Depomed, Inc. Investment Analysis on Depomed

Investment Analysis on Depomed-by Ferya

1. Overview of the company

Depomed, Inc. is a specialty pharmaceutical company focused on products to treat pain and other central nervous system conditions.

Figure1: Key Statistics               (8/10/2016)

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In the drug manufactures, healthcare industry. Depo is ranked in 94/265 (top 35.47%). Figure 2 shows part of Depo’s competitors, besides, Horizon Pharma plc., Keryx Biopharmaceuticals Inc., Durect Corporation, Cytokinetics, Incorporated, and Sarepta Therapeutics, Inc are its Comparable companies which were used in the comparable company analysis below.

Figure 2: Depomed’s Competitors

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Ended in 8/18/16, P/E ratio of Depo was -16.9, the industry average P/E was -8.99. However, in the past 5 year, Depo’s growth rate was 78.96%, the relative high growth rate could not justify the low P/E ratio, Depo might be underpriced.

Currently (8/18/16), Depomed’s price is $20.57. Based on the Financial Reports of Depomed, in 2015, Depomed’s net revenue was decreased from 2014. While, for the growth rate estimation, Depomed would get 71.4% growth rate in 2016, 24.20% in 2017, and in the next 5 years, the growth rate would be 19% per annum.

Based on my analysis, the suggestion of investment in DEPO is to hold or buy the stocks instead of sell. The analysis reasons are following.

1. DCF model

Using DCF valuation technique that values Depomed by projecting its future cash flows and then using the net present value method to value it.

Figure 2: Discounted Cash Flow Analysis

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Figure 3: Assumptions in DCF Analysis

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Based on the DCF analysis, within perpetuity growth method, the enterprise value (EV) of Depomed would be ($14,750,258.9), while within exit multiple method, the enterprise value (EV) of Depomed would be ($6,657,163.9), the exit multiple was assumed as 4.5x.

1. Comparable Companies Analysis

For the comparable companies model analysis, compared Depomed’s EV/LTM Sales, EV/2016 estimated sales, EV/ 2017 estimated sales with its mean/median of the comp group (from Figure 4), Depomed’s value may be undervalued.

Compared with Equity value multiples, Enterprise value multiples could allow the direct comparison and less affected by accounting differences. Thus, Enterprise value multiples are better to estimate the value of the company.

Using EV multiple, EV/Sales to estimate Depo’s value.

Depomed has an estimated sales of $490.1m in 2016, the EV multiple is 16177822.2x(median), Estimated EV is $7,928,750,646.11, Net Debt is $512,238, Equity Value is $7,928,238,408. Then the value of Depo would be $124.