this Report (PDF 128 KB)

May 12, 2015
Jason Napodano, CFA
312-265-9421
[email protected]
Small-Cap Research
scr.zacks.com
Depomed, Inc.
10 S. Riverside Plaza, Ste 1600, Chicago, IL 60606
(DEPO-NASDAQ)
UPDATE
DEPO: Nucynta Will Drive Depomed To
New Highs
Current Recommendation
Prior Recommendation
Date of Last Change
Current Price (05/12/15)
Target Price
Buy
Hold
08/09/2011
$19.68
$26.00
We continue to be positive on the Depomed story. The
transaction to acquire Nucynta / ER is transformational for
the company. The strategic fit is excellent and past
execution has been outstanding. If our modeling holds,
then Depomed will be trading at a reasonable 6.5x
EBITDA and 2.5x Sales based on 2017 forecasts. If the
company is successful with Nucynta / ER, an exit strategy
clearly emerges in 2017 or 2018. Based on our initial
modeling of the transaction, we believe that Depomed is
fairly valued around $26 per share. We view the name as
a good core-holding in the specialty pharmaceutical
industry with significant upside should the Nucynta / ER
product take off.
SUMMARY DATA
52-Week High
52-Week Low
One-Year Return (%)
Beta
Average Daily Volume (sh)
Shares Outstanding (mil)
Market Capitalization ($mil)
Short Interest Ratio (days)
Institutional Ownership (%)
Insider Ownership (%)
Annual Cash Dividend
Dividend Yield (%)
$27.65
$9.95
103.42
1.26
1,440,249
60
$1,458
7.52
90
3
$0.00
0.00
Risk Level
Type of Stock
Industry
Average,
Small-Blend
Med-Drugs
ZACKS ESTIMATES
Revenue
(in millions of $)
Q1
(Mar)
Q2
(Jun)
Q3
(Sep)
Q4
(Dec)
Year
(Dec)
2014
76.5 A
67.7 A
51.5 A
194.6 A
390.4 A
2015
32.2 A
81.7 E
95.8 E
108.0 E
317.7 E
2016
477.5 E
2017
588.5 E
Earnings per Share
5-Yr. Historical Growth Rates
Sales (%)
Earnings Per Share (%)
Dividend (%)
7.9
N/A
N/A
P/E using TTM EPS
N/M
P/E using 2015 Estimate
P/E using 2016 Estimate
N/M
14.9
(Adjusted EPS)
Q1
(Mar)
2014
2015
2016
2017
-$0.01 A
-$0.13 A
© Copyright 2015, Zacks Investment Research. All Rights Reserved.
Q2
(Jun)
$0.01 A
-$0.11 E
Q3
(Sep)
Q4
(Dec)
Year
(Dec)
$0.03 A
$0.25 E
$0.21 A
$0.27 E
$0.26 A
$0.34 E
$1.34 E
$2.05 E
WHAT S NEW
Q1 Revenues
Solid Results
On May 11, 2015, Depomed, Inc. (DEPO) reported financial results for the first quarter ended March 31, 2015. Total
revenues in the quarter were $32.2 million, down 58% from the first quarter 2014 when the company was still
reporting non-cash revenues from royalties on the diabetes franchise sold to PDL BioPharma in October 2013. We
are not concerned with the year-over-year decline in total revenues. Total revenue comparisons in 2015 will be
difficult for Depomed all year, as reported numbers in 2014 included $256.1 million in non-cash revenues from the
diabetes franchise and $18.2 million in licensing and milestone revenue related to formulation work with companies
like Mallinckrodt and Ironwood.
The story going forward for Depomed is product sales. Product sales in the first quarter 2015 totaled $31.7 million,
up 47% from the first quarter 2014. We believe tracking year-over-year product sales growth is the best financial
metric to use for judging Depomed s performance in 2015 and 2016. Below is a breakdown of the first quarter
numbers versus our expectation, with the first quarter 2014 included for comparison.
Revenue Line Items
Gralise Sales
Zipsor Sales
Cambia Sales
Lazanda Sales
Total Product Revenues
PDL Accounting
Other Royalties
Total Royalty Revenues
Acuform Technology
Licensing & Collaborative
Total Revenues
Zacks/SCR
Q1 2015 Est.
