On March 16, 2011, Depomed, Inc. disclosed in an SEC filing that it entered into a settlement agreement with Abbott Laboratories to terminate an exclusive license agreement between the parties relating to Depomed's gabapentin product. I have been paying close attention to this situation because it involved a potential dispute between the parties as to the meaning of diligence provisions in the license agreement.

In January, Abbott notified Depomed that despite the pending NDA for Depomed’s product, DP-1796, Abbott believed it was not obligated to launch and commercialize the product. A couple of weeks later, FDA approved DM-1796, or Gralise™ (Gabapentin) Tablets, for once-daily treatment of post-herpetic neuralgia (PHN), which is pain following healing of the rash associated with shingles. The parties engaged in a mediation proceeding and on March 16, disclosed the settlement of the dispute.

I have been curious to know what kind of argument Abbott may have had that, as an exclusive licensee, it was not required to launch and commercialize the licensed product after FDA approval. Depomed certainly did not see how Abbott could take this position as Depomed’s CEO said he was perplexed by Abbott’s decision.

The agreement was an Exclusive License Agreement between Depomed and Solvay Pharmaceuticals dated November 19, 2008. Abbott acquired Solvay in February 2010 and therefore assumed Solvay’s rights and obligations as licensee under the agreement. The agreement was publicly filed by Depomed with its Form 10-K filed with the SEC in March 2009.

Following are the diligence provisions in the license agreement as filed with the SEC (apologies for all of the redactions):

4.2 Commercially Reasonable Efforts to Commercialize. Commencing upon issuance to Solvay of Regulatory Approval with respect to the Product in a country of the Territory, Solvay will exercise Commercially Reasonable Efforts to commercialize the Product in the Field in such country of the Territory. Without limiting the foregoing, Solvay shall, itself or through Affiliates or sublicensees, Launch the Product in each country of the Territory within [***] days after it receives a letter from the Regulatory Authority in such country stating that the Product is approved in such country.

4.3 Specific Activities. Subject to Section 4.2 and provided that no Generic Product has been approved for commercial sale in the Field in the United States, and except to the extent limited by restrictions imposed by any Governmental Authority or Applicable Law, Solvay agrees to engage in the following specific activities relating to the Product in the United States:

(a) - (q) [Mostly redacted]

4.4 Promotional Requirements. Provided that no Generic Product has been introduced in the Field in the United States, and except to the extent expressly prohibited or restricted by Governmental Authority or Applicable Law, Solvay shall, in the United States, perform the activities described in subsections (a) and (b):

  1. conduct Details with respect to the Product in the Field in the Territory as follows:
    1. if the AE Profile relating to somnolence is [***], then a minimum of [***]; or
    2. if the AE Profile relating to somnolence is [***], then a minimum of [***]; and
  2. spend not less than:
    1. [***] Dollars ($[***]) on Promotional Expenditures in and/or [***];
    2. [***] Dollars ($[***]) on Promotional Expenditures in [***];
    3. in [***], an amount equal to [***]; and
    4. in [***], an amount equal to [***].

Section 4.2 provided a general obligation for Abbott to use Commercially Reasonable Efforts to commercialize the product and specifically required launch after approval. The definition of “Commercially Reasonable Efforts” was almost entirely redacted. It would be interesting to know Abbott’s position as to how Section 4.2 did not require it to launch and commercialize the product after FDA approval.

While Sections 4.3 and 4.4 have been heavily redacted, they set forth specific obligations for Abbott to perform a minimum number of Details and spend a minimum amount of money on promotional activities. On a conference call, Depomed said that the value of these activities was estimated at between $85 million and $135 million.

Sections 4.3 and 4.4 would not have applied if a Generic Product had been approved for sale or introduced in the Field in the U.S. The license agreement defines “Generic Product” as follows:

“Generic Product” means a pharmaceutical product that is the subject of either (i) an Abbreviated New Drug Application referencing data contained in an NDA and for which Regulatory Approval has been granted by the FDA, or (ii) an equivalent application and equivalent approval by a regulatory authority for such a pharmaceutical product in the OUS Territory.

The Generic Product definition above does not appear to be limited to generics of Depomed’s proprietary formulation of gabapentin. Did Abbott try to use the Generic Product wording as a limitation on its obligations?

Gabapentin in other formulations has been available as a generic since 2004. Did Abbott argue that the generic gabapentin products made Sections 4.3 and 4.4 inapplicable even though the generic versions already were available when the agreement was signed?

Abbott eventually agreed to terminate the license agreement and pay Depomed $40 million, so presumably the diligence provisions held their ground in the end.