supply, or other manufacture or supply difficulties;

·the outcome of our patent infringement litigation against Lupin and Sun for Glumetza;

·variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues;

·market acceptance of the Acuform technology;

·adoption of new technologies by us or our competitors;

·the introduction of new products by our competitors;

·the status of our compliance with laws and regulations applicable to the commercialization of pharmaceutical products;

·any limitations to access to physician prescription data, which may make our marketing efforts more effective;

·manufacturing costs;

·third-party reimbursement policies; and

·the status of our compliance with the provisions of the Sarbanes-Oxley Act of 2002.

As a result of these factors, our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the one we experienced following the announcement of our Serada Phase 3 trial results in October 2009, could give rise to shareholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in our favor.

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 collaboration or license arrangements with Santarus, Covidien, Merck, Janssen, Boehringer Ingelheim, and PharmaNova.  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

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considerably longer to conclude than the parties initially anticipate, which could cause us to enter into less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs.

We may be unable to enter into future collaborative arrangements on acceptable terms, which could 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;

·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.

Our collaborative arrangements do not necessarily 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.

Our existing resources may not be sufficient to fund our operations until such time as we may be able to consistently generate sufficient revenues to support our operations.

Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to consistently support our operations.  We currently do not have any committed sources of capital. To the extent that our capital resources are insufficient to meet our future capital requirements, in order to continue our development programs, we will have to raise additional funds through the sale of our equity securities, through debt financing, or from development and licensing arrangements. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. If adequate funds are not available we may have to:

·delay, postpone or terminate clinical trials;

·significantly curtail commercialization of our marketed products or other operations; and/or

·obtain funds through entering into collaboration agreements on unattractive terms.

We may be unable to protect our intellectual property and may be liable for infringing the intellectual property of others.

Our success will depend in part on our ability to obtain and maintain patent protection for our products and technologies, and to preserve our trade secrets.  Our policy is to seek to protect our proprietary rights, by, among other methods, filing patent applications in the United States and foreign jurisdictions to cover certain aspects of our technology. We hold issued United States patents, and have patent applications pending in the United States.  In addition, we are preparing patent applications relating to our expanding technology for filing in the United States and abroad.  We have also applied for patents in numerous foreign countries. Some of those countries have granted our applications and other applications are still pending. Our pending patent applications may lack priority over others’ applications or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or may not provide us with competitive advantages against competing products. We also rely on trade secrets and proprietary know-how, which are difficult to protect. We seek to protect such information, in part, through entering into confidentiality agreements with employees, consultants, collaborative partners and others before such persons or entities have access to our proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases, due to, among other things, the lack of an adequate remedy for breach of an agreement or a finding that an agreement is unenforceable. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing others’ patents or other intellectual property rights. We are not aware of any intellectual property claims against us.  However, the pharmaceutical industry has experienced extensive litigation regarding patents and other intellectual property rights. For example, Pfizer has initiated several suits against companies marketing generic gabapentin products, claiming that these products infringe Pfizer’s patents. The results of this litigation could adversely impact the commercialization of pharmaceutical products that contain gabapentin as an active pharmaceutical ingredient.  Also, patents issued to third parties relating to sustained release drug formulations or particular pharmaceutical compounds could in the future be asserted against us, although we believe that we do not

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infringe any valid claim of any patents.  If claims concerning any of our products were to arise and it was determined that these products infringe a third party’s proprietary rights, we could be subject to substantial damages for past infringement or be forced to stop or delay our activities with respect to any infringing product, unless we can obtain a license, or we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.  Such a license may not be available on acceptable terms, or at all.  Even if we, our collaborators or our licensors were able to obtain a license, the rights may be nonexclusive, which could give our competitors access to the same intellectual property.  In addition, any public announcements related to litigation or interference proceedings initiated or threatened against us, even if such claims are without merit, could cause our stock price to decline.

From time to time, we may become aware of activities by third parties that may infringe our patents.  Infringement by others of our patents may reduce our market shares (if a related product is approved) and, consequently, our potential future revenues and adversely affect our patent rights if we do not take appropriate enforcement action.  We may need to engage in litigation in the future to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights.  Our issued or licensed patents may not be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to us, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. We may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with our patent applications or other parties’ patent applications. Adverse determinations in litigation or interference proceedings could require us to seek licenses which may not be available on commercially reasonable terms, or at all, or subject us to significant liabilities to third parties.  If we need but cannot obtain a license, we may be prevented from marketing the affected product.

Our licensed patent covering the use of gabapentin to treat hot flashes associated with menopause is a method-of-use patent, which increases the risk that prescriptions for gabapentin to treat hot flashes in menopausal women could be written for, or filled with, generic gabapentin.

We have an exclusive sublicense from PharmaNova, Inc. to a patent held by the University of Rochester to develop and commercialize in the United States a gabapentin product for the treatment of hot flashes associated with menopause.  Because a method-of-use patent, such as the patent we have sublicensed from PharmaNova, covers only a specified use of a particular compound, not a particular composition of matter, we cannot prevent others from commercializing gabapentin for other indications for use.  Accordingly, physicians can already prescribe another manufacturer’s gabapentin to treat hot flashes in menopausal women, or pharmacists could in the future seek to fill prescriptions for Serada with another manufacturer’s gabapentin.  Although any such “off-label” use could violate our licensed patent, effectively monitoring compliance with our licensed patent and enforcing our patent rights against individual physicians and pharmacies may be ineffective, impractical, difficult and costly. Such competition would reduce sales of Serada and our revenues which could have a material adverse effect on our business.

It is difficult to develop a successful product. If we do not continue to develop successful products, our financial position and liquidity will be adversely affected.

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 Gralise and Glumetza, 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

·product candidates 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 successful commercialization of our potential products could adversely impact our financial position and liquidity.

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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 and our stock price may decline.

For planning purposes, we sometimes 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 or approval of regulatory filings.  From time to time, we may publicly announce the expected timing of some of these milestones, such as the completion of an ongoing clinical trial, the initiation of other clinical programs, or the commercial launch of products.  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:

·the efforts of our marketing partners with respect to the commercialization of our products;

·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 materials for our Acuform technology;

·our available capital resources; 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.

We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays outside of our control.

We rely on clinical investigators and clinical sites to enroll patients and other third parties to manage our trials and to perform related data collection and analysis. However, we may be unable to control the amount and timing of resources that the clinical sites that conduct the clinical testing may devote to our clinical trials.  If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them on our planned schedule, we will be unable to complete these trials or to complete them as planned, which could delay or prevent us from obtaining regulatory approvals for our product candidates.

Our agreements with clinical investigators and clinical sites for clinical testing and for trial management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.

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, which could delay, limit or prevent regulatory approval, and the FDA may not agree with our methods of clinical data analysis or our conclusions regarding safety and/or efficacy. Significant clinical trial delays could 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.

For example, the active ingredients in the products utilizing our Acuform delivery technology that are being developed pursuant to our collaboration with Covidien include acetaminophen in combination with opiates.  In connection with concerns that consumers may inadvertently take more than the recommended daily dose of acetaminophen, potentially causing liver damage, an FDA advisory committee has recommended that prescription products containing acetaminophen in combination with prescription analgesics (including opiates) should include black box warnings and/or be removed from the market.  The FDA is evaluating the recommendations and has indicated that such an evaluation will take some time.  The FDA is not required to accept advisory

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committee recommendations.  Covidien’s ability or willingness to develop and market the products subject to our collaboration may be adversely affected by actions of the FDA in response to the advisory committee recommendations.

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 and inspection, including compliance with FDA regulations governing current Good Manufacturing Practices (cGMP). The FDCA, the Controlled Substances Act and other federal and foreign statutes and regulations govern and influence the testing, manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products.  The failure to comply with these regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, non-renewal of marketing applications or criminal prosecution.

We are also required to report adverse events associated with our products to the FDA and other regulatory authorities. Unexpected or serious health or safety concerns could result in labeling changes, recalls, market withdrawals or other regulatory actions.  Recalls may be issued at our discretion or at the discretion of the FDA or other empowered regulatory agencies.  For example, in June 2010, we instituted a voluntary class 2 recall of 52 lots of our 500mg Glumetza product after chemical traces of 2,4,6-tribromoanisole or TBA were found in the product bottle.  We cannot be certain that the FDA will determine that we adequately addressed the matters that led to this recall or that the FDA will not seek to impose fines or sanctions against us as a result of this recall.  Any such fines or sanctions could adversely affect our financial condition and results of operations.

We are subject to risks associated with NDAs submitted under Section 505(b)(2) of the Food, Drug and Cosmetic Act.

The products we develop generally are or will be submitted for approval under Section 505(b)(2) of the FDCA which was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act.  Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference.  For instance, the NDA for Gralise relies on the FDA’s prior approval of Neurontin® (gabapentin), the immediate release formulation of gabapentin initially approved by the FDA.  An NDA for Serada would also rely in part on the FDA’s prior approval of Neurontin®.

For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply.  In accordance with the Hatch-Waxman Act, such NDAs may be required to includes certifications, known as “Paragraph IV certifications,” that certify any patents listed in the FDA’s Orange Book publication in respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable, and/or will not be infringed by the manufacture, use, or sale of the product that is the subject of the 505(b)(2) application.  Under the Hatch-Waxman Act, the holder of the NDA which the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the Paragraph IV certification.  Filing of a patent infringement lawsuit triggers a one-time automatic 30-month stay of the FDA’s ability to approve the 505(b)(2) application.  Accordingly, we may invest a significant amount of time and expense in the development of one or more products only to be subject to significant delay and patent litigation before such products may be commercialized, if at all.  A Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.  The FDA may also require us to perform one or more additional clinical studies or measurements to support the change from the approved product. The FDA may then approve the new formulation for all or only some of the indications sought by us.  The FDA may also reject our future Section 505(b)(2) submissions and require us to file such submissions under Section 501(b)(1) of the FDCA, which could be considerably more expensive and time consuming.  These factors, among others, may limit our ability to successfully commercialize our product candidates.

Pharmaceutical marketing is subject to substantial regulation in the United States.

All marketing activities associated with Gralise and Glumetza, as well as marketing activities related to any other products for which we obtain regulatory approval, will be subject to numerous federal and state laws governing the marketing and promotion of pharmaceutical products. The FDA regulates post-approval promotional labeling and advertising to ensure that they conform to statutory and regulatory requirements. In addition to FDA restrictions, the marketing of prescription drugs is subject to laws and regulations prohibiting fraud and abuse under government healthcare programs. For example, the federal healthcare program anti-kickback statute prohibits giving things of value to induce the prescribing or purchase of products that are reimbursed by federal healthcare programs, such as Medicare and Medicaid. In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Under this law, the federal government in recent years has brought claims against drug manufacturers alleging that certain marketing activities caused false claims for prescription drugs to be submitted to federal programs. Many states have similar statutes or regulations, which apply to items and services reimbursed under Medicaid and other state programs, or, in some states, regardless of the payer. If we, or our collaborative

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partners, fail to comply with applicable FDA regulations or other laws or regulations relating to the marketing of our products, we could be subject to criminal prosecution, civil penalties, seizure of products, injunction, and exclusion of our products from reimbursement under government programs, as well as other regulatory actions against our product candidates, our collaborative partners or us.

We may incur significant liability if it is determined that we are promoting or have in the past promoted the “off-label” use of drugs.

Companies may not promote drugs for “off-label” uses — that is, uses that are not described in the product’s labeling and that differ from those approved by the FDA.  Physicians may prescribe drug products for off-label uses, and such off-label uses are common across some medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDCA and FDA regulations restrict communications on the subject of off-label uses of drug products by pharmaceutical companies. The Office of Inspector General of the Department of Health and Human Services (OIG), the FDA, and the Department of Justice (DOJ) all actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained.  A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.

Notwithstanding the regulatory restrictions on off-label promotion, the OIG, the FDA, and DOJ allow companies to engage in truthful, non-misleading, and non-promotional speech concerning their products.  If the OIG or the FDA takes the position that we are not in compliance with such requirements, and, if such non-compliance is proven, we may be subject to significant liability, including civil and administrative remedies, as well as criminal sanctions. In addition, management’s attention could be diverted from our business operations and our reputation could be damaged.

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 Janssen, Merck, Boehringer Ingelheim and Madaus, 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 marketing partners 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

·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 could 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.

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We may be unable to compete successfully in the pharmaceutical product and drug delivery technology industries.

Other companies that have oral drug delivery technologies competitive with the Acuform technology include Elan Corporation, Bristol-Myers Squibb, TEVA Pharmaceutical Industries, Ltd., Johnson & Johnson, SkyePharma plc, Flamel Technologies S.A., Ranbaxy Laboratories, Ltd., and Intec Pharma, all of which develop oral tablet products designed to release the incorporated drugs over time. Each of these companies has patented technologies with attributes different from ours, and in some cases with different sites of delivery to the gastrointestinal tract.

Bristol-Myers Squibb is currently marketing a sustained release formulation of metformin, Glucophage XR, with which Glumetza competes. The limited license that Bristol-Myers Squibb obtained from us under our November 2002 settlement agreement extends to certain current and internally-developed future compounds, which may increase the likelihood that we will face competition from Bristol-Myers Squibb in the future on products in addition to Glumetza. Several other companies, including Barr Pharmaceuticals, Inc., Mylan Laboratories, Inc. and Teva Pharmaceutical Industries, Ltd. have received FDA approval for and are selling an extended-release metformin product.