$17.5 million
$6.0 million
$6.5 million
$3.5 million
$33.5 million
$0.5 million
$0.5 million
$0.5 million
$0.5 million
$34.5 million
Reported Q1
2015 Actual
$17.3 million
$5.8 million
$5.4 million
$3.2 million
$31.7 million
$0.5 million
$0.5 million
$32.2 million
Reported Q1
2014 Actual
$10.9 million
$5.3 million
$4.6 million
$0.7 million
$21.5 million
$42.8 million
$0.5 million
$43.3 million
$11.8 million
$11.8 million
$76.5 million
Comments
59% YoY, Rx 18%
9% YoY
16% YoY, Inventory 10-14 days
368% YoY, End-user 44%
47% YoY, Investor 1-2 weeks
No longer reporting these revenues
Tough comps all year
Included $10 million from MNK
Not expecting anything in 2015
58% on tough YoY comps
Despite the loss of significant non-cash revenues on royalty pass-through to PDL BioPharma and the absence of a
$10 million milestone payment from Mallinckrodt on the approval of Xartemis® in the first quarter 2014, the
underlying business trends at Depomed are solid. Product sales came in below our expectations in the quarter due
to inventory destocking at the wholesale level. Management noted wholesalers decreased inventory by between
one and two weeks on each product, with Cambia® being the hardest hit. We note that annual insurance deductible
re-sets may have also played a part in the slightly weaker-than-expected first quarter numbers, as many of
Depomed s products like Cambia® and Zipsor® are typically weaker in the first quarter of the year when out-ofpocket costs are at their highest. We believe these negative pressures will reverse in the coming quarters.
Gralise
Gralise came in essentially in-line with expectations in the first quarter with sales of $17.3 million. This was an
increase of 59% from the first quarter 2014. Gralise sales of $60.4 million in 2014 were up 67% from 2013 levels.
Growth is being driven by a combination of both volume and pricing. On a prescription basis, doctors wrote
approximately77k scripts for Gralise in the first quarter 2015, up 18% from the first quarter 2014. Strong pricing has
also been an important driver of revenues. The company also took two price increases in 2014 of 11% and 13%.
Those price increases follow two increases in 2013 of 9% and 11%. Nevertheless, the product still sells at a
discount to Pfizer s Lyrica®, so we expect continued solid volume increases in 2015.
Continued solid formulary coverage at the tier-2 level with the top three pharmacy benefit managers, CVS
Caremark, Express Scripts / Medco, and Catamaran should allow the growth trend with Gralise to continue in 2015.
Clearly management s past efforts with Medical Part-D and programs like Cover My Meds are working. Last year
the company instituted a co-pay assistance program and an adjudication committee to help patients with prior
authorizations. In the second half of the year Depomed rolled out a new program called Simple Script designed to
facilitate easy access to the company s drug. Again, we think these programs are working. The final thing we think
will benefit Gralise in 2015 is the expansion of the sales force. Depomed plans to bring in over 100 new reps to
promote Nucynta / ER. Many of these reps will also detail Gralise as a second product. The increased effort should
result in higher Gralise numbers in 2015. We model Gralise sales of $77 million in 2015, up 27% from last year.
Zacks Investment Research
Page 2
scr.zacks.com
Finally, Gralise exclusivity remains solid with eight listed patents in the FDA s Orange Book. The company recently
settled its ANDA litigation with Actavis, which should protect the drug from generic competition until January 1,
2024. Depomed has also received a favorable summary judgment in its case against the U.S. FDA. It looks like this
recent legal victory will force the FDA to recognize the full effects of the Orphan Drug designation, which includes
exclusivity until January 2018.
Zipsor
Zipsor sales came in a bit lighter than expected in the first quarter 2015 at $5.8 million. We think that wholesaler
destocking and insurance deductible re-sets likely account for the softer number. For the full year 2014, Depomed
recorded $25.2 million in Zipsor sales. We are not expecting much prescription growth from Zipsor in 2015, but we
still think the product can do 5% growth to $26 million in sales based mostly on price increases. For example,
Depomed just recently took an 11% price increase on the drug.
