Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



DepoMed Set to Jump on Sale of Royalty Portfolio to PDL BioPharma for $240.5 Million

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Shares of DepoMed (NASDAQ: DEPO  ) rallied after-hours on Monday after PDL BioPharma (NASDAQ: PDLI  ) announced that it would buy the company's royalty streams on its type 2 diabetes treatments and experimental drugs for $240.5 million.

The deal represents a fresh source of cash for DepoMed, which only generated $90.8 million in revenue in fiscal 2012, and greatly expands PDL BioPharma's collection of royalty streams.

PDL's business of collecting royalty streams
In 2008, PDL spun off its drug-development business, Facet Biotech, with the intention of purely focusing on building up a portfolio of royalty streams. PDL's new business model is simple -- it offers companies a sizable lump-sum cash payment in exchange for the rights to smaller, recurring payments over a longer period of time. Under this business model, PDL already receives royalties from Roche subsidiary Genentech and several other companies that specialize in the production of monoclonal antibodies.

Last quarter, PDL's earnings and revenue rose 27.5% and 14.1%, respectively, from the prior-year quarter. It also pays a hefty forward annual dividend yield of 7.4%. However, the stock hasn't really moved over the past 12 months, especially in comparison to DepoMed.

DEPO Chart

Source: YCharts.

The majority of DepoMed's revenue is generated from royalties from Glumetza (metformin) and sales of two drugs -- Gralise (for postherpetic neuralgia) and Zipsor (for actinic keratoses).

Glumetza is a diabetes drug manufactured by Santarus (UNKNOWN: SNTS.DL  ) . Last quarter, royalties from Glumetza came in at $14.2 million, accounting for 47% of DepoMed's total revenue. Royalties from other products came in at $904,000, accounting for another 3%.

DepoMed's total revenue from Glumetza and other royalty payments rose 58% from the prior-year quarter. This year, DepoMed was scheduled to receive 32% of this year's sales of Glumetza from Santarus and 34.5% in 2015.

Under the terms of the agreement, PDL's payment of $240.5 million grants it the rights to all royalty and milestone payments on sales of Glumetza, as well as two other new diabetes drugs, Janumet XR (Merck) and Invokana (Johnson & Johnson), along with several new versions of metformin.

The deal is retroactive and starts from all royalties starting on Oct. 1, and will end when PDL receives twice its original payment at $481 million. After that condition is met, the two companies will split the payments.

DepoMed, which is now guaranteed stable cash flow without having to worry about fluctuating sales of Glumetza, intends to use the capital to "fund future product acquisitions capable of driving growth into the next decade," according to CEO Jim Schoeneck.

The Foolish takeaway
PDL's $240.5 million payment may seem high, considering that DepoMed's royalties only came in at $44.5 million in 2012. At this rate, it's going to take a few years at least to just break even on the deal, and hitting $481 million looks like a very distant goal. However, royalties from other diabetes treatments, especially Invokana -- which some analysts believe could achieve annual peak sales of $2.5 billion -- could speed things along nicely.

The key for DepoMed investors now is to closely watch where it decides to invest all that cash.

One incredible growth stock to watch
This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2692874, ~/Articles/ArticleHandler.aspx, 9/29/2016 8:11:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:00 PM
DEPO $24.53 Up +0.13 +0.53%
DepoMed CAPS Rating: ****
PDLI $3.31 Up +0.01 +0.30%
PDL BioPharma CAPS Rating: ***
JNJ $119.39 Up +0.17 +0.14%
Johnson and Johnso… CAPS Rating: *****
MRK $63.30 Up +0.73 +1.17%
Merck and Co. CAPS Rating: ****
SNTS.DL $0.00 Down +0.00 +0.00%
Santarus CAPS Rating: *****