Upgrading Depomed To Outperform

Jason Napodano, CFA

Upgrading Depomed To Outperform

We are upgrading our rating on Depomed (DEPO - Analyst Report) to ‘Outperform’ from ‘Neutral’ and maintaining our $10 price target. This has been our price target for the past year or more.

The recent selloff in equities has created significant buying opportunities around many names in our coverage list. However, Depomed, with its solid cash position ($164 million as of June 2011), two approved drugs in Glumetza and Gralise, and our confidence in phase 3 Serada, presents both a compelling growth story and attractive valuation.  

The current market capitalization of $285 million is only $120 million above the cash value. In the past we’ve written that these are defining times for Depomed. The launch of Gralise is planned for October 2011 and data from BREEZE-3 will become available shortly thereafter. Both events have the potential to drive the shares meaningfully higher (or lower).

But we have confidence that Gralise is a good opportunity for management, and the changes to BREEZE-3 will result in a positive outcome with Serada. We see fundamentals as solid with the rest of the business, including Glumetza and partnerships with Merck, J&J, BI, and Covidien.

Our upgrade is based on the potential for meaningful upside based on Serada and Gralise in 2012, and our belief that the shares are undervalued today.
 

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