There are two key reasons we are not expecting much prescription growth for Zipsor in 2015. Firstly, formularies
like CVS Caremark and Express Scripts cracking down on over-priced generic NSAID reformulations like Horizon
Pharma s Duexis and Vimovo (see recent news here). As of now, Zipsor seems to have avoided the formulary axe,
but with generic Celebrex (celecoxib) expected to be a bigger threat in 2015 we think competition in the acute pain
space will heat up. The other main reason we are not expecting much volume growth from Zipsor in 2015 is that the
product will likely move to the third position for Depomed s sales force. Zipsor was a solid number two promote for
Depomed with pain docs behind Gralise in 2014. However, we think Nucynta moves into the number one position,
with Gralise moving to number two and Zipsor moving to mainly sampling going forward.
As the third product, sales reps will probably allocate minimal time, if any, to promoting Zipsor. The sales force will
rely on using the existing brand name and heavy sampling to keep Zipsor scripts at or slightly above 2014 levels.
Regardless of the stalled prescription growth, Zipsor remains a strongly positive cash flow product for the company
and a key strategic asset for the company given the patent protection until 2029.
Cambia
Cambia sales in the first quarter came in at $5.4 million, shy of our $6.5 million forecast as a result of investor
destocking at the wholesale level. Management noted on the first quarter call that Cambia was the hardest hit by
investor work-down, with inventories reduced by approximate 10-14 days at March 31, 2015 compared to
December 31, 2014. Based on the quarterly sales rate, that accounts for between $0.4 and $0.6 million in lost
reported revenue.
Despite the weaker-than-expected reported sales number, prescription demand for Cambia remains strong.
Prescriptions in the first quarter totaled 33k, up 34% year-over-year. That follows a solid 33% gain in the fourth
quarter 2014. Growth in 2015 should come from a combination of both growing prescriptions and hefty pricing
increase. Prescriptions are tracking at all-time highs right now and the company just took a 13% price increase at
the end of 2014. This followed an 11% price increase in July 2014.
Going forward, we believe Cambia will see an acceleration in both prescriptions and sales thanks to limited
competition Cambia is the only non-triptan NSAID indicated for the acute treatment of migraine attacks with or
without aura in adults (18 years of age or older) and synergistic marketing with Gralise and Nucynta ER. For
example, according to Depomed, neurologists have written roughly 70% of the Cambia prescriptions over the past
year. This is the core target market for Gralise in PHN and Nucynta ER in DPN and other neuropathic pains.
We note that earlier in February 2015 the American Headache Society (AHS) published an evidence-based
assessment of acute migraine treatments in the journal Headache. The assessment established diclofenac
potassium as an effective (Level A) treatment for acute migraine attacks, and reinforces Cambia as a stand-alone
option for treating migraines in adults, based on similar evidence for efficacy as seen with migraine-specific
medicines. Furthermore, it augments the drug s position from the American Academy of Neurology (AAN) 2000
Guidelines for acute treatment of migraine, in which diclofenac potassium was described as "probably effective."
Cambia is the number three branded medication for headache behind Relpax® and Treximet®, with market share
quickly approaching 5% of the category. Management expects that Cambia will move into the number two spot by
the end of the year. For 2015, we model Cambia sales of $30 million, up 40% from 2014.
Zacks Investment Research
Page 3
scr.zacks.com
Lazanda
Lazanda® sales totaled only $3.2 million in the first quarter 2015, but that still generated a lot of excitement from
management. Sales growth was up a solid 19% sequentially from the fourth quarter 2014, and looks to be
accelerating as the fourth quarter was up 16% sequentially from the third quarter 2014. Total prescribed sprays of
Lazanda exceeded 100k for the first time during first quarter, up 44% from fourth quarter of 2014, demonstrating the
rapidly increasing use of the product. We think the fact that Depomed expanded the Lazanda sales force earlier in
the year is helping to drive uptake for the product. In fact, for the week ending May 1st, Symphony Health reported
that Lazanda market share surpassed 5% of TIRF prescriptions for the first time ever. And the revenue market
share for Lazanda was even stronger at over 7.5%.
