Depomed (DEPO) Back in Play Amid Recent Chatter; Valuation Remains Below Horizon Offer - Mizuho
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Mizuho securities affirms Depomed (Nasdaq: DEPO) at Buy with a price target of $23 following news that the company is seeking a possible sale.
The firm commented,
We had previously modeled a hypothetical takeout price for DEPO of $26 based on a 4.5x EV/sales multiple applied to our FY:17 estimates of $558M. HZNP recently entered an agreement to acquire RPTP, an Orphan company, at a ~6.2x price/sales multiple (based on FY:16 guidance), and if DEPO were acquired a slight discount to this (4-5x), it could fetch somewhere between $24-$31/share, in our view. We note that this is still below last year's $32/share offer from HZNP. DEPO has been a top pick for us due to the compelling takeout thesis in the name, and we reiterate our Buy rating. We will reassess our PT after updating our model for Aug prescription trends.
We like how DEPO mgmt. may have opted to run a process to avoid a contentious shareholder vote to replace its Board later in the year. This initiative should generate an optimal outcome for shareholders, in our view. The timing also suggests to us that the company is nearing a Nucynta/ER legal decision, which will allow prospective buyers to better value the stock. We don't see HZNP as a likely buyer given its RPTP acquisition and its plans to diversify away from primary care. We see additional upside to valuation from DEPO's patent litigation with Purdue, which could entitle DEPO to a retroactive single digit royalty on ~$15B in branded Oxycontin sales.
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