There may be other companies developing products competitive with Glumetza of which we are unaware.

Gabapentin is currently marketed by Pfizer as Neurontin® for adjunctive therapy for epileptic seizures and for postherpetic pain. Pfizer’s basic U.S. patents relating to Neurontin have expired, and numerous companies have received approval to market generic versions of the immediate release product. Pfizer has also developed Lyrica® (pregabalin), which has been approved for marketing in the United States for postherpetic pain, fibromyalgia, diabetic nerve pain and for adjunctive therapy for epileptic seizures. In April 2011, GlaxoSmithKline and Xenoport, Inc.’s HorizantTM (gabapentin enacarbil extended-release tablets) received FDA approval in the United States for restless leg syndrome.

Competition in pharmaceutical products and drug delivery systems is intense. We expect competition to increase. Competing technologies or products developed in the future may prove superior to the Acuform technology or products using the Acuform technology, either generally or in particular market segments. These developments could make the Acuform technology or products using the Acuform technology noncompetitive or obsolete.

Most of our principal competitors have substantially greater financial, sales, marketing, personnel and research and development resources than we do. In addition, many of our potential collaborative partners have devoted, and continue to devote, significant resources to the development of their own drug delivery systems and technologies.

We depend on third parties who are single source suppliers to manufacture Glumetza, Gralise and our other product candidates.  If these suppliers are unable to manufacture Glumetza, Gralise or our product candidates, our business will be harmed.

We are responsible for the supply and distribution of Glumetza, and Patheon is our sole supplier for tablets of the 500mg strength of Glumetza pursuant to a supply agreement we entered into with Patheon in December 2006.  Valeant is our sole supplier for the 1000mg formulation of Glumetza.  We will be unable to manufacture Glumetza in a timely manner if we are unable to obtain 500mg Glumetza tablets from Patheon, active pharmaceutical ingredient from suppliers, or excipient suppliers, or 1000mg Glumetza tablets from Valeant.

Patheon is also our sole supplier for Gralise and Serada tablets. We currently have no long-term supply arrangement with respect to Gralise or Serada. Any failure to obtain Gralise or Serada tablets from Patheon, active pharmaceutical ingredient from suppliers, or excipient suppliers, could adversely affect our operating results.

We do not have, and we do not intend to establish in the foreseeable future, internal commercial scale manufacturing capabilities. Rather, we intend to use the facilities of third parties to manufacture products for clinical trials and commercialization. Our dependence on third parties for the manufacture of products using the Acuform technology may adversely affect our ability to deliver such products on a timely or competitive basis.  The manufacturing processes of our third party manufacturers may be found to violate the proprietary rights of others. If we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays and difficulties in our relationships with manufacturers, the market introduction and commercial sales of our products will be delayed, and our future revenue will suffer.

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A successful product liability claim against us could materially harm our business.

Our business involves exposure to potential product liability risks that are inherent in the development and production of pharmaceutical products. We have obtained product liability insurance for clinical trials currently underway and forecasted 2011 sales of our products, but:

·we may be unable to obtain product liability insurance for future trials;

·we may be unable to obtain product liability insurance for future products;

·we may be unable to maintain product liability insurance on acceptable terms;

·we may be unable to secure increased coverage as the commercialization of the Acuform technology proceeds; or

·our insurance may not provide adequate protection against potential liabilities.

Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. Defending a lawsuit could be costly and significantly divert management’s attention from conducting our business. If third parties were to bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liability limits, our business, financial condition and results of operations could be materially harmed.

Our success is dependent in large part upon the continued services of our CEO and senior management with whom we do not have employment agreements.

Our success is dependent in large part upon the continued services of our President and Chief Executive Officer, James A. Schoeneck, and other members of our executive management team, and on our ability to attract and retain key management and operating personnel. We do not have agreements with Mr. Schoeneck or any of our other executive officers that provide for their continued employment with us.  We may have difficulty filling open senior scientific, financial and commercial positions. Management, scientific and operating personnel are in high demand in our industry and are often subject to competing offers. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed could result in delays in the research, development and commercialization of our products and potential product candidates.

If we choose to acquire new and complementary businesses, products or technologies, 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. 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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Global 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

37

coverage or incur substantially higher costs to obtain coverage.  Moreover, we may be unable 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 selling, general and administrative expenses are likely to increase.

If we sell shares of our common stock in future financings, existing common shareholders will experience immediate dilution and, as a result, our stock price may go down.

As capital raising opportunities present themselves, we may enter into financing arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common shareholders will experience dilution and this dilution will be greater if we find it necessary to sell securities at a discount to prevailing market prices.

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 conduct 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 material weaknesses were found in our internal controls in the future, 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.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.RESERVED

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a)	Exhibits
	10.1	Third Lease Extension Agreement dated June 20, 2011 between the Company and Menlo Business Park, LLC
	10.2	Fourth Lease Extension Agreement dated June 20, 2011 between the Company and Menlo Business Park, LLC
	10.3*	Service Agreement dated June 20, 2011 between the Company and Ventiv Commercial Services, LLC.
	31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of James A. Schoeneck
	31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of Tammy L. Cameron
	32.1	Certification pursuant to 18 U.S.C. Section 1350 of James A. Schoeneck
	32.2	Certification pursuant to 18 U.S.C. Section 1350 of James A. Schoeneck
	101	Interactive Data Files pursuant to Rule 405 of Regulation S-T

*      Confidential treatment requested

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 2, 2011	DEPOMED, INC.
	/s/ James A. Schoeneck
	James A. Schoeneck
	President and Chief Executive Officer
	/s/ Tammy L. Cameron
	Tammy L. Cameron
	Vice President, Finance

39

EX-10.1

Exhibit 10.1

THIRD LEASE EXTENSION AGREEMENT

Building #5

1330 O’Brien Drive

Menlo Park, California 94025

THIS THIRD LEASE EXTENSION AGREEMENT (this “Agreement”) is made and entered into on June 20, 2011 by and between MENLO BUSINESS PARK, LLC, a California limited liability company (“Lessor”), and DEPOMED, INC., a California corporation (“Lessee”).

RECITALS

A.            Lessor and Lessee entered into a Lease dated April 30, 2003, as modified by that certain Lease Extension Agreement dated July 28, 2006, and as further modified by that Second Lease Extension Agreement dated March 18, 2008 (collectively, the “Lease”) of the premises referred to as Building #5 located at 1330 O’Brien Drive, Menlo Park, California 94025, more particularly described on Exhibit “A” attached to the Lease and incorporated by reference herein (the “Premises”).  The Premises contain approximately 25,366 rentable square feet of space.

B.            The expiration date of the extended term of the Lease is January 31, 2012.  Lessor and Lessee wish to extend the expiration date of the term of the Lease, subject to the terms and conditions set forth herein.

AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:

1.             Defined Terms.  Terms defined in the Lease and used in this Agreement shall have the meaning ascribed to them in the Lease.

2.             Extension of Term.  The term of the Lease is hereby extended for a period of twelve (12) calendar months commencing on February 1, 2012 and ending on January 31, 2013 (the “Third Extension Term”).  The Third Extension Term shall be upon all of the same terms and conditions of the Lease, except that the Monthly Base Rent payable by Lessee to Lessor during the Third Extension Term shall be as set forth in Paragraph 3 hereof.  Lessee shall have no further option to extend the Lease.

3.             Monthly Base Rent.  Lessee shall pay to Lessor Monthly Base Rent during the Third Extension Term, in monthly installments in advance on a triple net basis in lawful money of the United States, $65,951.60 per month.  Monthly Base Rent for any partial month shall be prorated on the basis of the number of calendar days in such month.

1

4.Additional Rent; Operating Expenses and Taxes.  In addition to the Monthly Base Rent payable by Lessee pursuant to Paragraph 3 above, Lessee shall pay to Lessor during the Third Extension Term, as Additional Rent, Operating Expenses and Taxes pursuant to Paragraph 5 of the Lease.

5.Condition of the Premises.  Lessee is currently in possession of the Premises and is conducting business thereon pursuant to the Lease.  Lessee agrees to accept the Premises in its “as is” condition at the commencement of the Extension Term.  Lessee acknowledges that Lessor has not inspected the Premises as a condition to entering into this Agreement. Accordingly, Lessee agrees that the execution and delivery of this Agreement by Lessor shall not constitute the approval by Lessor of any alterations to the Premises of which Lessor lacks actual knowledge, or the waiver by Lessor of any provisions of the Lease relating to alterations.

6.Security Deposit.  Lessor acknowledges that Lessor has received from Lessee and is currently holding the sum of Eighty Eight Thousand Eight Hundred Sixty Eight and 60/100 Dollars ($88,868.60) in cash (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under the Lease.  Lessor shall continue to hold the Security Deposit during the remainder of the initial term and during the Third Extension Term pursuant to Paragraph 7 of the Lease.

7.Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., who has acted as exclusive leasing agent for Lessor in connection with this Agreement, pursuant to a separate agreement between Lessor and said broker.  Lessor shall also pay leasing commissions to GVA Kidder Mathews, who have acted as leasing agents for Lessee in connection with this Agreement, pursuant to an agreement between Lessor and said brokers.  Each party represents and warrants to the other party that it has not had any dealings with any real estate broker, finder, or other person with respect to this Agreement other than the above named brokers.  Each party shall hold harmless the other party from all damages, expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, finder, or other person with whom the other party has or purportedly has dealt, other than the above named brokers.

8.Notices.  Paragraph 24, Notices, of the Lease is amended to read as follows:

“24.Notices.  All notices, statements, demands, requests, or consents given hereunder by either party to the other shall be in writing and shall be personally delivered or sent by United States mail, registered or certified, return receipt requested, postage prepaid, and addressed to the parties as follows:

Lessor: Menlo Business Park, LLC c/o Tarlton Properties, Inc. 1530 O’Brien, Suite C Menlo Park, CA 94025 Attention: John C. Tarlton Telephone: (650) 330-3600

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Lessee: DepoMed, Inc. 1330 O’Brien Drive Menlo Park, California 94025 Attention: General Counsel Telephone: (650)462-5900

All such notices or other communications given hereunder shall be addressed to the parties to such other address as either party may have furnished to the other as a place for the service of notice.  Notices shall be deemed given upon receipt or attempted delivery where delivery is not accepted.”

9.             Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

10.           Continuing Effect.  The parties acknowledge that the Lease remains in full force and effect as amended hereby, and with the initial term extended as provided herein.

3

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above.

“LESSOR”
MENLO BUSINESS PARK, LLC,
a California limited liability company
By:	/s/J.O. Oltmans
	J. O. Oltmans, II, Manager
By:	/s/James R. Swartz
	James R. Swartz, Manager
“LESSEE”
DEPOMED, INC.,
a California corporation
By:	/s/James A. Schoeneck
	James A. Schoeneck, President & CEO
By:	/s/Tammy Cameron
	Tammy Cameron, VP Finance

4

EX-10.2

Exhibit 10.2

FOURTH LEASE EXTENSION AGREEMENT

Building #6

1360 O’Brien Drive

Menlo Park, California 94025

THIS FOURTH LEASE EXTENSION AGREEMENT (this “Agreement”) is made and entered into on June 20, 2011 by and between MENLO BUSINESS PARK, LLC, a California limited liability company (“Lessor”), and DEPOMED, INC., a California corporation (“Lessee”).

RECITALS

A.            Lessor and Lessee entered into a Lease dated February 4, 2000, as modified by that certain Lease Extension Agreement dated April 30, 2003, as further modified by that Second Lease Extension Agreement dated July 28, 2006, and as further modified by that Third Lease Extension Agreement dated March 18, 2008 (collectively, the “Lease”) of the premises referred to as Building #6 located at 1360 O’Brien Drive, Menlo Park, California 94025, more particularly described on Exhibit “A” attached to the Lease and incorporated by reference herein (the “Premises”).  The Premises contain approximately 20,624 rentable square feet of space.

B.            The expiration date of the extended term of the Lease is January 31, 2012.  Lessor and Lessee wish to extend the expiration date of the term of the Lease, subject to the terms and conditions set forth herein.

AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:

1.             Defined Terms.  Terms defined in the Lease and used in this Agreement shall have the meaning ascribed to them in the Lease.

2.             Extension of Term.  The term of the Lease is hereby extended for a period of twelve (12) calendar months commencing on February 1, 2012 and ending on January 31, 2013 (the “Fourth Extension Term”).  The Fourth Extension Term shall be upon all of the same terms and conditions of the Lease, except that the Monthly Base Rent payable by Lessee to Lessor during the Fourth Extension Term shall be as set forth in Paragraph 3 hereof.  Lessee shall have no further option to extend the Lease.

3.             Monthly Base Rent.  Lessee shall pay to Lessor Monthly Base Rent during the Fourth Extension Term, in monthly installments in advance on a triple net basis in lawful money of the United States, $53,622.40 per month.  Monthly Base Rent for any partial month shall be prorated on the basis of the number of calendar days in such month.

1

4.Additional Rent; Operating Expenses and Taxes.  In addition to the Monthly Base Rent payable by Lessee pursuant to Paragraph 3 above, Lessee shall pay to Lessor during the Fourth Extension Term, as Additional Rent, Operating Expenses and Taxes pursuant to Paragraph 5 of the Lease.

