Why Depomed Inc. Stock Spiked Today

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What happened

Shares of the specialty pharma company Depomed (NASDAQ: DEPO) briefly spiked by as much as 11.8% as of 9:55 a.m. EST. The catalyst behind the opioid drugmaker's surge northward was a story in the New York Post over the weekend stating that the private equity firm KKR& Co. (NYSE: KKR)is planning on making a buyout offer.

So what

The activist hedgefund Starboard Value has been attempting to get Depomed to entertain buyout offers for awhile now, only to have management balk at the idea. However, the company is reportedly finally set to formally review bids this Wednesday, perhaps setting itself up to be acquired by KKR and subsequently integrated into the fund'sArbor Pharmaceuticals.

Now what

Although the all-important details of any potential bid from KKR -- or any other possible suitors, for that matter -- have yet to be disclosed,Mizuho's analysts think the company could fetch $25 a share (or around $1.5 billion) in a buyout scenario. That translates into roughly a 39% premium compared to where the drugmaker's shares ended 2016, and implies a remaining upside potential of 25% from current levels.

That being said, it's never a good idea to buy a pharma stock based solely on the possibility of a buyout. Mergers and acquisitions in the pharma industry, after all, often fall apart at the last second, leaving investors holding the bag.

So if you're going to buy Depomed's stock ahead of a potential deal, you'll first want to have a firm understanding of the company's pain med product portfolio and the risks highly addictive opioid drugs carry from an investing standpoint.

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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.