Investing in the drug business via biotechs and pharma stocks has become much more complicated of late. On top of political pressure over drug pricing, and companies being targeted by short sellers and anti-activists, companies that wholesale and retail drugs are occasionally putting drug companies in their bullseye.

DepoMed Inc. (NASDAQ: DEPO) is one such company that has seen its shares suffer, due to related ties after Express Scripts Holding Co. (NASDAQ: ESRX) targeted Horizon Pharma PLC (NASDAQ: HZNP). This environment has created a virtual minefield for investors of all walks of life. It also has thrashed the ambitious price targets that many analysts have for the best drug and biotechs down to the most speculative players in the space.

In a fresh report, Janney Capital Markets’ Ken Trbovich has said that bad news for Horizon Pharma is creating a buying opportunity in DepoMed.

Of course there may be more than meets the eye now in biotech and biopharma. This in particular is one of those analyst calls that projects high upside, but investors truly need to understand that uncertainty in this sector has been growing. If the pressures continue, or if even additional problems arise (and they certainly could), then the risks simply may have become more than most investors can tolerate or even fully understand.

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As far as how the shares have performed, DepoMed shares were last seen down 7.2% at $19.68, after putting in an intra-day low of $19.00. DepoMed has a 52-week range of $14.29 to $33.74. Horizon Pharma shares were last seen down 18.2% at $18.27.

Trbovic’s flash takeaway on DepoMed said:

Today’s sell off is completely unwarranted, creating an excellent buying opportunity. The sell off was prompted by a third negative story in as many months from The New York Times regarding specialty pharmacy distribution. However, we note DepoMed currently generates less than 5% of sales for products and far less than this from Linden Care. We note that DepoMed just reported an excellent quarter, raised guidance for remainder of the year, and continues to generate solid prescription growth.

The analyst does admit that Express Scripts’ decision to stop doing business with specialty pharmacy Linden Care is likely to be a cause for concern across the entire specialty pharmaceutical sector. Trbovich pointed out:

Linden Care focuses on distribution of drugs for pain management, thus the implications of the Express Scripts decision is likely to be of greatest concern for pain-focused companies such as Horizon Pharma, Endo International, Depomed, and Insys. … The pending all-stock offer from Horizon has had implications for DepoMed as each negative story that dragged down the valuation of Horizon has translated into a nearly identical impact on DepoMed.

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Another issue here is that DepoMed’s board of directors has rejected the Horizon offer, yet Horizon has continued in its attempt by calling for special shareholders meetings to remove DepoMed’s board and block a poison pill.

Specific to DepoMed’s exposure to Linden Care, Trbovich estimates that the company generates only 0.5% of its sales from this specialty pharmacy. The report concludes:

Depomed’s business remains just as strong today as it was Monday when it reported better-than-expected earning and upwardly revised guidance for the remainder of the year. We continue to believe the Horizon buyout offer has taken investors attention off of the solid fundamentals existent at Depomed, creating a tremendous buying opportunity. Thus, we reiterate our Buy rating and $35 fair value estimate.

If the Janney Capital Markets report is proven right, DepoMed could have almost 80% upside. Just keep in mind that the entire sector tied to biotech and pharma is currently full of much more risks than it has been in prior recent years.

Throwing in the political risk, pricing risk, partners turning enemies and a broad general uncertainty just creates a lot of uncertainty. That uncertainty also generates significant losses and gains for investors, quite often in a manner that is not so easy to predict.

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