MergerMArket
--> DEPO +2.68%
* Long list of bidders may be optimistic
* Company likely to resist sale at lower price
Starboard Value believes a sale of DepoMed (NASDAQ:DEPO) is the most direct way of yielding value for shareholders, a person familiar with the matter said.
There may be up to 10 potential buyers for the Newark, California-based specialty pharma company, this person said, including Japan’s Daiichi Sankyo (NASDAQ:DSKY), Allergan (NYSE:AGN), Teva Pharmaceutical (NYSE:TEVA) and Horizon Pharma Plc (NASDAQ:HZNP). Last year Horizon made an unsuccessful hostile bid for DepoMed.
Last week, Starboard revealed it had acquired a more than 9% stake in DepoMed and said it planned to request a special meeting of shareholders to nominate six new members of the board, including five from Starboard. The activist said it was making the move now to block the company from reincorporating to Delaware from California, which it said is a more shareholder-friendly state, among other reasons.
In the letter, Starboard said that a sale of the company is an option, but that it was not necessarily calling for a sale. But it said “board change is necessary” to ensure “the company is acting in the best interests of all shareholders.”
Prior to the 13-D filing, DepoMed announced it would hold its 2016 AGM on 18 May. Six directors are up for reelection, including CEO James Schoeneck.
DepoMed, which sells pain and other central nervous system drugs, last summer rebuffed hostile efforts by Horizon Pharma (NASDAQ:HZNP) to acquire the company for USD 33 per share in stock or alternatively, USD 32.50 per share in stock and cash. Horizon withdrew its bid after a California court blocked it, saying it was based on the Ireland-based company’s improper use of confidential information.
DepoMed stock subsequently fell by more than 50%, but Horizon’s also fell by more than 60% in connection to an overall decline in specialty pharmaceutical companies in the wake of criticism of the industry’s practice of raising drug prices and slower sales.
“It’s a travesty that DepoMed rebuffed the Horizon offer, but in retrospect, I’m glad they did,” said one top-20 DepoMed shareholder. “They did the right thing by rejecting funny money.”
DepoMed shares closed at USD 15.68 on Tuesday, giving it a market value of less than USD 1bn. The top-20 shareholder said the Starboard move “increases the probability of a sale” but said he wondered if there is a buyer.
From Starboard’s perspective, there are many potential global buyers for DepoMed, which bought the rights to Johnson & Johnson (NYSE:JNJ) painkiller Nucynta for USD 1.05bn more than a year ago and has grown the product to generate USD 190m in revenue, the person familiar said.
Japan’s Daiichi Sankyo, for instance, has said it could spend up to USD 2.5bn on US acquisitions, particularly in pain drugs, to offset patent expirations, the person familiar said. Earlier this year, Takeda Pharmaceutical (TYO:4502) told this news service that it could spend up to USD 1bn on acquisitions, including on CNS drugs.
Two industry bankers agreed that DepoMed would attract interest if it ran a sale process, but one said it “strikes me as fanciful that there could be ten buyers out there.” That banker said that the involvement of a prominent activist like Starboard means that there is a “50-50 chance” it will get sold in a year.
A second industry banker and a second investor said Starboard’s strategy is likely to garner shareholder support for a special meeting to replace the board and then push for a sale.
Given that DepoMed fended off a hostile bidder last year, it is unlikely that potential buyers would want go hostile again, particularly Horizon, the second banker said. He said that all the buyers are likely to be in wait-and-see mode to see how the Starboard campaign pans out, which could likely force the company to launch a sale process.
With DepoMed shares now around USD 15.70, its existing board and management is likely to be resistant to a sale, this banker said. He noted that they rejected USD 33 per share and Starboard may face a long battle.
Starboard “knows that DepoMed missed out on a high priced offer last year and that management is vulnerable, so they think that by getting board seats they can make changes,” the same banker said.
The second investor said he expects Starboard to begin reaching out to other shareholders for its campaign to get a special meeting and replace the board and begin a sale process.
The investor said Allergan, Horizon, Endo International (NASDAQ:ENDP) and Mallinckrodt (NYSE:MNK) could all be viable buyers, provided they made offers substantially in cash, rather than volatile shares. For buyers like Endo and Mallinckrodt, there will be large synergies due to DepoMed’s pain franchise, he said. Further, it would lower DepoMed’s tax rate if a buyer domiciled outside the US acquires it.
A spokesperson for DepoMed declined to comment. The company has said that Starboard did not communicate with it prior to filing the 13-D. A Starboard representative didn’t return a request for comment.