Bittersweet. That's how I'd describe the acquisition of Transkaryotic Therapies (Nasdaq: TKTX) by Shire Pharmaceuticals (Nasdaq: SHPGY). Of course, that's not the sentiment of a neutral observer, but rather that of someone who's owned shares of the company for nearly two years. It has also been almost exactly a year since I recommended the stock to Motley Fool Hidden Gems subscribers.
When the deal closes later this year, the Hidden Gems scorecard will show a 237% return on Transkaryotic. For just over a year's performance, that's certainly nothing to sneeze at. That doesn't change the fact that I liked Transkaryotic a lot and wanted to hold on for many more years as it transitioned into a profitable drugmaker.
Despite its run, the stock had a lot of life left in it. Looking out a few years, I think Transkaryotic could have been worth three times its value today. Clearly, Shire sees the possibilities as well and wants to take Transkaryotic's potential for growth under its wings. Thus my mixed feelings about being bought out. That said, Transkaryotic's board of directors did right by shareholders in negotiating the selling price, which is certainly very fair for what the company is worth today.
An inevitability
Let's take an objective look at Transkaryotic. Yes, selling to Shire was the right deal at the right time. It was only a matter of time before the company needed to become part of a larger organization. After all, only a handful of its products were of any value -- the biggest one on the horizon being the drug I2S for the treatment of Hunter syndrome. (I2S should launch next year if its phase 3 trial succeeds and the FDA approves the product.)
I2S, along with the already-marketed Replagal, could have given Transkaryotic $300 million in revenue just a few years from now. That's a tripling of the company's top line in a short period of time.
Aside from those two drugs driving growth, however, the sources of additional expansion for the longer term are a bit thin. That's because the only other products coming online would have been Dynepo and GA-GCB, whose value is somewhat marginal in my view. Dynepo can only be sold in markets outside of the U.S., and it could very well face generic competition. Since Transkaryotic planned to partner the drug, the royalties it would have received could have been relatively minor. GA-GCB faces the unenviable task of competing against Genzyme's (Nasdaq: GENZ) blockbuster Cerezyme, an entrenched product in the treatment of Gaucher disease.
I believe Dynepo and GA-GCB could have added value to the company, but the drugs are not clear and substantial winners like I2S. Looking deeper into Transkaryotic's drug pipeline, we discover that it is essentially bare since all the other programs are in the pre-clinical research stage. That means they are a very long way off from reaching the market and making a contribution to the top line.
So while Transkaryotic's growth prospects looked great over the next three years or so, the company would not have been able to drive growth from internal drug programs after that. One way to get around that is to become a part of another organization. This is why, even though I wish I could have taken the ride while I2S sales ramped up, I ultimately think that the board made the right move in selling to Shire at this time.
Superb management
At The Motley Fool, we stress the importance of quality management. So I'm taking this opportunity to give a shout-out to CEO Michael Astrue for a job well done. Astrue took the reins in February 2003 as the company experienced rough times. Replagal had just been locked out of the U.S. market, the company was hemorrhaging cash, and there was a crisis of confidence in former management. Astrue streamlined operations to focus research and development on commercial products and cut operating expenses. He was also at the helm when Transkaryotic regained the rights to Dynepo from Aventis, and he was responsible for making the GA-GCB program a priority.
Transkaryotic's market cap increased ninefold during Astrue's two-year tenure. My friends, that's called having a vision for a company and executing it. As a shareholder, I'm very happy with the job upper management has done over the past couple of years. If this CEO heads up another company soon, you can bet I'll be taking a look.
What now?
Transkaryotic has certainly done very well for its shareholders, including our Hidden Gems subscribers. If you're one of the latter, check out the dedicated Hidden Gems website later today for my thoughts on what you should do next.
Transkaryotic exemplifies one particular trait we look for as investors in small, unknown companies: superb leadership that clearly works to create value for its shareholders. The Hidden Gems approach is simple and it works. If you'd like to see how it can work for your portfolio, cometake a risk-free 30-day trial. You've got nothing to lose.
For additional articles on the biotech industry, see:
Motley Fool Rule Breakers biotech analyst Charly Travers owns shares of Transkaryotic Therapies. The Motley Fool has a disclosure policy.
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