We are expecting the solid growth trajectory to continue in 2015. Firstly, the sales force has been expanded from 15
reps throughout most of 2014 to now 24 reps. The added promotional effort along with the lessons learned from
targeting new markets like oncologists should help drive increase volume in 2015. Secondly, effective January 1,
2015, Express Scripts changes its plan to make Lazanda the only branded fentanyl for the breakthrough pain on its
national formulary. And thirdly, the product is off to a strong start so far this year, as noted by the rapidly increasing
market share. The current annualized run-rate is over $20 million. For 2015, we model Lazanda sales at $17 million.
Royalties, Licensing & Collaborative
In 2015, Depomed will no longer report revenue associated with the royalty-pass through on the diabetes franchise
sales going to PDL BioPharma. Throughout most of 2014, Depomed was acting as the middleman in this
transaction, booking the royalty revenue from Salix Pharma on Glumetza whereas PDL BioPharma actually
receives the cash. In October 2014, Depomed amended its agreements with Salix, which eliminated any and all
continuing obligations on the part of Depomed in the manufacture and supply of Glumetza 1000 mg tablets. As a
result, the entire remaining balance of the liability related to the sale of future royalties and milestones of
approximately $147.0 million was recognized within "Non-cash PDL royalty revenue" in the fourth quarter of 2014.
In 2014, Depomed recorded over $256 million in non-cash revenues. This number will be $0 in 2015.
Royalties in 2015 may come from Mallinckrodt selling Xartemis XR, an oxycodone hydrochloride / acetaminophen
extended release tablet (essentially Percocet XR ) that Depomed provided formulation work on to Mallinckrodt. In
return, Mallinckrodt will pay Depomed a high single-digit royalty on sales. Depomed also received milestone
payments on this work in 2014. The first was a $10 million milestone payment in March 2014 for the approval of
Xartemis XR and the second was a $5.0 million milestone payment for the U.S. FDA acceptance of the MNK-155
NDA in May 2014. MNK-155 is a hydrocodone hydrochloride / acetaminophen extended release (essentially
Vicodin XR ) that Depomed did formulation work on for Mallinckrodt. Similar to Xartemis XR, FDA approval earns
Depomed another $10 million in cash. The royalty terms for MNK-155 are identical to Xartemis XR. Once approved,
we expect Xartemis XR and MNK-155 will provide meaningful cash royalties to Depomed.
Operating Expenses & Net Income
Product gross margin in the quarter was a sold 90.2%, the second quarter in a row with gross margin above 90%.
Gross margin has been steadily increasing at Depomed, up from 82.8% in the first quarter 2014, 83.4% in the
second quarter 2014, and 88.5% in the third quarter 2014. Price increases and increased volume have been key
drivers of gross profitability for the company throughout 2014. That being said, we expect gross margin to decline
meaningfully in 2015 now that Depomed owns Nucynta / ER because the company must make sub-royalty
payments to Grünenthal (we assume 10% royalty). Nevertheless, the company will still see strong gross profitability
in the coming years.
Operating loss in the first quarter totaled $9.8 million, driven by $34.5 million in SG&A, $1.9 million in R&D, and $2.5
million in amortization expense. We believe Depomed has done an excellent job of growing the top-line without
frivolous costs. For instance, SG&A in 2014 totaled $121.1 million, up 15% whereas product sales were up 96% for
the same period. R&D expense remains very low at only approximately $10 million per year. Operating expenses
were almost identical to our expectations. We think management has done a solid job of keeping control of the
business while also focusing on expanding the top-line.
Reported net income in the first quarter totaled $11.6 million on a GAAP basis. This equated to $0.13 per share. Net
loss included a $4.2 million adjustment for non-cash income tax. On an adjusted basis, net loss totaled $8.0 million,
or $0.13 per share. Below we provide a quick breakdown of the net loss for the quarter on a GAAP and adjusted
basis. Depomed also made available an adjusted EBITDA table in its first quarter press release.
Zacks Investment Research
Page 4
scr.zacks.com
Source: Depomed
As investors can see, the non-GAAP net loss backs out the non-cash tax adjustment, along with other non-cash
items such as amortization expense, interest expense on convertible debt, and stock-based compensation. The
adjusted EBITDA number gives investors a very good picture on the underlying operating activities during the
quarter, and a better representation of the cash being used or generated from operating activities. Actual cash burn
during the quarter was only $2.5 million.
