Drug Approval, Sales Forecast Lift Depomed Price

| About: Depomed Inc. (DEPO)

We continue to be optimistic on the future of Depomed (NASDAQ:DEPO). We are raising our price target from $8 per share to $10 per share on Gralise approval. We have made the following adjustments in our sum-of-parts / NPV analysis:

Removed approval risk adjustment rate on Gralise NPV calculation.

  • Increased Gralise sales forecasts based on FDA approval label and key differentiating characteristic such as better tolerability and G-Pak (dose titration) availability relative to Lyrica.
  • Increase NPV calculation on Serada based on approval of Gralise.
  • Delayed Gralise sales and royalty payments to Depomed based on mediation process
  • Added in $48 million in cash (assumes Abbott pays).

The net result of these changes above has increased our price target to $10 per share. We note that the currentmediation process with Abbott (NYSE:ABT) is impacting our target by approximately $2 per share. Therefore, if Depomed and Abbott were to agree to terms on Gralise, our target would move to $12. This assumes the terms are similar to the previous contract signed with Solvay.

If Abbott were to walk away, we would need to adjust our price target accordingly. In our view, thehome-run scenario for Depomed shareholders would be if Abbott takes the entire extended-release gabapentinfranchise on a global basis. Under this all-or-none scenario, Depomed could be worth $15 per share. This assumesAbbott pays Depomed a licensing fee for Serada, and Ex-N.A. rights to both products.

Management expects the mediation process to take about eight weeks to conclude. We would not be surprised tosee it take longer. We believe Depomed shares will trade between $8 and $10 while we wait. Regardless of theoutcome, Depomed is in a strong financial position, with an estimated $110 million in cash expected at the end ofthe first quarter 2011 (assumes receipt of the $48 million), and we like the fact that Serada, Glumetza, andadditional collaborations with Merck, J&J, and Covidien are all moving forward.

Our $10 target equates to a 15x multiple on 2014 EPS of $1.46, discounting back to present at 20%.

Gralise Sales Forecasts

We have developed the following sales forecasts Gralise based on full promotion (at either Abbott or another large or specialty pharmaceutical company) effective May 1, 2011. We would need to adjust these forecasts accordingly if Depomed were to undertake a slower launch to specialist while talks with a primary promoter linger into the second half of the year. Our forecasts assume Gralise is launched at a price of $1,500 per course of treatment, capturing roughly 10% of the market by 2015.

Additional information available upon request.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.