5.Condition of the Premises.  Lessee is currently in possession of the Premises and is conducting business thereon pursuant to the Lease.  Lessee agrees to accept the Premises in its “as is” condition at the commencement of the Fourth Extension Term.  Lessee acknowledges that Lessor has not inspected the Premises as a condition to entering into this Agreement. Accordingly, Lessee agrees that the execution and delivery of this Agreement by Lessor shall not constitute the approval by Lessor of any alterations to the Premises of which Lessor lacks actual knowledge, or the waiver by Lessor of any provisions of the Lease relating to alterations.

6.Security Deposit.  Lessor acknowledges that Lessor has received from Lessee and is currently holding the sum of Seventy Eight Thousand Fifty One and 40/100 Dollars ($78,051.40) in cash (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under the Lease.  Lessor shall continue to hold the Security Deposit during the remainder of the initial term and during the Third Extension Term pursuant to Paragraph 7 of the Lease.

7.Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., who has acted as exclusive leasing agent for Lessor in connection with this Agreement, pursuant to a separate agreement between Lessor and said broker.  Lessor shall also pay leasing commissions to GVA Kidder Mathews, who have acted as leasing agents for Lessee in connection with this Agreement, pursuant to an agreement between Lessor and said brokers.  Each party represents and warrants to the other party that it has not had any dealings with any real estate broker, finder, or other person with respect to this Agreement other than the above named brokers.  Each party shall hold harmless the other party from all damages, expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, finder, or other person with whom the other party has or purportedly has dealt, other than the above named brokers.

8.Notices.  Paragraph 24, Notices, of the Lease is amended to read as follows:

“24.Notices.  All notices, statements, demands, requests, or consents given hereunder by either party to the other shall be in writing and shall be personally delivered or sent by United States mail, registered or certified, return receipt requested, postage prepaid, and addressed to the parties as follows:

Lessor: Menlo Business Park, LLC c/o Tarlton Properties, Inc. 1530 O’Brien, Suite C Menlo Park, CA 94025 Attention: John C. Tarlton Telephone: (650) 330-3600

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Lessee: DepoMed, Inc. 1330 O’Brien Drive Menlo Park, California 94025 Attention: General Counsel Telephone: (650)462-5900

All such notices or other communications given hereunder shall be addressed to the parties to such other address as either party may have furnished to the other as a place for the service of notice.  Notices shall be deemed given upon receipt or attempted delivery where delivery is not accepted.”

9.             Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

10.           Continuing Effect.  The parties acknowledge that the Lease remains in full force and effect as amended hereby, and with the initial term extended as provided herein.

3

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above.

“LESSOR”
MENLO BUSINESS PARK, LLC,
a California limited liability company
By:	/s/J.O. Oltmans, II
	J. O. Oltmans, II, Manager
By:	/s/James R. Swartz
	James R. Swartz, Manager
“LESSEE”
DEPOMED, INC.,
a California corporation
By:	/s/James A. Schoeneck
	James A. Schoeneck, President & CEO
By:	/s/Tammy Cameron
	Tammy Cameron, VP Finance

4

EX-10.3

Exhibit 10.3

CERTAIN MATERIAL (INDICATED BY [***]) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

SERVICE AGREEMENT

This Service Agreement (the “Agreement”) made as of June 20, 2011 (the “Effective Date”) by and between VENTIV COMMERCIAL SERVICES, LLC, a New Jersey limited liability company (“Ventiv”) and DEPOMED, INC., a California corporation (“Client”).  Ventiv and Client may each be referred to herein as a “Party” and collectively as the “Parties”.

1.             The Services - Ventiv will provide Client with a field force that shall consist of one hundred and sixty-four (164) full-time sales representatives (collectively the “Ventiv Sales Representatives”) who shall Detail Client’s Product (as defined in Section 2 below), five (5) Regional Training and Administrative Managers (each an “RTAM” and collectively the “RTAMs”), one dedicated Project Manager and one shared National Business Director.  The RTAMs, shared Project Manager, shared National Business Director and the Ventiv Sales Representatives may collectively be referred to herein as the “Project Team”.  The RTAMs shall be hired and employed by Ventiv will be responsible for a variety of employee relations matters such as conflict resolution and disciplinary actions with respect to the Ventiv Sales Representatives as well as assisting with the implementation and administration of human resources functions, operations and processes for the Project Team.  A “Detail” means a face-to-face contact by a Ventiv Sales Representative with Targets (identified by Client) and involves a presentation highlighting the Product features and benefits for its approved indications.  The Ventiv Sales Representatives shall distribute Product samples and Product Literature (as defined in Section 3(a)(iii)) to Targets.  A “Target” is a physician identified by Client and validated by Ventiv (for the fee set forth in Exhibit A, Section IV(d)) as a potential prescriber for the Products.  In connection with the promotion of Client’s Products, Ventiv shall provide the following services (collectively, the “Services”):

(a)           Implementation - (i) recruit and train the Ventiv Sales Representatives, with training consisting of five (5) days of home study and five (5) days of initial training to occur prior to Deployment (as defined in Section 1(b) below), (ii) develop program procedures, (iii) implementation of the call plan (which shall be established and maintained by Client) for use by the Ventiv Sales Representatives in detailing Client’s Product, (iv) customize program processes, and (v) establish program performance parameters, goals and metrics.

(b)           Deployment - (i) Deployment of the Ventiv Sales Representatives (salary, possible bonus, fleet vehicle, benefits, and table PC), (ii) Deployment of the RTAMs (salary, possible bonus, benefits and table PC); (iii) office costs/operational supplies; and (iv) operational support.  The Parties anticipate that the Ventiv Sales Representatives will begin employment on or about [***] and will be deployed and commence detailing the Product on or about [***] (the “Deployment” or “Deployment Date”).

(c)           Meetings - The length of training and, POA meetings shall be determined by Client.  All meetings shall be billed to Client as a pass-through expense (other than initial training pursuant to Section 1 (a) above) in accordance with a budget for each such meeting

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

provided in advance by Client.

(d)           Reports - Ventiv shall provide Client with standard reports in accordance with Exhibit C attached hereto.  Any customized or “non-standard” reports (i.e., reports requiring material changes in the nature of the data or formatting) requested by Client shall be prepared by Ventiv for Client and Client shall pay Ventiv [***] Dollars ($[***]) per hour for the preparation of such customized or “non-standard” reports.

(e)           Sample Accountability - Ventiv shall implement a sampling program (including sample accountability) in accordance with Exhibit B attached hereto.  The sampling program shall be consistent with all applicable state and federal laws as well as all statutes, laws, ordinances, rules and regulations of all governmental and regulatory authorities (collectively, the “Laws”), including but not limited to the Prescription Drug Marketing Act and its implementing regulations (“PDMA”).  Client shall be responsible for shipment of Product samples and literature to the Ventiv Sales Representatives in accordance with PDMA guidelines and shall confirm and provide documentation of such shipments to Ventiv within twenty-four hours.  Ventiv will reconcile such shipping information and Client will investigate all discrepancies.  Ventiv shall provide reasonable cooperation in connection with investigations conducted by Client.  Client is responsible for taking all action required or suggested by the Food and Drug Administration (“FDA”), including but not limited to: reporting of adverse events, confirming all returned samples and, where applicable, notifying the FDA, and all supplemental communications with respect to any of the above.

(f)            Compliance with Laws - Ventiv shall be responsible for (i) ensuring that the Services under this Agreement are performed in compliance with all Laws; (ii) ensuring that only Product Literature approved by Client are distributed by the Ventiv Sales Representatives; (iii) promoting the Product in a manner that complies in all respects with Laws, including but not limited to, the Federal Food, Drug and Cosmetic Act (“FDCA”), PDMA, the healthcare fraud and abuse laws (including but not limited to the federal healthcare program antikickback statute, 42 U.S.C. § 1320a-7b(b)), and the PhRMA Code on Interactions with Healthcare Professionals; (iv) reasonably cooperating with Client, at Client’s expense, to conduct any necessary recalls of the Product and/or Product Literature; and (v) ensuring that no employee of Ventiv responsible for any of the Services of this Agreement have been debarred or excluded from participating in any federal healthcare program.

(g)           Identification and Validation of Targets.  Client shall identify the Targets and Ventiv shall validate such Targets.  The fee for such validation services is set forth on Exhibit A attached hereto.

(h)           The territory where the Product will be promoted will be the United States (the “Territory”).

2.           The Product; Right to Sell; Market - Client’s Product is Gralise (the “Product”). The Product shall be promoted by Ventiv under trademarks owned by or licensed to Client and is a product which is either owned by Client and/or as to which Client has all lawful authority necessary to market and sell the Product.  This Agreement does not constitute a grant to Ventiv

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

2

of any property right or interest in the Product, trademarks, patents or patent applications owned by or licensed to Client and/or any other intellectual property rights which Client owns now or in the future.  Ventiv recognizes the validity of and the title to all of Client’s owned or licensed trademarks, trade names and trade dress in any country in connection with the Product, whether registered or not.  Client represents to Ventiv that to the best of its knowledge, neither the trademarks, trade names or trade dress referenced above, nor the promotion of the Product by Ventiv, infringes on any intellectual property or product marketing rights of any third party.

3.           Client Responsibilities - (a)  Client shall be responsible for:

(i)            identification of Targets and provision of a Target list and Territory alignment,

(ii)           establishment and maintenance of a call plan (the “Call Plan”) for use by the Ventiv Sales Representatives in detailing Client’s Product,

(iii)          production and distribution of Product samples and Product promotional materials and literature (collectively, the “Product Literature”) to Ventiv in accordance with all applicable Laws, including but not limited to the PDMA,

(iv)          reviewing and approving all of its Product Literature and for ensuring all such materials comply with all Laws.

(v)           hiring Client Manager(s), all of whom shall be Client employees and Client shall be responsible for salary, bonus, benefits and all employment matters with respect to such Client Managers,

(vi)          informing Ventiv promptly of any changes which Client believes are necessary or appropriate in the Product Literature or in information concerning the Product in order to be in compliance with all Laws,

(vii)         working with Ventiv to design, manage and implement the incentive compensation bonus plan for the Ventiv Sales Representatives,

(viii)        obtaining third party data, and

(ix)           timely responding to any and all inquiries concerning a Product from any licensed practitioner.

(b)           Client acknowledges that Ventiv is a service provider and is being retained pursuant to the terms set forth herein.  Client will design a marketing and promotion program (the “Program”), to be followed, implemented, managed and supported by Ventiv. Client represents and warrants that it is responsible for ensuring the Program (i.e., Program design, Targets, Territory alignment, Call Plan, Program materials, Product Literature, etc.) adheres to all Laws.  Ventiv represents and warrants that it will properly adhere to the designed Client Program and ensure implementation of Client’s Program adheres to all Laws.

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4.           Training - The training responsibilities of the Parties are as follows:

(a)           Ventiv shall be responsible for training members of the Project Team concerning: selling skills, Ventiv human resource policies, procedures and administration and other applicable Ventiv internal human resource and general compliance policies and procedures.

(b)           Client shall be responsible for training members of the Project Team concerning all Product specific information including Product complaint handling procedures, applicable specific Client health care compliance policies and Client customer service policies and procedures, orientation to Client’s business, compliance with all Laws, and adverse event reporting policies and procedures.  The Parties agree to work together to mutually determine if, when, and at what cost additional training shall be provided to members of the Project Team.

5.           Ventiv Compensation - Ventiv shall receive compensation for the Services provided hereunder as set forth in Exhibit A attached hereto and made a part hereof.

6.           Confidentiality; Ownership of Property (a) During the performance of the Services contemplated by this Agreement, each Party may learn confidential, proprietary, and/or trade secret information of the other Party (“Confidential Information”).  The Party disclosing Confidential Information shall be referred to as the “Disclosing Party” and the Party receiving Confidential Information shall be referred to as the “Receiving Party.”

Confidential Information means any information, unknown to the general public, which is disclosed by the Disclosing Party to the Receiving Party under this Agreement.  Confidential Information includes, without limitation, technical, trade secret, commercial and financial information about either Party’s (a) research or development; (b) marketing plans or techniques, contacts or customers; (c) organization or operations; (d) business development plans (i.e., licensing, supply, acquisitions, divestitures or combined marketing); (e) products, licenses, trademarks, patents, other types of intellectual property or any other contractual rights or interests (including without limitation processes, procedures and business practices involving trade secrets or special know-how) and (f) in the case of Ventiv, the names, addresses, phone numbers and work assignments of Ventiv employees.  The Receiving Party shall neither use nor disclose Confidential Information of the Disclosing Party for any purpose other than is specifically allowed by this Agreement.

Upon the expiration or termination of this Agreement, the Receiving Party shall return to the Disclosing Party all tangible forms of Confidential Information, including any and all copies and/or derivatives of Confidential Information made by either Party or their employees as well as any writings, drawings, specifications, manuals or other printed or electronically stored material based on or derived from, Confidential Information.  Any material or media not subject to return must be destroyed.  The Receiving Party shall not disclose to third parties any Confidential Information or any reports, recommendations, conclusions or other results of work under this Agreement without prior consent of an officer of the Disclosing Party.  The obligations set forth in this Section 6, including the obligations of confidentiality and non-use shall be continuing and shall survive the expiration or termination of this Agreement and will continue for a period of five (5) years therefrom.

