Key Analyst Sees Huge Catalyst in Depomed Patent Suit

At the end of March, a district court granted the request from Depomed Inc. (NASDAQ: DEPO) and lifted the stay of its patent infringement suit against Purdue regarding OxyContin. As a result, one key analyst sees this as potentially a $3 to $8 per share catalyst.

Lifting of the stay comes after the March 24 announcement that the Federal Circuit Court rejected Purdue’s appeal in an attempt to invalidate claims for two Depomed patents in dispute. With a potential royalty on cumulative net sales of $10 billion at stake, Janney Montgomery Scott conservatively estimates a damage award of $200 million is possible, with little or no downside risk to the company in the process.

The firm believes the three-year old patent infringement suit against Purdue represents a potential catalyst for Depomed that has received limited, if any, investor attention in the past, but it deserves investor attention now that the stay on the case has been lifted.

Depomed indicated the implied value of the settlement may have been worth upward of $75 million. Considering sales of Opana ER were about $826 million over the relevant period, it implies a single-digit royalty to the company on sales of Opana ER. Janney examined other deal terms for similar, patent-protected enabling drug delivery technologies and note that 2% to 5% is a reasonable range.
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In the report, the firm detailed:

At 2%, or the low end of what we see as a reasonable range, the potential damage award in this case may easily reach $200 million before interests and legal costs. This equivalent to $3/share, or more than 20% of DEPO’s current market capitalization. At 5% the value rises to $500 million, or $8/share.

Janney reiterated its Buy rating and $28 fair value estimate on this potential catalyst for Depomed’s stock.

Shares of Depomed were trading up 2.9% at $14.80 on Monday, with a consensus analyst price target of $23.17 and a 52-week trading range of $12.25 to $33.74.