Why Furiex Pharmaceuticals Inc. Shares Skyrocketed

Furiex shares soar after agreeing to be purchased by Forest Labs. Find out if this is a smart move or wasted money on Forest Labs' part.

Apr 28, 2014 at 1:03PM

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 Furiex Pharmaceuticals (UNKNOWN:FURX.DX), a drug development company that holds a percentage of royalty rights on a handful of FDA-approved therapies, skyrocketed as much as 33% after Forest Laboratories (NYSE:FRX) announced it was purchasing the company in a deal worth $1.46 billion.

So what: Under the terms of the deal Furiex shareholders will receive $95 per share in cash and could receive up to $30 per share in contingent value depending on whether or not the company's lead experimental drug, eluxadoline, a treatment for diarrhea-predominant irritable bowel syndrome, is approved by the Food and Drug Administration. According to the press release, once the transaction is completed Forest Labs intends to sell Furiex's royalty rights to type 2 diabetes therapy Nesina and premature ejaculation treatment Priligy to Royalty Pharma for roughly $415 million. The deal is unique in that Actavis (NYSE:AGN) is also in the process of acquiring Forest Labs at the moment, but it, too, has given its full support for the buyout.

Now what: I can remember but an instance or two over the years of one company purchasing another while also in the process of getting purchased itself, so this is a bit weird to say the least. I can't say I'm particularly thrilled with the value of this transaction from the perspective of Actavis or Forest Labs. I understand that the company would be able to recoup some of its purchase price by jettisoning Furiex's royalty rights, but it's placing a monstrous valuation on eluxadoline. Even with the company's positive late-stage trial results on eluxadoline I see this huge premium as carrying quite a bit of risk. For Furiex shareholders, however, you should be breaking out the champagne.

Furiex shares may have soared today, but over the long run this stock may easily outpace its gains
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