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The obligations of confidentiality and non-use set forth herein shall not apply to the following: (i) Confidential Information at or after such time that it is or becomes publicly available through no fault of the Receiving Party; (ii) Confidential Information that is already independently known to the Receiving Party as shown by prior written records; (iii) Confidential Information at or after such time that it is disclosed to the Receiving Party by a third party with the legal right to do so; (iv) Confidential Information required to be disclosed pursuant to judicial process, court order or administrative request, provided that the Receiving Party shall so notify the Disclosing Party sufficiently prior to disclosing such Confidential Information as to permit the Disclosing Party to seek a protective order.

(b)           All materials and documents supplied to either Party during the Term of this Agreement, including but not limited to sales force automation software, report designs, and sales training materials shall be the sole and exclusive property of the originator of those materials and developments.  Each Party agrees to hold all such property and developments, confidential in accordance with this Section 6 of the Agreement.

7.           Independent Contractors  (a) Ventiv and its directors, officers, employees and all members of the Project Team are at all times independent contractors with respect to Client.  No member of the Project Team shall be deemed to be an employee of Client.  Ventiv is solely responsible for withholding federal, state, or local income tax or other payroll tax of any kind on behalf of its employees.  Ventiv employees are not eligible for, are not entitled to, and shall not participate in any of Client’s benefit plans or programs, including but not limited to, any pension plan, welfare plan, profit sharing plan or any other “employee pension benefit plan”, or insurance plan or any other “employee welfare benefit plan” or “employee benefit plan” (as those terms are defined by the Employee Retirement Income Security Act of 1974, as amended) or any other plan, program, fringe, award, bonus, perquisite or other benefit (such as, but not limited to, vacation and holiday pay) incident to employment offered from time to time by Client.  Ventiv is responsible for the payment of all required payroll taxes, whether federal, state, or local in nature, including, but not limited to income taxes, Social Security taxes, Federal Unemployment Compensation taxes, and any other fees, charges, licenses, or similar payments required by law.

(b)             Ventiv shall not be responsible for any cost, however, attributable to: (i) any actions by Client that caused a person provided by Ventiv to perform services under this Agreement to be reclassified as an employee of Client, (ii) any unlawful or discriminatory acts of Client, and (iii) any benefits payable under any employee benefit plan (as such term is defined Section 3(3) of ERISA), and any other incentive compensation, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements that may be sponsored at any time by Client or any of its Affiliates that cause any Ventiv employee to be reclassified as an employee of Client.

8.           Ventiv Personnel  (a) Client may not employ or retain any Ventiv employee performing services pursuant to this Agreement during the Term of this Agreement or within [***]  after the termination of this Agreement without the prior written approval of Ventiv, which may be withheld by Ventiv in its sole and absolute discretion.

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(b)  Unless as otherwise set forth in Section 12 below, Client agrees during the Term of this Agreement and for [***] thereafter not: (i) to provide any contact information (including name, address, phone number or e-mail address) concerning any Project Team member to any third party which provides or proposes to provide to Client services that are the same or are substantially similar to the Services being provided by Ventiv pursuant hereto, or (ii) to assist actively in any other way such a third party in employing or retaining a Project Team member for such purpose.  Client shall pay or cause the third party to pay Ventiv $[***] for each Ventiv employee so employed or retained as liquidated damages for breach of this Section 8(b).

9.           Indemnification and Limitation of Liability  (a) Ventiv shall indemnify and hold Client, its officers, directors, agents and employees harmless from and defend against any and all third party liabilities, losses, proceedings, actions, damages, claims or expenses of any kind, including costs and reasonable attorneys’ fees which result from: (i) any negligent or willful acts or omissions by Ventiv, its agents, directors, officers, or employees, or (ii) any material breach of this Agreement by Ventiv, its agents, directors, officers or employees.

(b)  Client shall indemnify and hold Ventiv, its officers, directors, agents, and employees harmless from and defend against any and all third party liabilities, losses, proceedings, actions, damages, claims or expenses of any kind, including costs and reasonable attorneys’ fees which result from: (i) any negligent or willful acts or omissions by Client, its agents, directors, officers or employees, (ii) any material breach of this Agreement by Client, its agents, directors, officers, or employees, (iii) any claim that the Client Program or Detailing of the Product (including, without limitation, the patents listed in the Orange Book for the Product) and/or use of Client’s name or any Product Literature, infringes the intellectual property rights of a third party, or (iv) the Products, including but not limited to any product liability claims, whether arising out of warranty, negligence, strict liability (including manufacturing, design, warning or instruction claims) or any other product based statutory claim.

(c)  Any indemnity available hereunder shall be dependent upon the Party seeking indemnity providing prompt written notice to the indemnitor of any claim or lawsuit giving rise to the indemnity provided, however, that failure to comply with this notice requirement shall not reduce the indemnitor’s indemnification obligation except to the extent that the indemnitor is prejudiced as a result.  Thereafter, the indemnitor shall have control over the handling of the claim or lawsuit, and the indemnitee shall provide reasonable assistance to the indemnitor in defending the claim.  The indemnitee may participate, at its own cost, in the handling of the claim.

(d)  Client shall reimburse Ventiv for all reasonable actual out-of-pocket expenses incurred by Ventiv in connection with responses to subpoenas and other similar legal orders issued to Ventiv in respect to Client’s Product or the Services performed under this Agreement. However, Client shall have no obligation to reimburse Ventiv for any such expenses (and to the extent paid by Client to Ventiv, shall be repaid by Ventiv to Client) arising out of, in connection with or otherwise relating to actions or omissions of Ventiv or its employees, officers, directors and/or affiliates that violate this Agreement or Law.

(e)     Neither Party shall be liable to the other Party with respect to any subject matter

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of this Agreement under any contract, tort, negligence, strict liability, breach of warranty (express or implied) or other theory for any indirect, incidental, special, exemplary, punitive or consequential damages, nor for any loss of revenues or loss of profits, even if advised of the possibility of such damages.  For clarification, this limitation shall not apply to the parties indemnification obligations set forth in Sections 9(a) and 9(b) above, and Client’s reimbursement obligations set forth in Section 9(d) above.  As further clarification, this Section 9(e) is not intended to restrict or prevent either Party from seeking and obtaining direct damages for a breach of this Agreement.

10.        Term - The Agreement shall be in effect as of the Effective Date and shall remain in effect until the second anniversary of the Deployment Date (the “Term”).  The period from the Deployment Date until the day prior to the one year anniversary of the Deployment Date shall be referred to herein as “Year One” and the period from the one year anniversary of the Deployment Date through the end of the Term shall be referred to herein as “Year Two”.  This Agreement will renew for additional periods of one year each (each an “Additional Term”), upon written agreement by the Parties to be executed at least ninety (90) days prior to the end of the Term.  The compensation to Ventiv for any Additional Term must be agreed upon and set forth in the written agreement between the Parties.

11.        Termination - (a)     This Agreement may be terminated by Ventiv or Client by providing the other Party with written notice as follows:

(i)            by Ventiv, if payment to Ventiv by Client is not made when due and such payment is not made within ten (10) days from the date of notice to Client of such nonpayment; or

(ii)           by either Party, in the event that the other Party has committed a material breach of this Agreement and such breach has not been cured within thirty (30) days of receipt of written notice from the non-breaching Party of such breach; or

(iii)          by either Party, in the event that the other Party has become insolvent or has been dissolved or liquidated, filed or has filed against it, a petition in bankruptcy and such petition is not dismissed within sixty (60) days of the filing, makes a general assignment for the benefit of creditors; or has a receiver appointed for a substantial portion of its assets; or

(iv)          by Client providing Ventiv with at least [***] prior written notice; provided however, under no circumstances shall the actual termination date be prior to the [***] anniversary of the Deployment Date; or

(v)           by Ventiv providing Client with at least [***] prior written notice; provided however, under no circumstances shall the actual termination date be prior to the [***] anniversary of the Deployment Date.

(b)           In the case of: (i) any termination of this Agreement by Client or Ventiv under Section 11 of this Agreement (other than termination by Client pursuant to Section 11(a)(ii) or (iii)), or (ii) upon Client conducting a Conversion pursuant to Section 12 of this

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Agreement, or (iii) at the end of Term (or any Additional Term), Client shall (in addition to all other payment obligations under this Agreement) promptly pay (or if paid by Ventiv, promptly reimburse Ventiv): the amount due any lessor or rental agent of the equipment leased or owned by Ventiv and provided exclusively to Client’s employees (i.e., fleet vehicles, laptops, handheld PDA’s, etc. (collectively, the “Equipment”)), for any early termination of the lease or rental agreement.  Ventiv shall make a good faith effort to mitigate Client’s liability for such amount due by attempting to reassign the Equipment for use in connection with services being provided by Ventiv to a third party.  In addition, Client may elect to either: (x) in the event the Equipment is owned by Ventiv, transfer the Equipment and pay an amount equal to the net book value (if any) of the Equipment on the books of Ventiv at the time of the transfer event, or in the event the Equipment is subject to a lease or finance lease, the Equipment may be transferred to Client (subject to the last sentence of this Section 11(b) and Client shall assume the responsibility for all further payments due (including costs associated with the transfer), or (y) pay Ventiv the net loss to Ventiv on such Equipment determined by the difference between the net book value of such Equipment and the actual net price received by Ventiv for the disposal of such Equipment, plus any amounts due by Ventiv in connection with the lease or rental termination and costs associated with the disposal of said Equipment.  Any proposed transfer of Equipment shall be subject to Client establishing its own relationship and credit with the entity that Ventiv contracted with to lease or rent such Equipment.

(c)           Upon the effective date of such termination, the parties shall have no further obligation to each other (other than those set forth in Sections 3(b), 6, 7, 8, 9, 12, and 13 (i)), except that Client shall pay the amounts set forth or provided for in Exhibit A of this Agreement through the actual date of termination.

12.        Conversion (Selective Hiring and Block Conversion)

(a)           Notwithstanding Section 8 of this Agreement, during the Term (or any Additional Term) and after the Deployment Date, Client may solicit, employ or retain one or more Ventiv Sales Representatives performing Services hereunder (a “Selective Hiring”).  Client shall give sixty (60) days prior written notice to Ventiv of any Selective Hiring.  Should there be Selective Hiring by Client, Ventiv will backfill the respective position so as to maintain the previously agreed upon number of Ventiv Sales Representatives performing Services hereunder.  In the event Client wishes to implement a Selective Hiring during the Term (or any Additional Term), Client shall pay Ventiv $[***] as a recruitment fee for each replacement/backfill Ventiv Sales Representative.

(b)           Notwithstanding Section 8 of this Agreement, Client may solicit, employ or retain one or more Ventiv Sales Representatives performing Services hereunder and Ventiv shall not backfill the respective position (a “Block Conversion”) provided that: (i) such hiring may not occur prior to the first anniversary of the Deployment Date (as defined in Exhibit A) and (ii) Client provides at least ninety (90) days prior written notice to Ventiv of any Block Conversion.  In the event Client wishes to implement a Block Conversion, Client shall pay Ventiv a Conversion fee based upon the date of the actual Block Conversion, in accordance with the following:

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	[***]	Commencement of [***] until [***] anniversary of Deployment Date		[***] anniversary of Deployment Date until end of [***]		After [***]
Ventiv Sales Representative Conversion Fee	No conversion permitted	$	[***]	$	[***]	$	[***]

(b)           Client understands and agrees that Ventiv cannot guaranty that any Sales Representative will agree to participate in a Selective Hiring or Block Conversion.

(c)           In the event Client implements a Selective Hiring or Block Conversion, the Parties agree that any and all training materials made available to the Ventiv Sales Representatives will be immediately returned to Ventiv, it being understood and agreed that the Ventiv proprietary training modules constitutes valuable and proprietary information of Ventiv and is subject to the confidentiality obligations set forth in Section 6 of this Agreement.  Within five (5) days of implementing a Selective Hiring or Block Conversion, Client shall return to Ventiv any originals and copies of the Ventiv proprietary training modules which had been in possession of the converted Ventiv Sales Representatives.

(d)           In the event Client conducts a Selective Hiring or Block Conversion (collectively, a “Conversion”) and the converted Ventiv Sales Representative had been provided with use of a fleet automobile leased, rented or owned by Ventiv and Client wishes to commence an arrangement with the fleet vendor to assume such cars (and all associated costs and liabilities) under Client’s name, the converted Ventiv Sales Representative may only to continue to have access to such automobile following the Conversion if Client either: (i) registers the fleet automobile under its name; or (ii) ensures that Ventiv remains named as an additional insured under Client’s automobile insurance policies until such time as the vehicle is registered in Client’s name (which shall occur no later than three (3) months following the Conversion). The Parties understand and agree that it is solely Client’s obligation to ensure one of the above actions are taken and Client shall be responsible for indemnifying, defending and holding Ventiv harmless for all damages resulting from Client’s failure to take such action.  The Parties further agree that on the effective date of the Conversion, Client shall destroy the Ventiv insurance card(s) in the fleet vehicle(s) of the converted Ventiv Sales Representative.

13.        Miscellaneous  (a)  Each Party represents to the other that the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action; that the Agreement constitutes the legal, valid, and binding obligation of such Party, enforceable in accordance with its terms (except to the extent enforcement is limited by bankruptcy, insolvency, reorganization or other laws affecting creditors’ rights generally and by general principles of equity); and that this Agreement and performance hereunder does not violate or constitute a breach under any organizational document of such Party or any contract,

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other form of agreement, or judgment or order to which such Party is a party or by which it is bound.

