- DEPO has seen a 20% decline after releasing Q1 results that came in below expectations
- However, these results were impacted by accounting changes into the company and adversely affected by one time acquisition charges
- The company expects growth to continue at it’s regular pace, indicating that core operations are strong
Depomed Inc (NASDAQ:DEPO), a specialty pharmaceutical for pain and other central nervous system conditions, released Q1 earnings that came in below expectations. The company reported a loss of $11.6M, short of estimates and disappointed on the top line as well. As a result, DEPO stock has traded down nearly 20%. I believe this move was an overreaction.
Accounting Method Affecting Financials
One of the reasons for the earnings miss was due to the change in Depomed’s accounting method from the PDL transaction back in October 2014. These amendments took out “any amounts non-cash royalty revenue, non-cash interest expenses or non-cash taxes relating to the PDL transaction.” Since this revenue stream amounted to 71.3% of their overall revenue in Q1 2014, Q1 2015 results are not comparable to prior year. However, by isolating product sales, we see that there is a 47% increase in product sales in Q1 2015 from Q1 2014. This paints a more accurate picture of how Depomed is growing, as it is related solely to the increased demand of their products, which is their core business. In other words, organic growth is strong.
Acquisitions Paving Road for Growth
Depomed has had substantial growth within the past few years, going from $1 million in product sales in 2011 to $114 million in 2014. Similar growth is expected to continue in the future based on management guidance, with product sales outlook ranging from $310 million to $335 million in 2015.
The growth for 2015 is largely associated with the recent acquisition of the NUCYNTA franchise from Janssen, which management says is the most substantial transaction that they have made so far. The acquisition closed on April 2nd and they began shipping orders on April 6th, which means that they are able to record NUCYNTA sales for the whole second quarter.
However, I do not believe that it will appreciate much because of the fact that all of the non-recurring fees associated with the re-launch of NUCYNTA will drive down EBITDA. Management expects these expenses to be disproportionately high, guiding deal costs to be roughly $21 million. Thus, even with the increase in revenue from NUCYNTA, it might not be enough to bring earnings to a positive number.
Q3: The Turnaround?
Positive quarterly net earnings will be the catalyst to drive Depomed’s stock price back to levels it was trading at before the recent earnings “disappointment”. Q3 could end up being this inflection point since the non-recurring expenses will have been accounted for and the NUCYNTA product sales will be in full swing.
Depomed’s past growth and management’s outlook for 2015 should give investors confidence that the near 20% decline in price presents a buying opportunity. This drop could end up being a temporary setback which adds long term sustainable growth. Once the NUCYNTA sales are realized closer to year end, the stock has the potential to bounce back aggressively. Keep in mind, Depomed’s prior first quarters have historically been weaker than preceding quarters. The worst may already be over.