Should Shire Buy NPS Pharmaceuticals?

Acquisition season is apparently in full bloom in the health care sector with Shire (NASDAQ: SHPG  ) reportedly interested in making a deal for orphan drugmaker NPS Pharmaceuticals (NASDAQ: NPSP  ) . According to a couple of sources, Shire has put a $5 billion credit facility into place with Citigroup and is considering an initial offer of $40 a share. 

When this rumor initially broke on May 30, NPS shares immediately ripped higher and are still up 21% in the past week. Even so, NPS's management was quick to pour cold water on this rumor by stating that they have not been contacted by Shire about a potential takeover.

NPSP Chart

NPSP data by YCharts

That said, I think the bigger question is whether a Shire-NPS pairing even makes sense in the first place? With this in mind, let's take a closer look at why Shire might be interested in this mid-cap biopharma.

Shire is reportedly a prime takeover target itself
Shire has a big target on its back and for good reasons. Firstly, the Dublin-based company offers potential acquirers the attractive low-tax Irish domicile.

Secondly, Shire has become a leader in the rare disease space following its acquisition of ViroPharma. Specifically, the company's orphan drug unit is now valued at over $2 billion following this acquisition. It's important to bear in mind that orphan drugs are highly prized in the pharma world because of their extended patent protection and high margins. And adding fuel to fire, Shire is seeing double-digit sales growth across many of its commercial products, including its flagship ADHD drug Vyvanse. 

All told, you can see why companies like Allergan have reportedly taken a deep interest in acquiring Shire and hence, why the company may want to make a decently sized acquisition of its own in an attempt to remain independent. 

NPS' earnings could triple next year 
Turning to the object of Shire's alleged desire, NPS offers an acquirer stellar growth potential in the rare disease space. The company is seeing double-digit sales growth for its treatment for Short Bowel Syndrome called Gattex and its licensing revenue remains strong. 

What could really make NPS a prime takeover target, however, is an approval for the company's treatment for hypoparathyroidism called Natpara. Hypoparathyroidism is a rare disorder that makes it difficult to metabolize calcium.

Natpara is presently scheduled to be reviewed by an Advisory Committee on July 24, followed by a Prescription Drug Fee User Act goal date of October 24. What's key to understand is that NPS' management believes that Natpara could become a major revenue driver for the company moving forward. Indeed, we've now seen forward EPS growth projections of close to 300% next year if Natpara can get past the FDA. 

Foolish wrap-up
I think one of the best reasons a Shire-NPS deal makes sense is that it would add to Shire's already formidable orphan drug portfolio. It's no secret that Shire has been building this portfolio with haste in its attempt to become less dependent upon Vyvanse revenue for growth.

Looking ahead, the question thus becomes, would this deal give Shire the protection its seeking from a potential acquirer? A Shire-NPS pairing would probably result in an entity with a market cap of around $40 billion and would make it the undisputed king of the orphan drug game. At that point, Allergan may not have the firepower to make a bid that would require a premium to make it attractive.

That said, I think this deal would actually make Shire an even more attractive takeover target and could whet the appetites of bigger pharmas. After all, it was Shire's last acquisition of ViroPharma that apparently began the buyout talk in the first place. In sum, if such an acquisition were to occur, it might not have the intended effect of helping Shire remain independent.  

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