(b)           Each Party undertakes to maintain appropriate insurance in commercially reasonable amounts with financially capable carriers, including in the case of Client product liability insurance in the amount of at least $[***] million.  Each Party shall name the other Party as an additional insured on all liability insurance coverage. In addition, upon written request, each Party will provide the other with evidence of coverage complying with this Section.

(c)           Neither Ventiv nor Client may assign this Agreement or any of its rights, duties or obligations hereunder without the other Party’s prior written consent, provided, however, that either Ventiv or Client may assign its rights, duties and obligations as part of an acquisition of Ventiv or Client, as the case may be, so long as the acquirer (i) is a financially capable business entity and (ii) expressly assumes in writing those rights, duties and obligations under this Agreement and this Agreement itself, and (iii) is not a competitor of the other Party.

(d)           In the event Client elects to add a second product to be Detailed by the Ventiv Sales Representatives, Client shall provide Ventiv with written notice (the “Second Product Notice”).  Unless Ventiv provides written objection to Client to the proposed additional product being Detailed by the Ventiv Sales Representatives (for good cause set forth in the objection notice), within ten (10) business days of Ventiv’s receipt of the Second Product Notice, the Parties shall agree upon and execute an amendment to this Agreement setting forth all terms and conditions applicable to the Detailing of the additional product by the Ventiv Sales Representatives.  The Parties agree that the amendment shall address additional pass-through costs associated with the additional product, additional product training and impact on the Performance Fees (set forth in Section III of Exhibit A).  The term “Product” as set forth herein shall be defined to include such additional product identified in the executed amendment to this Agreement.

(e)           This Agreement supersedes all prior arrangements and understandings between parties related to the subject matter of this Agreement.

(f)            Noncompliance with the obligations of this Agreement (other than payment obligations) due to a state of force majeure, the laws or regulations of any government, regulatory or judicial authority, war, civil commotion, destruction of facilities and materials, fire, flood, earthquake or storm, labor disturbances, shortage of materials, failure of public utilities or common carriers, and any other causes beyond the reasonable control of the applicable Party, shall not constitute a breach of contract.

(g)           If any provision of this Agreement is finally declared or found to be illegal or unenforceable by a court of competent jurisdiction, both parties shall be relieved of all obligations arising under such provision, but, if capable of performance, the remainder of this Agreement shall not be affected by such declaration or finding.

(h)           This Agreement, including any attachments or exhibits entered into hereunder, contains all of the terms and conditions of the agreement between the parties and constitutes the

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complete understanding of the parties with respect thereto.  No modification, extension or release from any provision hereof shall be affected by mutual agreement, acknowledgment, acceptance of contract documents, or otherwise, unless the same shall be in writing signed by the other Party and specifically described as an amendment or extension of this Agreement.

(i)            Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, not including any dispute relating to patent validity or infringement, shall be settled by arbitration administered by the American Arbitration Association (“AAA”) under rules in effect on the effective date of this agreement.  Prior to arbitration, under this section, the Parties shall first attempt in good faith to resolve any controversy or claim among themselves.  In the event resolution is not obtained within a reasonable time, any Party may submit the dispute to arbitration five (5) business days following written notice by one Party to the other Party. The arbitrator(s) shall apply the law of the State of New York, without reference to rules of conflict of law, to the merits of any dispute or claim not related to patent validity or infringement.  Any other choice of law clause contrary in this Agreement notwithstanding, the arbitration shall be governed by the United States Arbitration Act.

Within 15 days after receipt of such demand, a Qualified Arbitrator, as defined below, shall be named by the Arbitration Committee of the AAA.  A “Qualified Arbitrator” means an arbitrator (i) selected from the AAA, (ii) who is neutral, (iii) has experience resolving disputes of a similar nature to those at issue in any arbitration hereunder and (iv) has either: (x) at least 10 years of judicial experience or (y) at least 10 years of practice as a lawyer and at least 5 years of experience as an arbitrator.

Except as provided in the following sentence, each party to any such matter shall be responsible for its own costs and expenses incurred in connection with the arbitration, including, without limitation, its attorneys’ and accountants’ fees and expenses.  The fees and expenses of the Qualified Arbitrator and any administrative expenses of the AAA shall be divided between the parties.

The arbitration hearing shall take place in New York, New York or such other location as the parties shall mutually agree (in writing), and shall be concluded within 10 days of its commencement unless otherwise ordered by the Qualified Arbitrator and the award thereon shall be made within 10 days after the close of the submission of evidence.  The Qualified Arbitrator shall conduct such evidentiary or other hearing as he or she deems necessary or appropriate and such Qualified Arbitrator shall be entitled to review such records and documents that the Qualified Arbitrator deems reasonably necessary or appropriate.  An award rendered by the Qualified Arbitrator appointed pursuant to this Agreement shall be final, binding and unappealable on all parties to the proceeding and judgment on such award may be entered by any party in any court having jurisdiction.

(j)            For the convenience of the Parties, this agreement may be executed in counterparts and by facsimile or email exchange of pdf signatures, each of which counterpart shall be deemed to be an original, and both of which taken together, shall constitute one agreement binding on both Parties.

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(k)           Any notices required or permitted under this Agreement shall be given in person or sent by first class, certified mail to:

Ventiv:

Ventiv Commercial Services, LLC
500 Atrium Drive
Somerset, New Jersey 08873
Attention:

with a copy to:

David S. Blatteis, Esq.
Norris, McLaughlin & Marcus, P.A.
721 Route 202-206
P.O. Box 5933
Bridgewater, NJ 08807-5933

Client:

Depomed Inc.
1360 O’Brien Drive
Menlo Park, CA 94025

Attention:  General Counsel

or to such other address or to such other person as may be designated by written notice given from time to time during the term of this Agreement by one Party to the other.

WHEREFORE, the parties hereto have caused this Agreement to be executed by their duly authorized representatives.

VENTIV COMMERCIAL SERVICES, LLC
By:	/s/ Paul Mignon
	Name: Paul Mignon
	Title: COO

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DEPOMED INC.
By:	/s/ Tammy Cameron
	Name: Tammy Cameron
	Title: Vice President, Finance

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EXHIBIT A

COMPENSATION - FIXED FEES, PASS-THROUGH COSTS,

PERFORMANCE FEES AND BILLING TERMS

I.FIXED FEES

(a)Implementation Fee

Client shall pay Ventiv $[***] for implementation fee associated with performance of the Services.   An initial payment of $[***] shall be made within ten (10) days of the date this Agreement is executed and the balance ($[***]) shall be paid no later than ten (10) days prior to the date Ventiv hires the Ventiv Sales Representatives.

(b)Fixed Monthly Fee

Commencing [***], Client shall pay Ventiv a Fixed Monthly Fee as follows:

PERIOD	FIXED MONTHLY FEE
Year One	$	[***]
Year Two	$	[***]

Payments for any partial month will be pro-rated.

(c)Backfill Recruiting Fee

In the event a Ventiv Sales Representative ceases to be employed by Ventiv, Ventiv shall backfill the vacated position and Client shall pay Ventiv a backfill recruiting fee of $[***] for each backfill Ventiv Sales Representative recruited and hired by Ventiv as a Ventiv Sales representative.  Notwithstanding the above, in the event the Ventiv Sales Representative ceases to be employed by Ventiv within [***] of the date such Ventiv employee was hired, there shall be no backfill recruiting fee due from Client.  The training obligations of the Parties with respect to backfill Ventiv Sales Representatives is set forth in Section 4 of this Agreement.

(d)[***]

[***]

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(e)[***] -

[***]

II.PASS-THROUGH COSTS

In addition to the Fixed Fees, certain expenses will be charged to Client on a pass-through basis.  These expenses will be billed to Client at actual cost.  Pass-through costs include:

·Bonuses for the Ventiv Sales Representatives (plus applicable employer portion of taxes)

·Office supplies, tolls and parking for the Ventiv Sales Representatives

·Costs for all meetings, including but not limited to POA, national and training meetings

·Travel and entertainment costs for Project Team

·DME / marketing expense

·Sales TRx data and any third party data

·Interview expense (including travel and entertainment)

·Turnover training

·Sample storage

·Backfill training and travel

·Licensing and/or credentialing required for the Ventiv Sales Representatives to provide the Services

III.PERFORMANCE FEES

(a)Included in the Monthly Fee (set forth in Section I(b) above, is Ventiv’s annual management fee, a portion of which (the “Performance Fee”) is subject to Company’s achievement of certain performance objectives in Year One and Year Two.

(b)The total annual Performance Fee in Year One is $[***] and the total annual Performance Fee in Year Two is $[***].

(c)The performance objectives for Year One are based on Product [***], each as more fully described below (each a “Performance Objective” and collectively, the “Performance Objectives”).  If Ventiv does not achieve the Performance Objectives, Ventiv will credit Client in accordance with the following.  In the event Ventiv exceeds certain Performance metrics, Ventiv shall invoice Client for such amounts due, in accordance with the following.  Performance objectives for Year Two shall be agreed upon by the Parties, in writing, at least ninety (90) days prior to the commencement of Year Two.

(d)Performance Objectives in Year One:

(1)[***] Objective — [***] percent ([***]%) of the Performance Fee shall be based on achievement [***] which shall be agreed upon by the Parties at least thirty (30) days prior to the [***].

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(2)[***] — [***] percent ([***]%) of the Performance Fee shall be based on [***] percent ([***]%) of the [***] meeting the agreed upon [***], unless otherwise agreed to by the Parties.

(3)[***] Objective — [***] percent ([***]%) of the Performance Fee shall be based on the [***] goal of having at least [***] percent ([***]%) of the [***] agreed to by the Parties.  In the event [***] shall be excluded when calculating the [***] Objective. Ventiv may achieve a portion of the [***] Objective in accordance with the following chart:

PERCENTAGE OF [***]	PERCENTAGE OF [***] ACHIEVED
[***]% - [***]%	[***]	%
[***]% - [***]%	[***]	%
[***]% - [***]%	[***]	%
[***]% - [***]%	[***]	%

(4)Product [***] — [***] percent ([***]%) of the Performance Fee shall be based on the [***] percent ([***]%), or an alternative [***] (as agreed to by the Parties).  The Parties understand and agree that the [***].  The Parties shall agree on the [***].

(5)[***] to [***] — [***] percent ([***]%) of the Performance Fee shall be based on [***] of the [***], at least [***] percent ([***]%) of the time there are [***].

(6)Average [***] Percentage — [***] percent ([***]%) of the Performance Fee to be determined at the end of the Term, is based on [***].  The [***] shall not be greater than [***] percent ([***]%) during [***] of the Term, which reflects [***].  For clarification, the [***] shall be calculated once [***].  In addition, [***] shall refer to a [***].  Ventiv may achieve a portion of the [***] in accordance with the following chart:

Average [***]	Percentage of [***]Achieved
Under [***]%	[***]	%
Between [***]% and [***]%	[***]	%
Between [***]% and [***]%	[***]	%
Between [***]% and [***]%	[***]	%
Between [***]% and [***]%	[***]	%

(e)The metrics set forth above shall be used solely for the calculation of the Performance Fee.  The failure to meet any of these metrics shall not be considered a breach of the Agreement.

(f)The Parties agree that achievement or nonachievement of one of the Performance Objectives does not impact or effect achievement or nonachievement of the other Performance

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

16

Objectives.

(g)In the event this Agreement is terminated prior to the end of the Term, the Parties shall determine if the Performance Objectives have been achieved through the actual termination date; it being understood and agreed that Ventiv shall be entitled to receive all Performance Fees earned (including a pro rata portion) through the actual termination date.

IV.MISCELLANEOUS SERVICES

(a)Realignment and Call Plans - See Exhibit B attached hereto.

(b)Ventiv IC Plan - Ventiv shall manage an incentive compensation program for Ventiv Sales Representatives at no cost to Client.

(c)Client IC Plan - Client shall design an incentive compensation program for the Client District Mangers, Regional Directors and RTAMS and shall provide such plan to Ventiv in writing when completed.  Ventiv shall provide the incentive compensation calculation pursuant to Client’s incentive compensation program at no cost to Client (unless customized, ad-hoc or non-standard reports are requested by Client, in which case Section 1(d) of the Agreement shall apply).  Client is solely responsible for paying its employees amounts due pursuant to Client’s incentive compensation program.

(d)State License Validation Fees

Client shall pay Ventiv a one-time set up fee of $[***] and a per-lookup fee in accordance with the following:

PERIOD	AUTOMATED LOOKUP	MANUAL LOOKUP
Year One	$[***] per lookup	$[***] per lookup
Year Two	$[***] per lookup	$[***] per lookup

(e)In the event Client elects to use IREP (proprietary software), Client shall pay Ventiv an incremental monthly fee of $[***] per user per month.