Nucynta Franchise Becomes Flagship Brand
On January 15, 2015, Depomed, Inc. (DEPO) announced it had entered into a definitive agreement to acquire the
U.S. rights to the Nucynta® franchise from Janssen Pharmaceuticals, a division of Johnson & Johnson (JNJ), for
$1.05 billion. The Nucynta deal closed on April 2, 2015, and Depomed began selling the product only a few days
later on April 6, 2015. Depomed immediately raised the price by 44% after they took ownership of the product.
Management financed the deal with $500 million in cash upfront out of its existing balance of $566.4 million in the
bank as of December 31, 2014 and another $575 million in debt raised in March 2015 through a loan facility with
Deerfield and Pharmakon. As a reminder, Depomed raised $334 million by offering 2.5% convertible notes in
September 2014. The notes have an initial conversion price of $19.24 per share, roughly a 40% premium to the day
of close. The notes will mature on September 1, 2021, unless earlier converted, redeemed or repurchased in
accordance with their terms prior to such date. Depomed may not redeem the notes prior to September 5, 2019.
After that time period, the notes are redeemable in cash or stock, as long as the stock is trading at >130% of the
conversation price, which is $25.02 per share.
The new loan facility with Deerfield and Pharmakon has a seven year term, and bears interest at the rate of 9.75%
over three month LIBOR, with a floor of 1% and subject to certain caps. The loan can be prepaid under certain
conditions and at Depomed's discretion any time after the second anniversary; with $100 million of the facility
eligible to be paid down after one year at 105% and full pre-payment after year two at 104%.
Background On Nucynta
Depomed acquired both Nucynta (tapentadol) and Nucynta ER (tapentadol extended-release). Nucynta is indicated
for the management of moderate to severe acute pain in adults. Nucynta ER is indicated for the management of: 1)
pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative
treatment options are inadequate, and/or 2) neuropathic pain associated with diabetic peripheral neuropathy (DPN)
in adults severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative
treatment options are inadequate. The drug is the only Schedule II new chemical entity (NCE) opioid approved in
the U.S. in the last 30 years.
Zacks Investment Research
Page 5
scr.zacks.com
Tapentadol is a centrally-acting synthetic analgesic with a believed dual mechanism of action. Preclinical animal
studies have shown that tapentadol is a mu-opioid receptor agonist and norepinephrine reuptake inhibitor. Clinical
data suggests a statistically significant improvement in pain with tapentadol use in as little as 48 hours after starting
treatment. Because of the dual mechanism, the drug has utility in both nociceptive and neuropathic pain. It has a
low abuse profile and mild side effect rate when compared to other opioid products.
Nucynta was approved in November 2008. The extended-release version, which was formulated by Depomed, was
approved in August 2011. Depomed was previously receiving a low single-digit royalty on sales of Nucynta ER at
J&J. Trailing twelve-month sales ending December 31, 2014 (unaudited) totaled $172 million, with approximately
$44 million of that in the fourth quarter 2014. Management notes that the ER formulation has around one-third of the
overall franchise. We suspect that overall prescription growth is flat due to minimal promotional effort being put forth
by J&J in 2014. Yet, despite this modest effort, there were still over 800,000 prescriptions written for the drug last
year. Nucynta has less than 1% market share in the short-acting opioid market. The ER formulation fairs slightly
better, with around 1.5% market share of the long-active opioid market based on 2014 data. Based on the 44%
price increase Depomed instituted in early April 2015, Nucynta ER at $18.44 per day is now priced comparable to
OxyContin CR at $18.40 per day and Opana ER at $20.40 per day.
Why This Makes Sense For Depomed
The Nucynta franchise acquisition meets all of the company s aforementioned criteria for a deal. These include:
Scale & Size
Depomed has said that any acquisition needs to increase the scale and accelerate growth of
the overall company. With $172 million in 2014 revenue, Nucynta / ER is expected to increase Depomed s
annual product revenue by 2.5x.
Synergies
Depomed has been squarely focused on the pain and neurology market since the launch of
Gralise in late 2011. The acquisitions of Zipsor in the pain market and Cambia in the neurology market have
added nicely to the synergistic co-promotion of Depomed s brands. According to management, the prescriber
overlap in pain, neurology, and primary care is roughly 70% with Nucynta / ER and Gralise, Cambia, and
Zipsor. And this is only the current Nucynta market being promoted by approximately 80-90 contract
representatives at J&J. Depomed expanded that to >270 reps today. This is three-times the size of J&J s effort
that delivered $172 million in revenues in 2014. We suspect that this increased promotion will have a
meaningful impact on Nucynta / ER prescriptions by the end of 2015.
