Why the DepoMed Drop Is a Gross Overreaction

By Chris Lange Updated Apr 28, 10:24AM EDT · Published May 12, 3:58PM EDT

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Sometimes, or lots of times, investors and markets take things a little too far. For instance, a stock might overreact, to the upside or downside, based on too much optimism or pessimism. The market may have overreacted to the downside for DepoMed Inc. (NASDAQ: DEPO). Janney Capital Markets has issued a report saying that DepoMed has dropped too much on news of an earnings miss.

Janney has a Buy rating for DepoMed with a fair value estimate of $25.50 which implies roughly a 25% gain over current prices. The firm fully believes that the current market movement is an emotional overreaction. Janney does not claim to know what will happen in the first two quarters, but it believes that if you ignore the near-term noise and look to the more distant future, there will be opportunity.

For a little background on DepoMed, the company is a specialty pharmaceutical company that develops and commercializes pharmaceutical products based on its proprietary AcuForm oral drug delivery technology. DepoMed sells Gralise for the treatment of post herpetic neuralgia, and Zipsor for acute pain.

The pain marketplace is relatively huge. Long-acting opioids were a $5.5 billion market in 2014 with roughly 20 million prescriptions (RXs) written. Short-acting opioids were even bigger with over $7 billion in sales with 230 million prescriptions written in 2014. DepoMed’s Nucynta has both an extended release and an immediate release formulation so it can play to both markets.

Currently, Nucynta (immediate release, IR) has 0.3% market share and Nucynta extended release (ER) has 1.5% market share. Considering the size of these market share numbers, the Nucynta franchise brought in close to $176 million in revenue. According to Janney, even a small percentage of growth in these markets translates to large dollar amounts.

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Janney described the promotion and sales forces:

In the fourth quarter of 2014, an 83-person dedicated contract sales force sold $44 million in product. Given, these numbers do not translate nicely to the 250 person DEPO sales force as there are many details to consider; the increase in price to bring the drug to pricing parity, the 85 new reps to DEPO, the fact the product is new to everyone, and lastly that the reps have other legacy products to worry about. All that said, we believe that a 3x larger sales force will not only cover the majority of current Nucynta writers but will expand. Pain is promotion sensitive and with 250 reps out there, growth will come.

The fair value estimate of $25.50 is based on an average of DCF out to 2017, a 2017 Sales Multiple Valuation as well as a Multiples Analysis of Revenue, EBITDA and Net Income for 2015 and 2016.

Late Tuesday afternoon, shares of DepoMed were down 17.5% at $20.13 on a 52-week trading range of $9.85 to $28.16. The stock has a consensus analyst price target of $27.92.

About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.