February 20, 2017
By Mark Terry, BioSpace.com Breaking News Staff
Newark, California-based Depomed has had an ongoing power struggle and some investors think it’s time for the company’s embattled chief executive officer to go. Todd Campbell, writing for The Motley Fool, takes a look at the company’s recent history and the battle between Starboard Value’s Jeff Smith and Depomed’s chief executive officer Jim Schoeneck.
Back in April 2016, conflicts between Starboard Value and Schoeneck heated up. Under California rules of incorporation, shareholders of 10 percent of a company can call a special meeting to replace directors. Other states, most notably Delaware, require 25 percent of shares. Starboard owned 10 percent of Depomed shares.
Starboard wanted to dump the company’s board and Schoeneck along with it. Depomed had indicated it was considering reincorporating in Delaware. Not only would this make it more difficult for other companies to make hostile takeover bids, it would make it more difficult for Starboard to dump the board. Then the company abruptly changed its plans, claiming it wasn’t in the best interests of the company and its shareholders.
Starboard accused—probably correctly—that Depomed was intentionally trying to change its corporate status to protect its board and lying about why it changed its mind. It then called for a complete change of the Depomed board.
Campbell writes, “Initially, Depomed’s board of directors clashed with Starboard Value’s Jeff Smith. However, the board agreed last fall to allow Smith to pick three people to join Depomed’s board of directors. Also, because Smith had been critical of management’s rejection of a $33 per share offer from Horizon Pharma in mid-2015, the board agreed to entertain bids from suitors.”
Horizon, apparently is not willing to pursue another bid, likely due to the full-force opposition to it. There have been some rumors that Purdue Pharma was interested, and that investment firm KKR might make a bid, but neither have made offers.
But in October 2016, Starboard and Depomed seemed to reach some sort of truce. Starboard gained three seats on the board of directors. At that time, company shares were trading at $27 per share.
The company is releasing its fourth-quarter and 2016 annual financials tomorrow, but the third-quarter results showed 5 percent year-over-year top-line growth, which were disappointing.
Campbell writes, “Absent a buyer, I think pressure will mount on Depomed CEO Jim Schoeneck to prove to investors that his course is the right one. Previously, rapid sales growth for Depomed’s opioid pain medicine, Nucynta, helped Schoeneck make his case, but opioid prescriptions have slumped on rising concern over abuse, and that’s slowing Nucynta’s momentum.”
Depomed bought Nucynta in early 2015 from Janssen Pharmaceuticals, a Johnson & Johnson company, for just over $1 billion.
Depomed is currently trading at $16.47. Given that Horizon was offering $33 per share two years ago, it’s easy to see why investors might want a change of direction.
Campbell suspects Starboard will likely push for Schoeneck’s ouster. That’s not exactly an unusual approach for Starboard or Jeff Smith. In 2014, Starboard succeeded in overturning the board at Darden Restaurants Inc., which owns the Olive Garden chain of restaurants. It was partially successful in a similar attempt with Yahoo. Smith had spent about 18 months criticizing Yahoo. In April 2016, the company finally gave Starboard four seats on the board of directors. Smith is one of the board members.
