Take Long View

An unexpected buyout offer from Horizon Pharma (NASDAQ:HZNP) is sending shares in DepoMed (NASDAQ:DEPO) soaring by 35% today.

Taking it to the streets
According to Horizon Pharma, attempts to negotiate a deal to acquire DepoMed behind closed doors have fallen on deaf ears since March, prompting Horizon Pharma to take its $3 billion bid for the company directly to shareholders.

The move appears to have done little to convince DepoMed's board to change its mind.

DepoMed's board quickly and unanimously rejected Horizon Pharma's public offer as inadequate; suggesting that Horizon Pharma will need to up the ante if it wants to get its hands on Depomed's slate of FDA approved pain medicine.

Resurrecting underperforming drugs
Both Horizon Pharma and DepoMed are having considerable success acquiring underperforming FDA-approved medicines and relaunching them with a larger sales forces and higher price tags.

The potential upside from their relaunch strategy led me to name DepoMed as one of my emerging favorites in biotech and for me to highlight both companies as moneymakers to consider buying last month.

Horizon Pharma's success stems in large part due to its $35 million acquisition of Vimovo, a drug that reduces ulcers in arthritis patients, in 2013. Vimovo's sales were tracking at just $20 million annually when Horizon Pharma bought it, but Vimovo sales have since soared to more than $160 million last year.

In addition to buying Vimovo, Horizon Pharma acquired Actimmune and Pennsaid last fall and spent $1.1 billion to buy out Hyperion Therapeutics earlier this year.

If Horizon convinces DepoMed to sell, it would gain the fast-growing pain medications Gralise, Lazanda, and Cambia. Importantly, it would also get its hands on Nucynta, an opioid pain medication that DepoMed bought from Johnson & Johnson in January.

In April, DepoMed relaunched Nucynta with 275 salespeople (three times the number deployed by J&J) and a new price (44% higher than it was previously).

If that relaunch allows DepoMed to leverage its relationships with pain specialists to boost Nucynta's markets share beyond its current low single digit levels, then Nucynta could be worth hundreds of millions of dollars more in future sales. DepoMed estimates that the short and long acting opioid market is worth more than $12 billion per year.

Looking forward
It's unclear whether or not Horizon Pharma is prepared to offer more money to acquire DepoMed, but it is possible.

In Horizon Pharma's press release today it states that its current offering price would still allow this deal to be "immediately and significantly" accretive to its adjusted EPS. However, a bigger question mark could be if DepoMed's board would even accept a higher offer.

Regardless, given Nucynta's potential to spark DepoMed's future sales and earnings, I think DepoMed is one stock that investors should do some more research on and consider buying. 

 

Todd Campbell owns shares of DepoMed. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.