DepoMed's Latest Acquisition: Too Good To Be True?

• Depomed Inc (NASDAQ: DEPO) shares have appreciated 26.13 percent year-to-date, although they are currently trading significantly below their 52-week high.
• Cantor Fitzgerald’s Chiara Russo has maintained a Buy rating and price target of $29 on the company.
• The company has announced that it has signed a purchase agreement with Grunenethal for a first-in-class, novel pain treatment, Cebranopadol.

Analyst Chiara Russo expressed surprise at the acquisition, saying that “it bucks the previous trend of acquiring already on-the-market assets and puts DEPO squarely back into the R&D game.”

While taking charge of an asset that is in Phase 3 development could entail risk, Russo believes that the product could be a potential blockbuster, at a price of $100 million in upfront and development costs and an end to a patent lawsuit.

According to the Cantor Fitzgerald report, “Cebranopadol is a novel, first-in-class opioid pain reliever that works on both pain related to actual nerve damage and pain related to tissue damage.”

“Cebranopadol has shown less impact on respiratory depression, reduced tolerance and abuse potential,” the report added.

While detailing the deal, Russo mentioned that DepoMed will pay $25 million in cash and that the deal is likely to be closed in 4Q15. DepoMed will also settle an ongoing patent lawsuit related to the product.

“If approved, DEPO will pay royalties on net sales and one-time net sales milestones. DEPO will not have to pay any clinical development milestones,” Russo explained.