To pain specialists, Depomed s new 270 sales reps will have an attractive bag of products including Nucynta,
Gralise, and Zipsor. And although Zipsor moves to the third position, it still remains handsomely cash flow
positive for the company at roughly $28-30 million in annualized revenue. To neurologists, Depomed can now
promote two powerful and differentiated neuropathic pain products in Nucynta ER and Gralise, along with
Cambia to headache specialists. Gralise is indicated for post-herpetic neuralgia (PHN) and used off-label for
diabetic peripheral neuropathy (DPN) and fibromyalgia. With Nucynta ER, Depomed can actively promote the
DPN label something J&J had yet to embark upon giving neurologists a full suite of neuropathic pain options
for their patients. DPN is an enormous opportunity. Approximately 20% of the adult population has diabetes,
and up to 50% of these individuals will experience DPN at some point in their lifetime (Tesfaye, S. et al, 2012).
A Nature Review article from 2012 lists both Gralise and Nucynta ER as two of the more interesting neuropathic
pain products to hit the market, predicting that Nucynta ER will become the market leader by 2020. From a
synergistic standpoint, the deal is a perfect fit for Depomed.
Protection
The tapentadol composition of matter patent goes until August 2022, with potential pediatric
extension taking exclusivity into 2023. Depomed plans to explore filing additional patents that could extend
exclusivity of the product.
Zacks Investment Research
Page 6
scr.zacks.com
Guidance & Expectations For 2015
Guidance for 2015 product sales is between $310 and $335 million, up from the previous range of $152 and $162
million before the Nucynta / ER deal closed on April 2, 2015. Investors can then see, Depomed is looking for
anywhere between $148 and $183 million in Nucynta / ER sales for 2015. This obviously assumes other products
are tracking within the previously announced guidance. We think this is a fair range, and currently model $166
million in Nucynta / ER sales in 2015. As far as other products, the first quarter was a bit softer than expected
(missed our forecast by $1.8 million) but expanding the sales force to >270 reps in the next few months will certainly
help drive sales in the rest of the year. We model $316 million in product sales for 2015, toward the low-end of the
current range, but we would not be surprised to see our number easily beat as Depomed management has a history
of providing conservative guidance.
Other guidance from management is as follows:
Total SG&A + R&D expense of $195 to $210 million
We model $199.7 million
Note this range includes ~$21 million in one-time deal-related costs to be included in the second
quarter financial results
Intangible asset amortization of $85 to $90 million
We model $88.0 million
Non-GAAP adjusted income of $16 to $28 million
We model $22.1 million
Adjusted EBITDA of $85 to $100 million
We model $89.8 million
On an adjusted basis, we forecast positive net income of in 2015 of $22.1 million, or $0.34 per share. We continue
to expect that the Nucynta / ER deal will be strongly accretive and that Depomed will generate over $100 million in
positive free cash flow in 2016.
Conclusion
We continue to be positive on the Depomed story. The transaction to acquire Nucynta / ER is transformational for
the company. The strategic fit is excellent and past execution has been outstanding. There is clearly a lot of future
execution that still must take place for this to benefit shareholders but the plan is in place and looks solid.
Depomed currently has an enterprise value of roughly $1.9 billion. We expect adjusted EBITDA in 2015 will be
around $90 million, so the current valuation of 21x EV/EBITDA is rather expensive. However, the Nucynta / ER deal
just closed. The adjusted EBITDA guidance is really only based on a half a year s worth of Nucynta / ER promotion.
After all, management does not plan to formally re-launch the product until June 2015, and it will take the sales
force at least six months to gain traction.
Depomed s expected adjusted EBITDA as a percent of revenues is only 28% for 2015, well below the industry
average of around 50-55%. We think that Depomed will be at industry average adjusted EBITDA by the end of
2016. In 2017, we model revenues of $589 million, and adjusted EBITDA of $303 million. The pharmaceutical
industry current trades with an EV/EBITDA of around 9x. Plugging an industry-average EV/EBITDA multiple on our
2017 adjusted EBITDA number yields an EV of $2.7 billion. Backing out the $0.8 billion in debt and we expect
Depomed s common equity to be worth $1.9 billion in 2017. This equates to a stock price of $32 per share. If we
discount that back to present day at 12%, we arrive at our target of $26 per share.