V.BILLING TERMS

The Implementation Fee shall be paid by Client to Ventiv pursuant to Section I (a) of this Exhibit A.  Within thirty (30) days of the proposed hire date of the Ventiv Sales Representatives (as agreed to by the Parties), Ventiv shall invoice Client for two (2) months of the Fixed Monthly

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

17

Fees (as set forth in this Exhibit A, Section I (b) above).  Ventiv shall refund Client or not invoice Client for the Fixed Monthly Fees for the last two (2) months of the Term.  Commencing on the first month of Deployment, Client will be billed monthly in advance the amount stated above as the Fixed Monthly Fee (as set forth in this Exhibit A, Section I (b) above).  Pass-through Costs (as set forth in Section II above) will be billed to Client at actual cost as incurred by Ventiv.  Bonuses for Ventiv Sales Representatives (as set forth as a pass-through cost in Section II above) shall be paid by Client to Ventiv within ten (10) days of the Parties reaching agreement on the actual amount of the bonuses to be paid.

Invoices are due upon receipt.  If not paid within 30 days of date of invoice, there will be a finance charge of 1.5% monthly, applied to the outstanding balance due.

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

18

EXHIBIT B

SAMPLING OF PRODUCTS TO TARGETS

General

Ventiv shall cause the Ventiv Sales Representatives to distribute samples of Products to Targets (and shall in no event distribute Samples to non-Targets) as part of the detailing activity of the Ventiv Sales Representatives, under a sampling program (the “Sampling Program”) in accordance with the terms of the Agreement.  Any Sampling Program will be reviewed with and approved (in writing) by Client prior to implementation it being understood that any Sampling Program shall be Client’s program and shall comply in all respect with all Laws.  The program shall be implemented by Ventiv and Ventiv Sales Representatives in a manner that complies in all respects with all Laws.  The Parties agree that Product samples shall not be considered an item of value.

In connection with the foregoing, Client expressly authorizes Ventiv to distribute the Product samples during the Term (or any Additional Term) of this Agreement.

If the Sampling Program provides for the shipment of samples to Ventiv’s affiliate, Promotech Research Associates, Inc. for distribution by Ventiv to the Ventiv Sales Representative (and thereafter to Targets), Ventiv shall store the samples of the Products and distribute the samples to Targets (and shall in no event distribute samples to non-Targets) in compliance with all applicable legal requirements, including, without limitation, the PDMA.  If the Sampling Program to which this Exhibit is attached provides for the distribution of samples by Client directly to the Ventiv Sales Representatives, Client shall be responsible for storage and distribution in accordance with applicable legal requirements, including, without limitation, the PDMA. Client shall nonetheless retain all risk of loss with respect to samples of the Products. Furthermore, Client shall at all times maintain its own insurance with respect to loss, damage or destruction of the Products.

Responsibility for Sample Distribution and Storage

Ventiv shall be responsible for any necessary storage of samples in the aggregate and for distribution of samples to the Ventiv Sales Representatives. Ventiv Sales Representatives shall be accountable for samples received by Ventiv Sales Representatives (including any storage of samples by individual Ventiv Sales Representatives).

State License Number for Targets

If requested in writing by Client, a list of Targets utilized by the Ventiv Sales Representatives shall be validated by Ventiv against a current list of state license numbers.  The fees for such service are set forth in Section IV of Exhibit B.  All additions, changes and off-list potential Targets shall be validated in advance by Ventiv.

Sample Accountability Records

Ventiv shall utilize a security and audit program that includes allowance for all of: random, for cause and periodic physical inventories of samples delivered to the Sales Representatives consistent with the PDMA and applicable regulations of the Food and Drug

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

19

Administration (“FDA”).  In the course of utilizing that program Ventiv will generate Inventory Records, Reconciliation Reports and Summary Report as required by the regulations of the FDA.

Written Accountability Policies

Ventiv will prepare written policies, provide instruction and testing concerning those policies and (with the cooperation of Client) gather all required information concerning Sample Accountability issues to assure that Ventiv is in compliance with the requirements of the regulations of the FDA covering the sampling services (if any) provided by Ventiv.  Those written policies and procedures will address: (i) the inventory process, (ii) an inventory schedule, (iii) the audit standards for detecting falsified and incomplete records, (iv) what is a significant loss and how it is to be identified, (v) responsibility for notifying the FDA, (vi) system for monitoring samples to identify the loss or theft of samples and (vii) the standards for storage of samples.  Those written policies and procedures shall be provided to and accepted in writing by Client.  In addition, Client shall prepare written policies and procedures covering shipping of samples by Client and return of samples, as applicable. Client shall provide Ventiv with a written copy of Client’s written policies and procedures.

Audit Services

Ventiv will develop audit procedures, random selection audits, operational guidelines, proposed timelines and checklists to allow testing and demonstration of PDMA compliance.  These procedures will include random and for-cause audit criteria, on-site inventory, inspection of sample storage locations, interviews of Sales Representatives and reconciliation services and reports. The on-site inventory of the samples in the possession of a Ventiv Sales Representative and related interview of that Ventiv Sales Representative (with accompanying reconciliation services and report) shall constitute a “physical audit.”  A physical audit, as requested by Client, shall be conducted with respect to Ventiv Sales Representatives with appropriate subsequent reconciliation of samples provided to that Ventiv Sales Representative. In addition to any other physical audits, performed by either Client or Ventiv, required by the PDMA and/or regulations thereunder and/or by the applicable written policies and procedures for the sample accountability program, a physical audit shall be conducted on each Ventiv Sales Representative upon termination of employment either by Client or Ventiv.  Random signature audits will be performed by Ventiv and the results reported to Client.

Shipment of Samples

If Client is shipping samples directly to the Ventiv Sales Representatives, Client shall be responsible for those shipments, including using appropriate delivery verification system and confirmation documentation. Under any Sampling Program, Client shall provide Ventiv with a written description of that delivery verification system and copies of the conformation documentation forms.  Client shall provide Ventiv with all PDMA-related information concerning shipped samples as required by FDA regulations, i.e., including lot numbers.  This information may be delivered either electronically or on paper but in either case within 24 hours of the shipment of the samples. Client shall also provide all information reasonably necessary to allow Ventiv to verify the receipt of shipped samples.

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

20

Ventiv will ensure they receive a copy of all documents confirming shipments of samples to the Sales Representatives, whether by Ventiv, a warehouse or Client. Ventiv will, in all cases, reconcile the receipt of samples by each Ventiv Sales Representative with the samples shipped to that Sales Representative, based upon the shipping records provided to it and acknowledged of delivery provided by the Sales Representatives.  All discrepancies between the sample shipping records (whether by Ventiv, warehouse or Client and the acknowledgment of delivery by the Sales Representatives shall be identified by Ventiv and reported to Client within five (5) days of discovery.  All loss of samples or potential loss of samples shall be investigated by Client.  To the extent either party uses a third party vendor to provide any shipping and/or delivery verification services, that party shall insure that the third party vendor is compliant with all applicable federal and state laws, including the PDMA and the regulations of the FDA.

Returns

Client shall be responsible for confirming all returns of samples by Ventiv or the Ventiv Sales Representatives.  Client will provide Ventiv with written confirmation of sample returns promptly after receipt by Client of the returned sample.  The Parties recognize that Ventiv will reconcile sample data and account for samples based (in part) on the return confirmations provided by Client.  Client shall not remove, destroy or otherwise impair the availability of the returned samples until either Ventiv confirms the return of samples in the quantities reported by the Sales Representative or, if Ventiv has not begun such confirmation after the passage of thirty (30) days following notice to Ventiv.

Access to Records

Ventiv shall provide Client access in less than twenty-four (24) hours.

Notification of Client; of FDA

Upon Ventiv’s discovery that any Product samples have been lost or stolen, Ventiv shall, within twenty-four (24) hours, report such theft or loss to Client.  Client will be responsible for determining whether a “theft” or a “significant loss” has occurred under the PDMA and the regulations of the FDA. Client shall also be responsible for determining whether there is “reason to believe” that a diversion of a sample or falsification of a sample record by a Ventiv Sales Representation has occurred.  Client is responsible for reporting the theft or loss to the FDA.

Recalls

Ventiv shall maintain such traceability records at the product code level on samples of the Products as may be necessary to permit a recall or field correction of the Product.  The decision to conduct and the right to control a recall shall be solely Clients.  Ventiv shall cooperate fully with Client in connection with any recall efforts affecting the Product.

Accountability Training

The Parties recognize that a Sampling Program will require incremental training in sample accountability.  Ventiv, with the assistance of Client, will provide, as part of the training, all

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

21

Ventiv Sales Representatives with training which addresses sampling matters.  Ventiv will consult with Client to assure that the Ventiv Sales Representatives will use detail bags and report forms which are acceptable to Client.  Should Ventiv and/or Client determine that follow-on training is necessary in the future, Client will be responsible for the reasonable costs associated with such follow-on training.

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

22

EXHIBIT C

SALES REPORTS AND ANALYSIS

Work to be performed

Database	Base assumptions	Standard Annual Frequency	Standard Timing	Typical Turnaround
Initial Data Loads	Data provided from one source in basic Ventiv provided layout	1	3-6 weeks prior to deployment	5 business days
Universe Deletions	Data provided from one source in basic Ventiv provided layout	4	Quarterly	5 business days
Universe Merges	Data provided from one source in basic Ventiv provided layout	4	Quarterly	5 business days
Universe Additions	Data provided from one source in basic Ventiv provided layout	12	monthly	5 business days
Universe Zip/Terr Changes	Standard (zip code :from territory : to territory) format	4	Quarterly	5 business days
Minor realignments (less than 25% of universe changes)	Standard (zip code: from territory: to territory) format	4	Quarterly	10 Business Days
Target changes		4	Quarterly	5 business days
Data Extracts: Physician Universe	Format as agreed upon by Client and Ventiv	12	monthly
Data Extracts: CID Data for Physicians	Format as agreed upon by Client and Ventiv	12	monthly
Data Extracts to third party vendors	standard format-no charge for setup-per run charge (TBD with			10 days for initial set up/ run/qc time

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

23

Work to be performed

Database	Base assumptions	Standard Annual Frequency	Standard Timing	Typical Turnaround
	complexity.			thereafter

Standard Reports	Base assumptions	Standard Frequency	Standard Timing	Level	Delivery Mechanism
Call Activity	Standard Format SFA synchronized data	Daily	Updated every morning by 8am	Nat., RD,DM	Portal
Territory Summary	Adapted to specific activity measurements and goals within set up matrix (calls, targets only, reach, frequency, sample distribution) Up to 3 promoted products	Weekly	By Wednesday of each week. Monthly (Within 10 business days of close of the month)	Nat., RD,DM Rep	Portal Email
InVentiv intelligence	Adapted to specific activity measurements and goals within set up matrix (calls, targets only, reach, frequency, sample distribution and monthly prescriber /product data) Up to 3 promoted products and 6 competitive products	Weekly SFA data Monthly Sales Data	15th of each month	Nat., RD,DM	Portal
Competitive Analysis	Adapted to specific product/market definition Monthly Prescriber based product level prescription data Up to 3 promoted	Monthly	5 business days post receipt of last data input and quality control release.	Nat., RD,DM Rep	Portal Email

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

24

	products Reps also receive a Top 25 report
Activity/Productivity aka Impact Report	Adapted to specific product/market definition Up to 3 promoted products Monthly Prescriber based product level prescription data	Monthly	5 business days post receipt of last data input and quality control release.	Nat., RD,DM Rep	Portal Email

*All customizations, expedited timeframes or increases to standard frequency of tasks will be performed at hourly rate. All Customization is scoped and signed off by client before processing includes set-up, generation and QC of report.

Other available services: Scoped for workload, materials, programming , quality control and data needs to determine applicable costing at $[***] per hour

Custom/Non-Standard and Ad hoc Reporting

Web portal access for representatives

Web Portal Customizations

Data Extract Set Up and Modification

Data Set up For Third Party Data Extracts

Payor based Reporting

Web Based Universal Maintenance

inVentiv Intelligence for Representatives

Weekly Competitive Analysis* -assumes the purchase of weekly prescriber based data

Structured Ad hoc Analytics Hours by Tier

CDC Data Reporting - assumes the purchase of Monthly CDC based data

Recommendation Data Reporting

Additional report samples can be made available.

