So what: Starboard Value L.P. believes that DepoMed's board was incorrect to shun a takeover offer last year. Horizon Pharma (HZNP) initially offered $29.25 per share to buy DepoMed, but later increased that offer to $33. Given that shares in DepoMed have been cut in half since then, Starboard Value may have a point.
Starboard Value is run by Jeffrey Smith, who gained notoriety in late 2014 when he won a proxy contest, and ousted the board of directors of Darden Restaurants while owning less than 10% of its stock. Since that victory, Smith reorganized the board and C-suite, and investors have been handsomely rewarded with a 29% return.
Smith has now turned his sights on DepoMed, a much-smaller company than Darden that has accumulated a product portfolio of pain medicines. According to filings with the SEC, Smith's Starboard Value has acquired nearly 6 million shares in DepoMed, giving him a 9.8% stake in the company.
Now what: Smith's interest in DepoMed could stem from one DepoMed drug, in particular. Early last year, DepoMed orchestrated a $1 billion deal to buy Nucynta, an under-performing competitor to Oxycodone, from Johnson & Johnson.
Since acquiring Nucynta, DepoMed has tripled the drug's sales force, and repriced it to bring its cost into parity with Oxycodone. Those moves appear to be paying off. In Q4, Nucynta's sales were $68 million, and in February, prescription volume for the extended-release version of Nucynta was 22% higher than a year ago. Nucynta's early success has DepoMed projecting that it could one day deliver sales of $1 billion per year.
Nucynta's peak sales potential has Smith thinking that DepoMed should be valued much higher than it is today -- especially because the company also markets the shingles pain drug Gralise, with annualized sales of $86 million, the migraine drug Cambia, with $32 million in annualized sales, and the fentanyl spray Lazenda, which is clocking in at an annualized $21 million pace. All three of those drugs delivered year-over-year sales growth of at least 25% in the fourth quarter.
Smith is calling for DepoMed's board to be replaced. While its unclear if he'll be as successful with DepoMed as he was with Darden, investor interest in this stock is understandable. DepoMed is already profitable -- it's expected to deliver EPS of $1.28 this year -- and it's growing -- revenue increased 200% last year thanks to Nucynta.