Our target of $26 per share equates to a Price / Sales ratio of only 3.1x our projected 2016 revenues of $478
million. On a non-GAAP basis, our target equates to a Price / Earnings ratio of 19.4x.
Zacks Investment Research
Page 7
scr.zacks.com
PROJECTED INCOME STATEMENT
Income Statement
DEPOMED, INC.
2013 A
2014 A
Q1A
Q2E
Q3E
Q4E
2015 E
2016 E
2017 E
Total Product Sales
$58.3
$114.2
$31.7
$81.4
$95.4
$107.5
$316.0
$472.0
$580.0
YOY Growth
112.1%
95.9%
47.3%
188.2%
211.9%
217.3%
176.6%
49.4%
22.9%
Total Royalties
$45.0
$110.9
$0.5
$0.3
$0.4
$0.5
$1.7
$3.0
$6.0
YOY Growth
350.2%
146.4%
-98.8%
-99.1%
-98.0%
-96.4%
-
-
-
Total Licenses Revenues
$17.8
$165.2
$0
$0
$0
$0
$0
$2.5
$2.5
YOY Growth
-78.2%
828.5%
-
-
-
-
-
-
-
$134.2
$390.4
$32.2
$81.7
$95.8
$108.0
$317.7
$477.5
$588.5
YOY Growth
47.8%
190.9%
-57.9%
20.6%
86.1%
-44.5%
-18.6%
50.3%
23.2%
Cost of Goods Sold
$7.1
$15.1
$3.1
$15.8
$20.0
$22.0
$61.0
$89.7
$104.4
Total Revenues
Product Gross Margin
87.8%
86.7%
90.2%
80.6%
79.0%
79.5%
80.7%
81.0%
82.0%
SG&A
$105.2
$121.1
$34.5
$64.0
$45.0
$46.5
$190.0
$180.0
$190.0
% SG&A
78.4%
31.0%
107.3%
78.3%
47.0%
43.1%
59.8%
37.7%
32.3%
R&D
$8.1
$7.1
$1.9
$2.5
$2.6
$2.7
$9.7
$10.0
$10.0
% R&D
6.0%
1.8%
5.8%
3.1%
2.7%
2.5%
3.0%
2.1%
1.7%
Amortization
$4.5
$10.2
$2.5
$28.5
$28.5
$28.5
$88.0
$115.0
$115.0
$9.3
$236.8
($9.8)
($29.1)
($0.3)
$8.3
($31.0)
$82.8
$169.1
6.9%
60.7%
-
-
-
-
-9.8%
17.3%
28.7%
($4.5)
($0.2)
($71.9)
($9.6)
$0
($6.0)
$0
($3.0)
$0
($2.0)
$0
($2.0)
$0
($13.0)
$0
($15.0)
$0
($15.0)
Operating Income
Operating Margin
Non-Cash PDL Int. Exp.
Other Income (Net)
Pre-Tax Income
$4.6
$155.3
($15.8)
($32.1)
($2.3)
$6.3
($44.0)
$67.8
$154.1
Taxes
($38.8)
$20.1
($4.2)
($8.3)
($0.6)
$1.6
($11.4)
$17.6
$40.1
Tax Rate
0%
13%
26%
26%
26%
26%
26%
26%
26%
$43.3
$136.0
($11.6)
($23.7)
($1.7)
$4.6
($32.5)
$50.2
$114.0
GAAP Net Income
Net Margin
GAAP EPS
32.3%
34.8%
-
-
-
-
-10.2%
10.5%
19.4%
$0.75
$2.05
($0.20)
($0.39)
($0.03)
$0.06
($0.50)
$0.61
$1.34
YOY Growth
-
172.4%
-
-
-
-
-124.3%
-222.7%
119.2%
Adjustments to GAAP
Non-GAAP Net Income
-
($119.2)
$16.0
$3.6
($8.0)
$17.0
($6.7)
$17.0
$15.3
$17.0
$21.6
$54.6
$22.1
$60.0
$110.2
$60.0
$174.0
-
$0.26
($0.13)
($0.11)
$0.25
$0.27
$0.34
$1.34
$2.05
57.5
66.3
59.6
60.5
61.0
80.0
65.3
82.0
85.0
Adjusted (Non-GAAP) EPS
Diluted Wt. Ave Shares Out
Source: Zacks Investment Research, Inc.
