Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Depomed CEO Jim Schoeneck and his team may have thought they were in the clear. It's been about nine months since the maker of drugs for severe pain snubbed an approach from Horizon Pharma. The suitor turned hostile, only to be averted by Depomed's poison pill. In mid-November, amid an industry-wide selloff, the situation ended anticlimactically. 

But on Thursday evening, it got interesting again. Prolific activist investor Starboard Value, led by Jeff Smith, disclosed a large stake in the now $1 billion company and said it's concerned about "serious corporate governance deficiencies," calling Depomed's actions last year "egregious." The investor wants to hold a special shareholder vote to overhaul the board before May, when Depomed is scheduled to hold its annual shareholder meeting. The company has proposed moving its state of incorporation from California to Delaware, after which Starboard says investors would no longer be able to call a special meeting to remove board members. 

Turning Bearish
Short sellers are once again targeting Depomed, a maker of pain medicine. The stock was trading near a one-and-half-year low before Starboard Value disclosed its activist stake.
Source: Markit, Bloomberg

Depomed has responded with the boilerplate language that it welcomes communications with shareholders, etc., etc. Remember, though -- when it was fighting off Horizon Pharma, the drug industry was in the midst of a merger frenzy. In that sort of M&A environment, summarily rejecting a bidder willing to negotiate a premium did seem like poor corporate governance, as I wrote at the time. Starboard has a strong case.

Second Chance?
Depomed passed up the chance to sell itself last year, even as the drug industry continued a record takeover spree and buyers proved willing to pay richer valuations than in the past.
Source: Bloomberg

Depomed's stock had dropped nearly 20 percent since a court sided with the company and Horizon Pharma ended its pursuit.  On Friday, it surged 13 percent to $16.93 as of 11:45 a.m. That's still roughly half of what it sold for in July, when Horizon Pharma made its takeover proposal public. 

Smith wrote in a letter to Schoeneck that he isn't advocating for a particular transaction or necessarily one at all. However, he doesn't have faith that should such opportunities arise in the future, Depomed's current leadership will act in the best interest of shareholders.

An acquisition of Depomed may be a matter of when, not if. There are a number of companies that have been interested in pain and central nervous system therapies, Horizon Pharma included. A deal would still make strategic sense for Horizon Pharma. And financially, it may even be more compelling now, given that Depomed has gotten cheaper. (That said, Reuters reported  Friday that Horizon Pharma said it wasn't interested in revisiting the situation. We'll see.)

The company is relatively small, narrowly focused and like all drugmakers, faces inevitable patent cliffs. Without a sale, Depomed will have to find its own bolt-on acquisitions and licenses, a challenge given current debt markets. It's also highly leveraged, which is increasingly a concern in this industry after investors turned on Valeant Pharmaceuticals, the king of debt-fueled drug M&A. 

Deep in Debt
Depomed owes lenders almost as much as it has in market value. Net debt is also more than triple the Ebitda it's projected to bring in this year.
Source: Bloomberg

Analysts do foresee impressive growth for the next couple of years, as its Nucynta takes market share from OxyContin. That's the appeal for buyers. (Depomed's Nucynta may cause less constipation, a major drawback of opioid pain treatments. And it may be less likely to be abused, which is a big plus as painkiller addiction becomes a huge problem in the country.) 

Should any suitors out there be willing to offer a decent takeover premium, why not entertain them? Let's see if Jeff Smith can work his magic.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Separately, Horizon Pharma has been dragged through the mud during that time, coming under scrutiny for how it distributes medications and receiving a federal subpoena about its patient assistance programs. It's part of what Bloomberg News has called the "post-Valeant crackdown."

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Tara Lachapelle in New York at

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Beth Williams at