Activist Investor Jeffrey Smith Wants to Overturn Depomed Board and Run it Like Olive Garden

Published: Aug 17, 2016

Activist Investor Jeffrey Smith Wants To Overturn Depomed Board and Run it Like Olive Garden August 17, 2016
By Mark Terry, BioSpace.com Breaking News Staff

Jeffrey Smith, managing member of hedge fund Starboard Value LP, has a 9.8 percent stake—more than 6 million shares—of Newark, California-based Depomed . Apparently Smith, known as an activist investor, is attempting to replace Depomed’s board. Last month, he sent a letter to the company’s shareholders that it has had a lot of success in replacing boards and bringing in more value—primarily because that’s what he did with Darden Restaurants (DRI), which operates Olive Garden, LongHorn Steakhouse, Bahama Breeze and Yard House.

Depomed focuses on pain treatment and other central nervous system disorders. It markets Gralise (gabapentin) for Postherpetic Neuralgia, Cambia (diclofenac potassium for oral solution) for acute migraines, Zipsor (diclofenac potassium) liquid filled capsules for mild to moderate acute pain, and Lazanda (fantanyl) nasal spray CII for breakthrough pain in cancer patients. It also offers a drug-delivery technology called Acuform.

In January, Depomed signed a deal for the U.S. rights to the Nucynta franchise from Janssen Biotech valued at $1.05 billion. The Nucynta franchise includes Nucynta ER, extended release tablets for pain management, including neuropathic pain associated with diabetic peripheral neuropathy, and Nucynta, for moderate to severe acute pain in adults.

Although Depomed’s stock has been considered undervalued, The Motley Fool’s Todd Campbell wrote in February that with projected sales for Nucynta at $1 billion peak sales and growing, “I think this is a stock worth hitching up with for the long haul.”

This tension between Starboard and Depomed isn’t new. In April, Depomed contemplated moving its incorporation to Delaware, presumably to make a hostile takeover more difficult, but the company stated the primary reason was “the prominence and predictability of Delaware corporate law.”

It would also have made it more difficult for Starboard to overturn the board, as well. Shortly after, though, Depomed announced it was canceling the reincorporation plans, saying, “Depomed determined that to proceed with this proposal is not in the best interests of the Company and its shareholders as it would result in a costly and distracting proxy contest at a time when the Company is focused on growing its business and driving shareholder value.”

Starboard accused Depomed of intentionally trying to change its corporate status to protect its board and lying about why it had changed its mind. Starboard then called for a complete change of the Depomed board.

And as mentioned above, this appears to be a Starboard strategy. It did so in 2014 with Darden, and attempted semi-successfully to do the same thing with Yahoo. After a year and a half of criticism and attempts to fully replace the board, Yahoo gave four seats on the board of directors, including one to Jeffrey Smith.

It’s fairly easy to argue that a business is a business, and any businesses, even a biotech company, should be run smart. On the other hand, there isn’t a single product Depomed develops or markets that comes with a side salad and breadsticks.

Smith is pushing for a special shareholders meeting, which might take place in September or October.

Ron Leuty, writing for the San Francisco Business Times, said, “Bringing up Orlando, Florida-based Darden may or may not appeal to Depomed shareholders. Drug companies are proud of a lot of things—innovation, R&D, revenue and growth, for example—but running like a chain restaurant is not on the list. Yet Starboard-focused Darden’s dish of gooey returns has proved delicious to its investors.”

Demoped is currently trading at $20.80.

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