Bloomberg News

ViroPharma Orphan Drug Appeal Seen Driving 50% Return: Real M&A

September 19, 2013

ViroPharma Director Paul Brooke

ViroPharma Inc. Director Paul Brooke. Photographer: Daniel Acker/Bloomberg

ViroPharma Inc. (VPHM:US), the maker of drugs for rare diseases that rallied on optimism it will be the next biotechnology takeover target, could fetch a 50 percent premium in a deal.

The stock (VPHM:US) already surged as much as 34 percent to a 13-year high after Bloomberg News reported ViroPharma is working with Goldman Sachs (GS:US) Group Inc. on a possible auction and attracted interest from suitors including European drugmakers Sanofi and Shire Plc (SHP), citing people familiar with the process. JMP Group Inc. said the $2.6 billion seller of a treatment for hereditary angioedema, an inflammatory condition, could fetch $60 a share, compared with $40 yesterday.

Sanofi and Shire may be drawn by the chance to market ViroPharma’s drugs through existing salesforces and snap up the company’s pipeline while investors aren’t fully valuing (VPHM:US) its future revenue opportunities, said Oppenheimer Holdings Inc. and shareholder Penn Capital Management Co. Even after the gains, the Exton, Pennsylvania-based company traded yesterday at a lower multiple of projected sales than 87 percent of similar-sized U.S. peers, according to data compiled by Bloomberg.

“I’m certainly not surprised that they attracted interest,” Richard Simons, a Philadelphia-based analyst at Penn Capital, which oversees more than $7 billion including ViroPharma shares, said in a phone interview. “In terms of the pipeline, it’s very underappreciated. There are a lot of potential shots on goal that aren’t reflected in the stock.”

Unsolicited Approach

ViroPharma hired Goldman Sachs after fielding an unsolicited approach, said the people familiar with the process, who asked not to be named because the talks are private. The investment bank has actively sought other suitors since then, one person said.

After the Sept. 13 report, ViroPharma’s shares climbed three out of four days, closing at a 13-year high of $40.78 on Sept. 17.

Today, ViroPharma shares fell 0.1 percent to $39.96.

Michelle Larkin, a spokeswoman for ViroPharma, said the company doesn’t comment on speculation when asked whether the drugmaker has been approached by potential buyers.

ViroPharma is an attractive target because of the growth potential in both the U.S. and Europe for its primary drug Cinryze and because of the possible sales opportunity for maribavir, an experimental antiviral treatment that’s currently being tested, according to Akiva Felt of Oppenheimer. Felt estimated the company could fetch as much as $50 a share in a competitive bidding situation.

An acquirer “could have a large and growing rare-disease franchise,” the San Francisco-based analyst said in a phone interview. “Any company with the balance sheet to absorb the acquisition could potentially be interested.”

‘Pretty Inexpensive’

Investors aren’t giving the company credit for its sales prospects, said Liisa Bayko, a Chicago-based analyst at JMP. While analysts project (VPHM:US) ViroPharma’s revenue (VPHM:US) will rise to $674.1 million in 2015, a 58 percent increase from 2012, the drugmaker trades (VPHM:US) at a discount to peers.

ViroPharma is valued at 3.9 times its projected 2015 sales, compared with a median 10 times for U.S. biotechnology companies valued at more than $1 billion, according to data compiled by Bloomberg.

“The stock is not really valuing elements of their pipeline just yet and so maybe someone wants to pay in advance for those,” Bayko said. “It still seems pretty inexpensive.”

Shire and Sanofi (SAN) are the most logical acquirers, said Simons of Penn Capital. Shire could sell Cinryze alongside its own HAE treatment, Firazyr, while Sanofi could use ViroPharma to further bolster the rare-disease medicine foothold it acquired through the purchase of Genzyme Corp. that closed in 2011, he said.

Orphan Appeal

Orphan-drug “assets tend to be very long-lived assets, with very predictable growth, obvious geographical expansion opportunities,” Simons said. Sanofi and Dublin-based Shire “are very well-positioned to have a good idea of how that space is going to evolve.”

ViroPharma’s valuation in a takeover could jump to $52 a share if the buyer is a company like Shire with an existing HAE salesforce, Robyn Karnauskas, a New York-based analyst at Deutsche Bank AG, wrote in a Sept. 13 note. It may fetch $46 a share from an acquirer without the same cost-cutting opportunities, she said.

Karnauskas published a new report dated Sept. 18, reducing her recommendation to “hold” based on limited upside after the stock’s recent gains. She now estimates the shares could be valued at about $43, based on a probability adjusted discounted cash flow analysis with a takeover premium.

Jazz Interest?

Other large pharmaceutical companies including Pfizer Inc., (PFE:US) AstraZeneca (AZN) Plc and Basel, Switzerland-based Novartis (NOVN) AG have shown interest in orphan drugs and also could seek to bid on ViroPharma, Simons said.

While a deal may not materialize, Jazz Pharmaceuticals Plc (JAZZ:US) has a specialty-drug business model that would complement ViroPharma’s rare-disease treatments and could also use its Irish corporate structure to trim the company’s tax rate, Joseph Schwartz, a Boston-based analyst at Leerink Swann LLC, wrote in a Sept. 13 note.

Representatives for Paris-based Sanofi, London-based AstraZeneca, Dublin-based Jazz, New York-based Pfizer, Shire and Novartis declined to comment on whether their companies would be interested in buying ViroPharma.

Cinryze will lose some of its exclusivity by 2015, which makes ViroPharma’s longer-term growth prospects less certain, Mario Corso, a Boston-based analyst at Mizuho Securities USA Inc., wrote in a Sept. 16 note. The treatment also could face competition from the oral HAE drug that’s being developed by BioCryst Pharmaceuticals Inc. (BCRX:US), according to a report yesterday from Bank of America Corp. analysts including Rachel McMinn.

‘Value Proposition’

Given growth concerns and the limited number of HAE patients, buyers may balk at paying a premium for the company, said Stephen Brozak, president of WBB Securities LLC.

“I don’t see the value proposition in this type of an acquisition,” Brozak said in a phone interview from Clark, New Jersey. “I would not spend my money on going out there and going for a premium to where they are trading.”

Bayko of JMP is more optimistic about the company’s growth prospects and said even a relatively high takeover bid may not be that pricey. A $60-a-share offer would give ViroPharma an enterprise value (VPHM:US) of about $3.8 billion, or 9.4 times its trailing 12-month sales. That compares with a median revenue multiple of 8.3 for U.S. biotechnology deals valued at more than $1 billion, according to data compiled by Bloomberg.

A 50 percent premium “seems like a lot but then again in biotech, that’s really not that much,” Bayko said. “Clearly they’ve got good products and there’s a lot of leverage in their pipeline still to come.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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