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Could This Be the Next Health Care Acquisition Target?

If you follow the health-care sector in any way, shape, or form, the pay week and a half has been nothing short of incredible. Merger and acquisition activity usually comes in spurts, and true megadeals are rare. But in recent days we have been privy to an almost overwhelming amount of M&A activity.

Novartis (NYSE: NVS  ) , for example, last week announced a complete business overhaul that included jettisoning its animal health operations to Eli Lilly for $5.4 billion and selling its vaccines unit to GlaxoSmithKline (NYSE: GSK  ) for $7.1 billion. In return, Novartis purchased Glaxo's oncology division for $14.5 billion plus an additional $1.5 in contingent value.

There was also official confirmation this week of rumors that pharma giant Pfizer (NYSE: PFE  )  has been and is still pursuing British peer AstraZeneca. Although AstraZeneca hasn't been biting at Pfizer's near-$100 billion bid, the would-be buyer appears undeterred.

Even medical device makers are getting in the action. Zimmer Holdings last Thursday announced the acquisition of privately held Biomet for $13.35 billion. The buyout is part of an effort to expand Zimmer's product portfolio and geographic diversity, as well as to improve its pricing power.

Source: Novartis.

Could this be the next deal?
This sudden influx of deals has many health-care analysts on Wall Street offering their two cents regarding what might come next. While I'm no Wall Street analyst, I always keep a keen eye on the biopharmaceutical sector, and I see a potential buyout opportunity that would make a lot of sense for both companies involved. This doesn't in any way mean a deal is happening, nor do I have any inside clues that one is about to go down, but on paper the combo looks good.

The deal that might happen sooner rather than later could be GlaxoSmithKline purchasing Theravance (NASDAQ: THRX  ) . Overall, I see three primary reasons supporting this thesis.

Longtime partners
First, Glaxo and Theravance have a long working relationship. Forged in November 2002 and expanded a number of times thereafter, the partnership has brought two FDA-approved chronic obstructive pulmonary disorder, or COPD, therapies to market: Breo Ellipta, an inhalable, once-daily, long-term maintenance therapy of airflow obstruction and exacerbation reduction in patients with COPD, and Anoro Ellipta, another inhaled long-term maintenance therapy for airflow obstruction. The two also have a handful of other COPD collaborations working their way through clinical and preclinical studies. By combining the two companies, GlaxoSmithKline would no longer split a percentage of revenue with Theravance and could instead take full advantage of the blockbuster potential of both drugs.

A deal makes even more sense when you consider that Theravance is on track to split into two independent companies later this quarter. Its COPD and lung disease therapies will be lumped into a new company, Royalty Management, while its remaining disease focuses will remain under Theravance BioPharma. Even if GlaxoSmithKline were a bit gun-shy about purchasing the entirety of Theravance, the spun-off lung disease assets will soon be held within a single entity in which the only existing partnerships are with GlaxoSmithKline. With no cross-royalty streams to worry about, a deal here might be a no-brainer. 

COPD competition is building
Second, competition in COPD therapies is mounting, and GlaxoSmithKline's precious revenue stream from COPD maintenance therapy seretide (known as Advair) isn't going to last forever.

Source: GlaxoSmithKline, Flickr.

Seretide actually lost its patent protection in the U.S. in 2010 and in Europe last year, yet the medication continues to deliver blockbuster results ($8.9 billion in sales in 2013, a 4% constant currency increase from the prior year). Seretide is able to achieve this because no generic-drug producer has yet been able to make a biosimilar of the treatment. Generics producers for years got no help from the FDA, which failed to outline what efficacy endpoints would need to be established for agency approval of a Seretide biosimilar.

Last year, though, the FDA finally issued those guidelines, and I'd say Mylan (NASDAQ: MYL  ) is the front-runner to get a biosimilar in front of the agency within the next two to three years. Mylan paid $17.5 million in 2011 for the licensing rights to Pfizer's "copy" of Glaxo's Seretide, which made it quite clear that Mylan was interested in infiltrating this market. Long story short, branded Seretide's days are numbered -- maybe even before a biosimilar reaches market.

Novartis announced last week that its Onbrez Breezhaler was confirmed as noninferior to Glaxo's Seretide in its phase 4 INSTEAD study. The results demonstrated that Onbrez delivered "similar symptomatic benefits in terms of shortness of breath and health status after 12 and 26 weeks in patients treated with Onbrez Breezehaler and [Seretide]." The conclusion was that instead of using Seretide, patients with moderate COPD who are at low risk of exacerbation could switch to Onbrez.

With competition coming from all angles, I think it would be in GlaxoSmithKline's best interests to scoop up Theravance to minimize the inevitable loss of Seretide.

The price could be right
Finally, the prospect of a buyout makes considerably more sense following the biotech sell-off that ravaged the share price of both big and small companies. Theravance, for instance, saw its stock fall from a 52-week high of nearly $43 down to a 52-week low just off $26.

THRX Chart

THRX data by YCharts.

This $2 billion reduction in market value could represent the perfect opportunity for GlaxoSmithKline to swoop in.

This is all mere speculation on my part, but I don't think it would hurt health-care savvy investors to add Theravance and GlaxoSmithKline to their watchlist, as there's potential on paper for this to become the next M&A deal.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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9/1/2015 4:01 PM
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