Jason Napodano, CFA
© Copyright 2015, Zacks Investment Research. All Rights Reserved.
HISTORICAL ZACKS RECOMMENDATIONS
© Copyright 2015, Zacks Investment Research. All Rights Reserved.
DISCLOSURES
The following disclosures relate to relationships between Zacks Small-Cap Research ( Zacks SCR ), a division of Zacks Investment Research
( ZIR ), and the issuers covered by the Zacks SCR Analysts in the Small-Cap Universe.
ANALYST DISCLOSURES
I, Jason Napodano, CFA, CFA, hereby certify that the view expressed in this research report accurately reflect my personal views about the
subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the
recommendations or views expressed in this research report. I believe the information used for the creation of this report has been obtained from
sources I considered to be reliable, but I can neither guarantee nor represent the completeness or accuracy of the information herewith. Such
information and the opinions expressed are subject to change without notice.
INVESMENT BANKING, REFERRALS, AND FEES FOR SERVICE
Zacks SCR does not provide nor has received compensation for investment banking services on the securities covered in this report. Zacks SCR
does not expect to receive compensation for investment banking services on the Small-Cap Universe. Zacks SCR may seek to provide referrals
for a fee to investment banks. Zacks & Co., a separate legal entity from ZIR, is, among others, one of these investment banks. Referrals may
include securities and issuers noted in this report. Zacks & Co. may have paid referral fees to Zacks SCR related to some of the securities and
issuers noted in this report. From time to time, Zacks SCR pays investment banks, including Zacks & Co., a referral fee for research coverage.
Zacks SCR has received compensation for non-investment banking services on the Small-Cap Universe, and expects to receive additional
compensation for non-investment banking services on the Small-Cap Universe, paid by issuers of securities covered by Zacks SCR Analysts.
Non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage
services, advisory services, equity research, investment management, non-deal road shows, and attendance fees for conferences sponsored or
co-sponsored by Zacks SCR. The fees for these services vary on a per client basis and are subject to the number of services contracted. Fees
typically range between ten thousand and fifty thousand USD per annum.
POLICY DISCLOSURES
Zacks SCR Analysts are restricted from holding or trading securities placed on the ZIR, SCR, or Zacks & Co. restricted list, which may include
issuers in the Small-Cap Universe. ZIR and Zacks SCR do not make a market in any security nor do they act as dealers in securities. Each
Zacks SCR Analyst has full discretion on the rating and price target based on his or her own due diligence. Analysts are paid in part based on
the overall profitability of Zacks SCR. Such profitability is derived from a variety of sources and includes payments received from issuers of
securities covered by Zacks SCR for services described above. No part of analyst compensation was, is or will be, directly or indirectly, related to
the specific recommendations or views expressed in any report or article.
ADDITIONAL INFORMATION
Additional information is available upon request. Zacks SCR reports are based on data obtained from sources we believe to be reliable, but are
not guaranteed as to be accurate nor do we purport to be complete. Because of individual objectives, this report should not be construed as
advice designed to meet the particular investment needs of any investor. Any opinions expressed by Zacks SCR Analysts are subject to change
without notice. Reports are not to be construed as an offer or solicitation of an offer to buy or sell the securities herein mentioned.
ZACKS RATING & RECOMMENDATION
ZIR uses the following rating system for the 1110 companies whose securities it covers, including securities covered by Zacks SCR:
Buy/Outperform: The analyst expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters.
Hold/Neutral: The analyst expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters.
Sell/Underperform: The analyst expects the company will underperform the broader U.S. Equity market over the next one to two quarters.
The current distribution is as follows: Buy/Outperform- 17.2%, Hold/Neutral- 76.7%, Sell/Underperform
business day immediately prior to this publication.
Zacks Investment Research
Page 10
5.4%. Data is as of midnight on the
scr.zacks.com