Tesaro says it’s for sale, but who can afford it

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The News:

Just ahead of the year’s biggest download of cancer data, the maker of a closely watched drug has put itself up for sale, according to The Wall Street Journal. That would be Tesaro Inc. (Waltham MA), whose PARP inhibitor Zejula won FDA approval in March. (PARP inhibitors are a group of pharmacological inhibitors of the enzyme poly ADP ribose polymerase (PARP). They’re developed for multiple indications; the most important is the treatment of cancer.)

@Tesarobio has put itself up for sale after #Zejula won @US_FDA approval Click To Tweet

That medicine launched soon after the green light at a price of $118,000 per year, which Tesaro boasted is lower than its head-to-head rivals in ovarian cancer, AstraZeneca PLC’s Lynparza and Clovis Oncology Inc.’s Rubraca.

Analysts have classified Zejula, or niraparib, as one of 2017’s biggest launches, with 2022 sales pegged at $1.9 billion. That’s an enticing prospect for bigger companies looking to bulk up their oncology portfolios, but that very fact could also make it an expensive shopping spree. Thanks to a huge run-up in its share price since Tesaro rolled out top-line Zejula data last July, the company’s market value was $7.62 billion as of June 5.

The WSJ’s sources say Tesaro has requested offers from a variety of potential bidders over the past few weeks–but they also say potential acquirers aren’t exactly beating down its doors to pursue a deal.

Price is potentially one reason, obviously. Another is that would-be buyers have been waiting for the American Society of Clinical Oncology meeting over the weekend, where AstraZeneca presented data on Lynparza and Tesaro posted data on a Zejula combination with Merck & Co.’s blockbuster PD-1 therapy Keytruda, according to FiercePharma.

Tesaro closed Monday (June 5, 2017) at $142.48.

Steve’s Take:

Zejula’s hefty sales projections rely on its ability to garner new indications, including prostate and breast cancer. And they rely on Zejula’s ability to stake out a piece of the PARP market.

It’s a hot field, with more pipeline treatments likely to add to the three competitors already vying for scripts; Pfizer Inc.’s forthcoming talazoparib, for instance. AstraZeneca, meanwhile, is up for a new indication that would put it on more even footing with Zejula, which currently enjoys a broader label.

Other possibilities include Gilead Sciences Inc., which needs a big deal to rescue itself from hepatitis C’s decline, and has said it’s interested in oncology, and Sanofi SA is eyeing the market for M&A up to $20 billion. Then there’s Novartis AG, which doesn’t have a PARP drug in its pipeline.

Some analysts speculate the Swiss drug giant will soon have a cash hoard after selling its Alcon unit. Finally, there’s Bristol-Myers Squibb Co., which has been rumored as a takeover target itself, and doesn’t have a PARP candidate.

Max Nisen at Bloomberg points out that it’s been almost exactly a year since a positive trial result for Zejula in an ovarian-cancer trial doubled Tesaro’s share price. Since then, the company’s stock has soared raced ahead even more on near-constant takeover speculation, given another boost by the Wall Street Journal report last week that it has officially placed itself on the auction block.

But the prospect of competition for the firm’s lead drug and the sheer boldness of its valuation combine to make a deal exceedingly unlikely at the price it probably wants. Interest is “lukewarm,” according to the Journal, and it’s likely to stay that way, Nisen judges.

He goes on to posit:

“Your view of Tesaro’s takeout prospects depends on which side you take in a religious war. Investors and analysts are divided on whether Zejula is the best of a group of drugs called PARP inhibitors, or if there isn’t all that much difference between the drug and two on-market competitors, Lynparza from AstraZeneca PLC and Rubraca from Clovis Oncology Inc. Tesaro’s initial stock-price boost came from trial data last summer suggesting its drug works better and in a larger population than expected. It then netted a rapid and broad FDA approval to treat ovarian cancer.”

Nisen closes his analysis wryly with,

“Want to get into the PARP market? Clovis is a far cheaper option.”

Nothing can be ruled out in pharma M&A, where a lot of cash-rich companies are hungry for deals, and there’s a storied history of overpaying for assets. But having cash isn’t an excuse to be extravagant.

Bottom Line:

What do the analysts think?

Consensus recommendation

As of June 2, 2017, the consensus forecast among 20 polled investment analysts covering Tesaro advises that the company will outperform the market. This has been the consensus since the sentiment deteriorated on Nov. 4, 2016. The previous consensus forecast advised investors to buy the name.

Recommendations 1yr ago Latest
Buy 8 7
Outperform 5 5
Hold 1 8
Underperform 0 0
Sell 0 0

1-year change in share price: +211%

Share price forecast

The 17 analysts offering 12 month price targets for Tesaro have a median target of $183.00, with a high estimate of $236.00 and a low estimate of $124.00. The median estimate represents a 28% increase from the last price of $142.51.

Given the 211% increase in the company’s share price over the past year, and widespread skepticism about the probability of a buyout, I’d steer clear of this name for the time being and allow some cooler heads like Nisen at Bloomberg to address the speculation roiling around the Street.

Steve's Take: @Novartis could be looking for an #acquisition, @Tesarobio might just fit the bill Click To Tweet

Anything is possible in the pharma/biotech M&A game. Just ask Novartis, which paid $60 billion for Alcon seven years ago and is now contemplating offloading the disappointing unit for $25-$35 billion.

But that would generate a cash pile of around $50 billion following several other, smaller asset sales. And despite downplaying a possible big deal, recently minted, California-born CEO Joe Jimenez is itching to pull the trigger and prove he’s a gamer, too.