Confidential Information, indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission

25

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James A. Schoeneck, certify that:

1.I have reviewed this Quarterly Report of Depomed, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 2, 2011
	By:	/s/ James A. Schoeneck
		James A. Schoeneck
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tammy L. Cameron, certify that:

1.I have reviewed this Quarterly Report of Depomed, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 2, 2011
	By:	/s/ Tammy L. Cameron
		Tammy L. Cameron
		Vice President, Finance

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Depomed, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James A. Schoeneck, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 2, 2011

/s/ James A. Schoeneck

James A. Schoeneck

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Depomed, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tammy L. Cameron, Principal Accounting and Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 2, 2011

/s/ Tammy L. Cameron

Tammy L. Cameron

Vice President, Finance

XML



CONDENSED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock, no par value
Preferred stock, shares authorized	5,000,000	5,000,000
Common stock, no par value
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	55,339,962	52,957,787
Common stock, shares outstanding	55,339,962	52,957,787
Series A convertible preferred stock
Preferred stock, shares designated	25,000	25,000
Preferred stock, shares issued	18,158	18,158
Preferred stock shares surrendered	18,158	18,158
Preferred stock, shares outstanding	0	0

XML



CONDENSED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Revenues:
Product sales	$ 16,153	$ 11,657	$ 31,464	$ 24,257
Royalties	67	91	232	179
License and collaborative revenue	4,998	12,671	72,623	15,342
Total revenues	21,218	24,419	104,319	39,778
Costs and expenses:
Cost of sales	2,140	2,981	3,775	4,462
Research and development expense	4,043	4,570	9,197	9,758
Selling, general and administrative expense:
Promotion fee expense	11,055	8,099	21,317	16,978
Other selling, general and administrative expense	9,976	4,541	17,216	8,091
Total selling, general and administrative expense	21,031	12,640	38,533	25,069
Gain on settlement agreement	0	0	(40,000)	0
Total costs and expenses	27,214	20,191	11,505	39,289
Income (loss) from operations	(5,996)	4,228	92,814	489
Other income (expense):
Interest and other income	357	56	436	150
Interest expense	(39)	(157)	(109)	(340)
Total other income (expense)	318	(101)	327	(190)
Net income (loss) before income taxes	(5,678)	4,127	93,141	299
Benefit from (Provision for) income taxes	(1)	(1)	(3)	(2)
Net income (loss)	$ (5,679)	$ 4,126	$ 93,138	$ 297
Basic net income (loss) per common share	$ (0.11)	$ 0.08	$ 1.73	$ 0.01
Diluted net income (loss) per common share	$ (0.11)	$ 0.08	$ 1.67	$ 0.01
Shares used in computing basic net income (loss) per common share	54,056,064	52,436,681	53,706,617	52,368,085
Shares used in computing diluted net income (loss) per common share	54,056,064	53,103,623	55,883,346	52,918,507

XML



Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 01, 2011
Document and Entity Information
Entity Registrant Name	DEPOMED INC
Entity Central Index Key	0001005201
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		55,362,918

XML



COMPREHENSIVE INCOME (LOSS)

6 Months Ended

Jun. 30, 2011

COMPREHENSIVE INCOME (LOSS)

COMPREHENSIVE INCOME (LOSS)

NOTE 7.  COMPREHENSIVE INCOME (LOSS)

The following table summarizes components of total comprehensive income (loss) (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Net income (loss)	$	(5,679)	$	4,126	$	93,138	$	297
Unrealized gain on available-for-sale securities.	97		46		86		47
Total comprehensive income (loss)	$	(5,582)	$	4,172	$	93,224	$	344

XML



INCOME TAXES

6 Months Ended

Jun. 30, 2011

INCOME TAXES

INCOME TAXES

NOTE 12.  INCOME TAXES

As of December 31, 2010 and June 30, 2011, the Company had $3.4 million and $3.5 million of unrecognized tax benefits, respectively. All tax years since inception remain open to examination by the Internal Revenue Service and the California Franchise Tax Board until such time the Company's net operating losses and credits are either utilized or expire. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense by the Company. The Company does not have any accrued interest or penalties associated with unrecognized tax benefits.

XML



NET LOSS PER COMMON SHARE

6 Months Ended

Jun. 30, 2011

NET LOSS PER COMMON SHARE

NET LOSS PER COMMON SHARE

NOTE 3.  NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, plus dilutive common shares for the period determined using the treasury-stock method. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per share are calculated as follows:

(in thousands, except for per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Numerator:
Net income (loss)	$	(5,679)	$	4,126	$	93,138	$	297
Denominator for basic net income (loss) per share	54,056		52,437		53,707		52,368
Net effect of dilutive common stock equivalents	—		667		2,176		550
Denominator for diluted net income (loss) per share:	54,056		53,104		55,883		52,918
Basic net income (loss) per share	$	(0.11)	$	0.08	$	1.73	$	0.01
Diluted net income (loss) per share	$	(0.11)	$	0.08	$	1.67	$	0.01

For the three and six months ended June 30, 2011, the total number of antidilutive outstanding common stock equivalents excluded from the net income per share computation was 4.0 million and 0.8 million, respectively. For the three and six months ended June 30, 2010, 3.2 million and 3.7 million common stock equivalents, respectively, were not included in dilutive shares because their effect is anti-dilutive.

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

6 Months Ended

Jun. 30, 2011

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following (in thousands):

	June 30, 2011		December 31, 2010
Accounts payable	$	2,246	$	1,655
Accrued compensation	3,367		2,638
Accrued clinical trial expense	793		307
Accrued rebates and sales discounts	2,823		2,625
Allowance for product returns	6,410		5,355
Accrued promotion fee	4,269		2,490
Other accrued liabilities	3,614		3,403
Total accounts payable and accrued liabilities	$	23,522	$	18,473

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SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2011

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 14. SUBSEQUENT EVENTS

Ironwood Pharmaceuticals, Inc.

         In July 2011, the Company entered into an agreement with Ironwood Pharmaceuticals, Inc. (Ironwood) granting Ironwood a license for worldwide rights to the Company's Acuform drug delivery technology for an undisclosed Ironwood early stage development program. Under the terms of the agreement, the Company will assist with initial product formulation and Ironwood will be responsible for all development and commercialization of the product. The Company received an upfront license fee of $0.9 million and will receive additional payments pending achievement of certain development and regulatory milestones, as well as royalties on product sales.

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SHAREHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2011

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

NOTE 10.  SHAREHOLDERS' EQUITY

Option Exercises

For the three and six months ended June 30, 2011, employees and consultants exercised options to purchase 1,617,010 and 2,312,253 shares of the Company's common stock with net proceeds to the Company of approximately $5.0 million and $7.3 million, respectively.

Employee Stock Purchase Plan

In May 2011, the Company sold 69,922 shares under the ESPP. The shares were purchased at a weighted average purchase price of $4.37 per share with proceeds of approximately $0.3 million.

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INVENTORIES

6 Months Ended

Jun. 30, 2011

INVENTORIES

INVENTORIES

NOTE 8.  INVENTORIES

Inventories relate to the manufacture of the Company's Glumetza, Gralise and Proquin XR products. Inventories are stated at the lower of cost or market and consist of the following (in thousands):

	June 30, 2011		December 31, 2010
Raw materials	$	1,082	$	74
Work-in-process	137		202
Finished goods	3,778		1,254
Deferred costs	17		41
Total	$	5,014	$	1,571

  Deferred costs represent the costs of Proquin XR product shipped for which recognition of revenue has been deferred.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed financial statements and the related footnote information of Depomed, Inc. (the Company or Depomed) have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company's management, the accompanying interim unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the interim period ended June 30, 2011 are not necessarily indicative of results to be expected for the entire year ending December 31, 2011 or future operating periods.

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the SEC. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of its products, royalties earned, and on payments received and services performed under contractual arrangements. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements met certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company's customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that we remain obligated to perform services.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable.

·Product Sales:

·Glumetza®: The Company sells Glumetza® (metformin hydrochloride extended release tablets) to wholesalers and retail pharmacies subject to rights of return six months before product expiration and up to twelve months after product expiration. The Company recognizes revenue for Glumetza sales at the time title transfers to its customers, which occurs at the time product is delivered to its customers.

·Proquin®XR: Up until the fourth quarter of 2010, the Company sold Proquin® XR (ciprofloxacin hydrochloride) to wholesalers and retail pharmacies subject to rights of return six months before product expiration and up to twelve months after product expiration.  Given the Company's limited history of selling Proquin XR and declining prescription demand for Proquin XR, the Company was not able to reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of Proquin XR until the right of return no longer exists, which occurs at the earlier of the time Proquin XR units are dispensed through patient prescriptions or expiration of the right of return. The Company estimates patient prescriptions dispensed using an analysis of third-party information, including third-party market research data and information obtained from wholesalers with respect to inventory levels and inventory movement. As a result of this policy, the Company has a deferred revenue balance of $0.4 million at June 30, 2011 related to Proquin XR product shipments that have not been recognized as revenue, which is net of wholesaler fees, retail pharmacy discounts and prompt payment discounts. In addition, the costs of manufacturing Proquin XR associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

·Product Sales Allowances — The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company's agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from the Company's estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company's product sales allowances include:

·Product Returns — The Company estimates product returns on sales of Glumetza. The Company allows customers to return product that is within six months before and up to twelve months after its product expiration date.  The shelf life of the 500mg Glumetza is currently 48 months from the date of tablet manufacture. On product launch in August 2006 and through the second quarter of 2008, the shelf life of 500mg Glumetza product shipped was 36 months from the date of tablet manufacture. The shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. The Company monitors actual return history on individual product lot basis since product launch, which provides it with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product, shipment and prescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products.

·Managed Care Rebates — The Company offers rebates under contracts with certain managed care organizations. The Company establishes an accrual equal to its estimates of future managed care rebates attributable to sales and recognizes the estimated rebates as a reduction of revenue in the same period the related revenue is recognized. The Company estimates its managed care rebates based on the terms of each agreement, estimated levels of inventory in the distribution channel, and historical and expected future utilization of product by the managed care organization.

·Wholesaler and Retail Pharmacy Discounts — The Company offers discounts to certain wholesale distributors and retail pharmacies based on contractually determined rates. The Company accrues the discount on shipment to the respective wholesale distributors and retail pharmacies and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

·Prompt Pay Discounts - The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on the Company's experience, the Company expects its customers to comply with the payment terms to earn the cash discount. The Company accounts for cash discounts by reducing accounts receivable by the full amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

·Medicaid Rebates — The Company participates in Medicaid rebate programs, which provide assistance to certain eligible low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which the prescription is filled. The Company estimates and accrues Medicaid rebates based on product pricing, current rebates and changes in the level of discounts the Company offers that may affect the level of Medicaid discount, historical and estimated future percentages of product sold to Medicaid recipients and estimated levels of inventory in the distribution channel.

·Chargebacks — The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs.  These federal entities purchase products from wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.  The Company estimates and accrues chargebacks based on estimated wholesaler inventory levels, current contract prices and historical chargeback activity.

·Patient Discount Programs — The Company offers loyalty card programs to patients for Glumetza in which patients receive certain discounts at participating retail pharmacies that are reimbursed by the Company.  The Company estimates and accrues future redemptions based on historical redemption activity.

·Royalties — Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured. Royalties received under the Company's agreements with Valeant Pharmaceuticals International, Inc. (Valeant) and LG Life Sciences (LG) are recognized when the royalty payments are received as they cannot reliably be estimated.

·                  License and Collaborative Arrangements  — Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company's remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement; (2) consideration earned relates to past performance, and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company's performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company's performance, the consideration earned relates solely to past performance, and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Recently Issued Accounting Standards

In June 2011, the FASB issued guidance amending the presentation requirements for comprehensive income. For public entities, this guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. Upon adoption, we will have the option to report total comprehensive income, including components of net income and components of other comprehensive income, as a single continuous statement or in two separate but consecutive statements. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

         In September 2009, the FASB revised the authoritative guidance for revenue arrangements with multiple deliverables. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. We elected to adopt this guidance prospectively, effective for the Company's fiscal year beginning January 1, 2011. Upon adoption, the guidance did not have a material impact on the Company's financial statements and is not expected to have a material impact on the Company's future operating results.

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LICENSE AND COLLABORATIVE ARRANGEMENTS

6 Months Ended

Jun. 30, 2011

LICENSE AND COLLABORATIVE ARRANGEMENTS

LICENSE AND COLLABORATIVE ARRANGEMENTS

NOTE 4. LICENSE AND COLLABORATIVE ARRANGEMENTS

Ventiv Commerical Services, LLC

In June 2011, the Company entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), pursuant to which inVentiv Selling Solutions, Ventiv's outsourced sales business, will provide sales force recruiting, training, deployment and ongoing operational support to the Company to promote Gralise. The agreement provides for a sales force of 164 full-time sales representatives dedicated to the Company, all of whom will be employees of Ventiv.  Members of sales management will be Company employees.

Under the terms of the agreement, the Company will pay Ventiv an upfront implementation fee and agreed upon fixed monthly fees, which are subject to adjustment based on actual staffing levels.  During the term of the agreement, a portion of Ventiv's management fee will be subject to payment by the Company only to the extent that specified performance objectives are met.  The Company will also pay certain pass-through costs of Ventiv incurred in connection with the agreement, which primarily include bonuses, travel costs and certain administrative expenses. The Company incurred $0.9 million of expense associated with the upfront implementation fee during the three and six months ended June 30, 2011.

         The agreement will expire on the second anniversary of the date on which sales representatives hired by Ventiv are deployed. The agreement is subject to early termination under certain circumstances and may be terminated by either party upon advance notice after the first anniversary of the deployment date

Abbott Products Inc. (formerly Solvay Pharmaceuticals, Inc.)

          In November 2008, the Company entered into an exclusive license agreement with Solvay Pharmaceuticals, Inc. (Solvay) granting Solvay exclusive rights to develop and commercialize Gralise^TM (gabapentin) for pain indications in the United States, Canada and Mexico. In February 2010, Abbott Laboratories acquired the pharmaceutical business of Solvay and Abbott Products, a subsidiary of Abbott Laboratories, became responsible for the Gralise license agreement with the Company.

          In March 2010, Abbott Products submitted an NDA for Gralise to the U.S. Food and Drug Administration (FDA) for the management of postherpetic neuralgia (PHN). In May 2010, the FDA accepted the NDA filing for Gralise, which triggered a $10.0 million milestone payment from Abbott Products which Depomed received in June 2010. As the nonrefundable milestone was substantive in nature, achievement of the milestone was not reasonably assured at the inception of the agreement and the milestone was related to past performance, the Company recognized the entire $10.0 million as revenue in the second quarter of 2010.

