What happened

Shares of specialty pharmaceutical developer Collegium Pharmaceutical (COLL 1.14%) rose over 23% today after the company announced that it will acquire the pain drug Nucynta from Depomed (ASRT -0.16%). The move will expand its pain management portfolio and its top line -- significantly. 

Investors are also cheering what it could mean for Depomed, which has struggled to justify the $1.05 billion acquisition of Nucynta from Janssen in early 2015. Continually falling sales for the franchise have weighed on the stock this year, so a relatively favorable divestment to Collegium Pharmaceutical could provide more certainty for the company going forward.

As of 11:48 a.m. EST, Collegium Pharmaceutical stock had settled to a 11.9% gain, while Depomed's had settled to a gain of 9.8%

A woman checking her smartphone and pumping her fist as dollar bills fall around her.

Image source: Getty Images.

So what

Aside from the significant increase in revenue that will be achieved, the acquisition is a bit of a head scratcher for Collegium Pharmaceutical for a couple of reasons.

First, the company has begun finding success with its Xtampza brand of abuse-deterrent pain drugs, which are becoming an increasingly important focus for the U.S. Food and Drug Administration as it looks to combat the opioid crisis. That was certainly an important narrative for the company, too, but investors may need to rethink that considering Nucynta has a high risk of dependence and addiction.

Then again, the FDA's intent to speed up the development and commercialization of generic abuse-deterrent drugs poses a risk to brand-name drugs such as Xtampza. From that perspective, it makes sense that Collegium Pharmaceutical would be keen to diversify its business through an acquisition, and the more mature Nucynta is wildly more successful than its own pain product. Through the first nine months of 2017, Xtampza generated $17.7 million in revenue, while Nucynta notched $183.3 million in revenue.  

But the financial details of the deal will significantly erode the increase in sales. For the first four years of the agreement, Collegium Pharmaceutical must pay Depomed a minimum annual license fee of $135 million, plus double-digit royalties on annual sales over $233 million. Given that quarterly sales of Nucynta have been falling throughout 2017, the value of the deal could come into question during that four-year period if the new owner of the brand doesn't find a way to reverse the revenue trend. 

Now what

The high gross margins of Nucynta should allow Collegium Pharmaceutical to benefit financially from the deal -- even after accounting for sizable annual licensing payments -- but perhaps not nearly as much as investors think. The big question now is whether the company's sales force can halt sliding revenue for the drug franchise to increase the long-term value of the acquisition.