Why DepoMed Inc. Shares Were Rocked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of DepoMed (NASDAQ: DEPO  ) , a specialty pharmaceutical company that develops therapies to treat pain and diseases of the central nervous system, dipped as much as 18% after reporting its first-quarter results after the closing bell last night.

So what: For the quarter, DepoMed produced total revenue of $76.5 million, a near tripling from the year-ago period, as net product sales jumped 136% to $21.5 million. The biggest boost came from the collection of $42.8 million in noncash royalties tied to the sale of its diabetes drug royalties to PDL BioPharma (NASDAQ: PDLI  ) in October. DepoMed did swing to a GAAP profit on the heels of this noncash recognition, but on an adjusted EPS basis reported a loss of $0.01. Comparatively, Wall Street was looking for a profit of $0.01 per share.

The wheels really fell off the wagon when DepoMed issued its full-year sales guidance of $200 million-$215 million and a profit forecast of $0.00-$0.16 in EPS. Its full-year sales figure bracketed the Street's $208.6 million consensus nicely, but EPS fell well short of the $0.26 that analysts were looking for.

Now what: Following a tripling in DepoMed's share price at one point over the trailing 52-weeks, it's clear that investors were expecting more from the company. The sale of its diabetes portfolio to PDL definitely boosted the company's near-term prospects, but it may not generate a long-term solution unless it can really ramp up sales of Gralise. The good news is DepoMed also settled two of its three patent litigation cases against potential Gralise biosimilar producers during the quarter, so it's doing a good job of protecting its lead drug. I can't say I'm particularly enthralled with DepoMed following today's warnings, but I see enough potential that I'd suggest adding it to your watchlist.

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