         In January 2011, Abbott Products received FDA approval of Gralise for the management of PHN, which triggered a $48.0 million development milestone from Abbott Products to the Company, which the Company received in February 2011. As the nonrefundable milestone was substantive in nature, achievement of the milestone was not reasonably assured at the inception of the agreement and the milestone was related to past performance, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

         In March 2011, the Company entered into a settlement agreement with Abbott Laboratories  which provided for (i) the immediate termination of the Gralise license agreement; (ii) the transition of Gralise back to Depomed; and (iii) a $40.0 million payment to Depomed which the Company received in March 2011. The $40.0 million payment was recognized as a gain within operating income in the first quarter of 2011.        

         Pursuant to the exclusive license agreement originally entered into in November 2008,  Solvay paid the Company a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time the Company's development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, the Company no longer has continuing obligations to Abbott Products. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue.

Boehringer Ingelheim International GMBH

        In March 2011, the Company entered into a license and service agreement with Boehringer Ingelheim International GMBH (Boehringer Ingelheim) granting Boehringer Ingelheim a license to certain patents related to the Company's Acuform drug delivery technology to be used in developing fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the terms of the agreement, Boehringer Ingelheim was also granted a right of reference to the New Drug Application covering the Company's Glumetza product and associated data for use in potential regulatory submission processes.

        In connection with the license and service agreement, the Company received an upfront payment of $10.0 million less applicable withholding taxes of approximately $1.5 million, for a net receipt of approximately $8.5 million in April 2011. The Company received the remaining $1.5 million of taxes previously withheld directly from German tax authorities in June 2011.    

        The $10.0 million upfront fee is being amortized ratably through October 2011, which is the estimated length of time Depomed is obligated to perform formulation work under the agreement. The Company recognized approximately $3.9 million and $4.9 million of revenue associated with this upfront license fee during the three and six months ended June 30, 2011, respectively. The remaining deferred revenue balance is $5.1 million at June 30, 2011.

         Under the terms of the agreement, the Company may receive an additional $2.5 million upon delivery of experimental batches of prototype formulations that meet certain specification. The Company is also eligible to receive additional milestone payments based on regulatory filing and approval events, as well as royalties on worldwide net sales of products.

          Depomed is responsible for providing certain initial formulation work associated with the fixed dose combination products. Work performed by the Company under the service agreement will be reimbursed by Boehringer Ingelheim on an agreed-upon FTE rate per hour plus out-of-pocket expenses. The Company recognized approximately $0.5 million and $0.6 million of revenue associated with the reimbursement of formulation work under the service agreement during the three and six months ended June 30, 2011, respectively

Santarus, Inc.

Santarus began promotion of Glumetza in October 2008. Santarus is required to meet certain minimum promotion obligations during the term of the agreement, and is required to make certain

minimum marketing, advertising, medical affairs and other commercial support expenditures. The Company continues to record revenue from the sales of Glumetza product, and starting in October 2008, began paying Santarus a promotion fee equal to 80% of the gross margin earned from net sales of Glumetza product in the United States. The promotion fee was reduced to 75% of gross margin beginning in the fourth quarter of 2010. For the three and six months ended June 30, 2011, the Company recognized $11.1 million and $21.3 million, respectively, in promotion fee expense under the agreement, which is classified within selling, general and administrative expense. For the three and six months ended June 30, 2010, the Company recognized $8.1 million and $17.0 million, respectively, in promotion fee expense under the agreement.

        The Company is also entitled to receive sales milestones payments from Santarus totaling up to $16.0 million, based on achieving certain levels of net product sales of Glumetza. In January 2011, the Company achieved the first of these sales milestones related to net sales of Glumetza reaching $50.0 million for the 13 month period ending January 31, 2011. As the milestone was achieved and related to past performance the entire $3.0 million was recognized in its entirety as milestone revenue in the first quarter of 2011.

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LONG-TERM DEBT

6 Months Ended

Jun. 30, 2011

LONG-TERM DEBT

LONG-TERM DEBT

NOTE 5.  LONG-TERM DEBT

In June 2008, the Company entered into a loan and security agreement with General Electric Capital Corporation, as agent (GECC), and Oxford Finance Corporation (Oxford) that provided the Company with a $15.0 million credit facility. The credit facility was available in up to three tranches.  The first tranche of $3.8 million was advanced to the Company upon the closing of the loan agreement.  The second tranche of $5.6 million was advanced to the Company in July 2008. The third tranche of $5.6 million was not drawn and is no longer available to the Company, and GECC and Oxford waived the 2% unused line fee related to the unused portion of the credit facility.

The Company paid interest only on the first tranche for the first six months at an interest rate of 11.59%.  Beginning in January 2009, the Company began principal payments on the first tranche, plus interest at such rate, which will be paid in 30 equal monthly installments. The second tranche was interest-only through December 31, 2008, with principal and interest payable thereafter in 30 equal monthly installments at an interest rate of 11.59%. Interest expense, which includes amortization of debt issuance costs, was approximately $25,000  and $81,000 for the three and six months ended June 30, 2011, respectively.

        As of June 30, 2011, the outstanding balance under the facility was approximately $147,000, and the unamortized portion of the debt issuance costs was approximately $33,000. The credit facility was fully repaid in July 2011.

The obligations of the Company under the loan agreement were secured by interests in all of the Company's personal property, and proceeds from any intellectual property, but not by the Company's intellectual property.

The credit facility contained affirmative and negative covenants with which the Company was required to comply with, and imposed restrictions with regards to additional indebtedness, liens, various fundamental changes (including mergers and acquisitions), payments, investments, transactions with affiliates, and other limitations customary in secured credit facilities. The Company was in compliance with such covenants as of June 30, 2011.

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LEASE AMENDMENTS

6 Months Ended

Jun. 30, 2011

LEASE AMENDMENTS

LEASE AMENDMENTS

 

NOTE 13. LEASE AMENDMENTS

In June 2011, the Company entered into amendments to its existing leases for the Company's premises located at 1330 and 1360 O'Brien Drive, Menlo Park, California, consisting of approximately 46,000 rentable square feet.  The lease amendments extend the term of the existing leases for twelve months, from February 1, 2012 through January 31, 2013.  All material provisions of the leases remain the same, except that the Company may not extend either of the lease terms. The lease for the Company's premises located at 1430 O'Brien Drive, consisting of approximately 9,000 rentable square feet, was not amended by the lease amendments, and has a term through January 31, 2012.

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STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2011

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 6.  STOCK-BASED COMPENSATION

The following table presents stock-based compensation expense recognized for stock options, stock awards and the Company's employee stock purchase program (ESPP) in the Company's statements of operations (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of sales	$	14	$	3	$	33	$	6
Research and development expense	156		143		311		309
Selling, general and administrative expense	995		371		1,523		746
Total	$	1,165	$	517	$	1,867	$	1,061

For the three and six months ended June 30, 2011, the Company recognized approximately $0.4 million in stock-compensation expense associated with the accelerated vesting of stock options in connection with a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. See Note 11 for further information with regards to the separation agreement and release.

At June 30, 2011, the Company had $5.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants that will be recognized over an average vesting period of 2.3years. 

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CONDENSED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Operating Activities
Net income (loss)	$ 93,138	$ 297
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	123	210
Loss on disposal of property and equipment	0	46
Stock-based compensation	1,867	1,061
Changes in assets and liabilities:
Accounts receivable	(1,597)	473
Inventories	(3,443)	1,089
Prepaid and other assets	(1,572)	(381)
Accounts payable and other accrued liabilities	4,074	(58)
Accrued compensation	729	(985)
Deferred revenue	(11,235)	(5,395)
Net cash provided by (used in) operating activities	82,084	(3,643)
Investing Activities
Purchases of property and equipment	(444)	(58)
Purchases of marketable securities	(94,777)	(38,579)
Maturities of marketable securities	21,399	34,490
Sales of marketable securities	0	4,482
Net cash provided by (used in) investing activities	(73,822)	335
Financing Activities
Principal payments on long-term debt	(2,098)	(1,867)
Proceeds from issuance of common stock	7,621	599
Net cash provided by (used in) financing activities	5,523	(1,268)
Net increase (decrease) in cash and cash equivalents	13,785	(4,576)
Cash and cash equivalents at beginning of period	22,526	26,821
Cash and cash equivalents at end of period	$ 36,311	$ 22,245

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CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

6 Months Ended

Jun. 30, 2011

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of June 30, 2011 and December 31, 2010 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	4,990	$	—	$	—	$	4,990
Money market funds		31,321		—		—		31,321
Total cash and cash equivalents	$	36,311	$	—	$	—	$	36,311
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
U.S. corporate debt securities	15,403		5		(1)		15,407
U.S. government agency debt securities	16,191		7		—		16,198
U.S. Treasury securities	45,852		558		(493)		45,917
Total maturing between 1 and 2 years and included in marketable securities:
U.S. corporate debt securities	—		—		—		—
U.S. government agency debt securities	20,101		21		(1)		20,121
U.S. Treasury securities	30,197		59		—		30,256
Total available-for-sale securities	$	127,744	$	650	$	(495)	$	127,899
Total cash, cash equivalents and marketable securities	$	164,055	$	650	$	(495)	$	164,210
December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	3,913	$	—	$	—	$	3,913
Money market funds		17,613		—		—		17,613
U.S. Treasury securities		1,000		—		—		1,000
Total cash and cash equivalents	$	22,526	$	—	$	—	$	22,526
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
U.S. corporate debt securities	12,099		4		(2)		12,101
U.S. government agency debt securities	25,667		21		—		25,688
U.S. Treasury securities	10,015		21		—		10,036
Total maturing between 1 and 2 years and included in marketable securities:
U.S. corporate debt securities	—		—		—		—
U.S. government agency debt securities	—		—		—		—
U.S. Treasury securities	6,512		25		—		6,537
Total available-for-sale securities	$	54,293	$	71	$	(2)	$	54,362
Total cash, cash equivalents and marketable securities	$	76,819	$	71	$	(2)	$	76,888

The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality, U.S. financial institutions and, to date has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in "interest and other income" in the condensed statement of operations.

At June 30, 2011, the Company had eight securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 (in thousands):

	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. corporate debt securities	4,067		(1		)	—		—		4,067		(1		)
U.S. government agency debt securities	11,032		(1		)	—		—		11,032		(1		)
U.S. Treasury securities	1,512		(493		)	—		—		1,512		(493		)
Total available-for-sale	$	16,611	$	(495	)	$	—	$	—	$	16,611	$	(495	)

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company's securities. Based on the Company's review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company's ability and intent to hold the investments until maturity, there were no material other-than-temporary impairments for these securities at June 30, 2011.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company utilizes the following fair value hierarchy based on three levels of inputs:

·Level 1: Quoted prices in active markets for identical assets or liabilities.

·Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of June 30, 2011 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	31,321	$	—	$	—		31,321
U.S. corporate debt securities	—		15,407		—		15,407
U.S. government agency debt securities	—		36,319		—		36,319
U.S. Treasury securities	—		76,173		—		76,173
Total	$	31,321	$	127,899	$	—	$	159,220

The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2010 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	17,613	$	—	$	—	$	17,613
U.S. corporate debt securities	—		12,101		—		12,101
U.S. government agency debt securities	—		25,688		—		25,688
U.S. Treasury securities	—		17,573		—		17,573
Total	$	17,613	$	55,362	$	—	$	72,975

There are no financial liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.

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RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2011

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

 

NOTE 11.  RELATED PARTY TRANSACTIONS

Carl A. Pelzel

In April 2011, the Company entered into a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. Pursuant to the separation agreement, Mr. Pelzel will be paid $520,000, which is equivalent to one year of his base salary.  Payments are being made over one year, and will be reduced dollar-for-dollar by any compensation Mr. Pelzel receives in connection with employment (or full-time consulting) by another employer (or third party).  The Company will also pay Mr. Pelzel's health and dental insurance COBRA premiums for up to 18 months following his separation from the Company.  The separation agreement further provides for three months' accelerated vesting of Mr. Pelzel's options to purchase the Company's common stock, and a release of claims in favor of the Company.  The Company incurred a one-time severance charge of approximately $1.0 million in the second quarter of 2011 with respect to this separation agreement, consisting of approximately $0.4 million in stock-based compensation related to the accelerated vesting of Mr. Pelzel's awards and approximately $0.6 million of severance expense related to future payments and health care benefits

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CONDENSED BALANCE SHEETS (USD $) In Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash and cash equivalents	$ 36,311	$ 22,526
Marketable securities	77,522	47,825
Accounts receivable	7,360	6,094
Receivables from collaborative partners	584	253
Inventories	5,014	1,571
Prepaid and other current assets	2,918	1,330
Total current assets	129,709	79,599
Marketable securities, long-term	50,377	6,537
Property and equipment, net	994	698
Other assets	181	197
TOTAL ASSETS	181,261	87,031
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities	23,522	18,473
Deferred product sales	420	1,041
Deferred license revenue	7,647	10,665
Other current liabilities	404	635
Current portion of long-term debt	121	2,170
Total current liabilities	32,114	32,984
Deferred license revenue, non-current portion	23,328	30,926
Other long-term liabilities	0	15
Commitments
Shareholders' equity:
Preferred stock, no par value
Common stock, no par value	200,831	191,343
Accumulated deficit	(75,167)	(168,306)
Accumulated other comprehensive gain	155	69
Total shareholders' equity	125,819	23,106
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 181,261	$ 87,031