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What: The potential for price curbs on drugs that have been previously approved and are being rebranded with higher price tags is causing shares of DepoMed (NASDAQ:DEPO) to slip 10% today.

So what: DepoMed's strategy of breathing new life into previously forgotten therapies has proven to be very successful, but a recent media frenzy surrounding competitors' purchase and subsequent 4,000% plus price hike has led to a firestorm of controversy about the business model.

DepoMed currently markets a handful of therapies; however, only one of those -- the shingles pain therapy Gralise -- was developed internally. The other drugs include: Lazanda, a breakthrough pain medication; Cambia, a migraine therapy; and Nucynta, an opioid pain reliever -- all three of which were acquired on the cheap, rebranded, repriced, and relaunched.

Thanks to DepoMed's acquisition and relaunch strategy, sales in the second quarter jumped 234% to $94.3 million; however, a big chunk of that growth comes courtesy of Nucynta, which DepoMed bought from Johnson & Johnson earlier this year and officially relaunched with a 44% price hike in the second quarter.

Due in part to Nucynta's potential to move the needle, DepoMed recently turned down an $3 billion acquisition offer from its larger rival, Horizon Pharmaceuticals, a company that employs a similar business approach.

Now what: Management may be wishing that they'd been more willing to negotiate on a price with Horizon following news that Presidential-hopeful Hillary Clinton is targeting runaway price increases.

Clinton hasn't specifically called foul on DepoMed, but a tweet on Monday in reference to Turing Pharmaceuticals' relaunch has kicked off considerable debate as to whether or not companies acquiring previously-approved therapies in order to mark up their prices are gouging patients and payers.

It's likely that the worst case abusers of this business model will have to think carefully before they set prices in the future, but it's still uncertain how Clinton's proposed policies will shake out and what, if any, impact they will have on DepoMed.

Although the risk of price controls to the industry shouldn't be ignored, investors might want to press the pause button before selling shares in DepoMed. While DepoMed did increase Nucynta's price, they only brought that price up in line to what is being charged for the current market leader oxycontin, which costs $18.40 per day, and that's an arguably different scenario than the price gouging practices that are being discussed in the media this week. 

 

Todd Campbell owns shares of DepoMed. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends Johnson & Johnson. 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.