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What Does the ViroPharma Buyout Mean for BioMarin?

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Shire plc (NASDAQ: SHPG  ) is in the process of buying orphan drug-specialist ViroPharma (UNKNOWN: VPHM.DL  ) for $4.2 billion, strengthening Shire's already robust commercial drug portfolio for rare diseases. The deal is expected to be finalized no later than Jan. 9, after Shire extended its tender offer to acquire all outstanding ViroPharma shares last week.

When the buyout was originally announced in November, it came at a 27% premium compared to the previous day's closing price for ViroPharma shares. Put another way, Shire is paying about 10 times ViroPharma's annual pre-tax sales to make this deal.

What this buyout clearly demonstrates is big pharma's increasing willingness to pay a hefty premium to go after orphan drugs. Back in 2011, Sanofi  (NYSE: SNY  ) paid an eye-popping $20 billion for Genzyme's cadre of enzyme replacement therapies. And although this price tag seemed excessive at the time, it turned out to be a very savvy move on Sanofi's part, with Genzyme's products quickly becoming Sanofi's top earners.

Orphan drugs are hot items
Orphan drugs have become hot ticket items in the biopharma industry over the past decade for a myriad of reasons. First off, treatments for rare diseases often command a high price that insurance companies are generally willing to pay.

Moreover, drugs that receive the coveted Orphan Drug Status, or ODS, from the Food and Drug Administration, or FDA, are eligible for numerous benefits, including reduced regulatory times, tax benefits, and seven years of market exclusivity. As such, it's no surprise that this business model has produced multiple blockbuster treatments, as well as dozens of drugs generating better than average sales.

Will BioMarin be the next orphan drugmaker to be bought out?
Over the last decade, BioMarin Pharmaceutical (NASDAQ: BMRN  ) has become one of the top orphan drug specialists, making it a frequent visitor to the buyout rumor mill. Roche (NASDAQOTH: RHHBY  ) was previously named as an interested party, but the company's CEO squashed that rumor, saying BioMarin was too expensive.

So, is BioMarin too expensive? BioMarin is expected to haul in around $545 million in revenue this year and possibly around $700 million next year following the approval of Vimizim, an enzyme replacement therapy for Morquio syndrome. If ViroPharma's deal is any guide, this would mean that Biomarin's tender offer would still only be around $7 billion-ish. Yet, its current market cap is a stately $9.7 billion, well below this mark. In short, BioMarin does appear too expensive. 

Foolish takeaway
Roche's CEO Severin Schwan was probably providing an honest assessment when he said BioMarin is expensive, and not trying to keep BioMarin's share price from skyrocketing. Overall, an acquisition of BioMarin would have to come at a premium to today's price to satisfy shareholders, and that means the acquirer wouldn't get much in terms of immediate cost savings. And with BioMarin shares currently trading at around 25 times the company's cash position, the market has already built in a nice premium. In other words, I'm not sure a buyout can occur at a premium on top of a premium. 

That said, BioMarin's commercial portfolio is expected to generate sales of more than $1 billion by 2018. Looking at the issue this way, it's plausible that an acquirer could justify a tender offer more akin to the Sanofi/Genzyme deal. For me, however, the key issue that may trigger a buyout is continued progress in BioMarin's clinical pipeline for rare diseases such as Achondroplasia, Pompe's disease, among many others. And that's really where BioMarin's hidden value truly lies.

In sum, I don't believe a buyout is imminent because of BioMarin's hefty market cap, but a positive data readout for the company's Pompe's disease treatment in 2016 may be too enticing to pass up.

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