After reporting that Collegium Pharmaceutical (COLL 0.20%) will take over commercializing its top-selling drug, Nucynta, Depomed Inc.  (ASRT 2.52%) shares rallied 10% yesterday. The pact is good news for the company because its revenue and profit have been falling this year due to waning demand for Nucynta. Does this deal make Depomed a buy? 

Exit, stage left

Depomed probably wishes it had a do-over on Nucynta. It acquired the opioid painkiller from Johnson & Johnson (NYSE: JNJ) in 2015 for $1 billion shortly before opioid prescription volume fell off a cliff because of the opioid epidemic.

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While Depomed can't turn back the clock on acquiring Nucynta, it announced today that Collegium Pharmaceutical has agreed to license it from them. 

Collegium Pharmaceutical will pay Depomed $10 million up front, plus a minimum licensing fee of $135 million per year for four years, paid quarterly in arrears.

If Nucynta's sales eclipse $233 million per year, then Collegium Pharmaceutical will also pay Depomed a double-digit royalty on those sales on top of the minimum license fee. After four years, Depomed will receive double-digit royalties on all net sales.

The deal is expected to close in January 2018, and Collegium Pharmaceutical says it expects Nucynta will immediately add to its earnings. The company will market Nucynta using its existing sales force for Xtampza ER, an abuse-deterrent opioid medication. 

A necessary decision

After it acquired Nucynta, Depomed touted it as an undermarketed pain reliever with billion-dollar blockbuster potential. In fact, Depomed was so enamored with Nucynta's potential that it rejected a $33 per share acquisition offer from Horizon Pharmaceutical (HZNP) only months after outbidding Horizon for Nucynta. 

Clearly, rejecting that offer was a mistake.

Initially, Nucynta's sales increased because Depomed built up a dedicated sales force for it, but Nucynta's sales have fallen in the past year as doctors have sought out alternatives to opioid medications. Through the first nine months of 2017, Nucynta's sales were $183 million, down from $207 million in the same period of 2016. The decline has taken a toll on Depomed's profitability, too. The company's year-to-date operating loss is $9.5 million, reversing a gain of $6.6 million in the same period last year.

What's the takeaway

In the short term, licensing Nucynta to Collegium Pharmaceutical could be a win for Depomed because it provides it with high-margin licensing revenue over the next four years. It could also be a win for Collegium Pharmaceutical if Nucynta's sales stabilize and it can successfully leverage those sales against costs it's already spending to market Xtampza ER.

Ultimately, however, whether this deal is a longer-term success depends on how the market for opioids changes. There's a big push to develop pain relievers that don't pose the same risk of abuse as opioids, and if those efforts result in FDA approvals, Nucynta's volume's likely to keep on falling.