Why Shares of DepoMed Inc. Sank Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of the specialty pharma company DepoMed fell by over 15% today on high volume due to a weaker than expected first-quarter earnings report. Specifically, the company reported a net loss of $11.6 million or $0.20 per share for the three-month period. The Street, by contrast, was expecting the company to post earnings per share of $0.12 for the first-quarter.

Digging into these numbers, we can see that total revenue for the quarter came in at $32.2 million, missing consensus by only $1.56 million. So, this substantial earnings miss appears to be the result of the company's rising SG&A expenses, which amounted to $34.2 million in the first-quarter, combined with the loss of non-cash royalty revenues from PDL BioPharma.

So what: DepoMed's lead pain medicines ofGralise, Cambia, and Lazanda all posted strong sales growth, year over year. However, these drugs apparently haven't gotten to the point in their respective commercial lifecycles where management can ease off on their active, and hence costly, promotion.

Now what: DepoMed is on the cusp of relaunching the neuropathic pain medicine franchise Nucynta, recently acquired from Janssen Pharmaceuticals for $1.05 billion.

My bet is that this launch is going to ramp up SG&A expenses even further going forward. As such, I wouldn't put much stock on the company's updated 2015 guidance that was rolled into this first-quarter earnings report. DepoMed appears to be just getting the hang of the complex process of bringing drugs to market, meaning that their cost estimates might best be viewed as ballpark figures at this point.

That said, the company has built out an impressive product portfolio that should see double-digit sales growth for the next few years. So, today's drop might be a good time to pick up some shares on the cheap.

The article Why Shares of DepoMed Inc. Sank Today originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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