Image source: Getty Images.

What happened

Investors in Vitae Pharmaceuticals (NASDAQ: VTAE) should be smiling from ear to ear today. The company's shares are up more than 158% as of 10:30 a.m. EDT in response to the news that pharma giant Allergan PLC (NYSE:AGN) will be acquiring the clinical-stage biotech in an all-cash deal.

So what?

Allergan has made an offer to buy out Vitae Pharmaceuticals for approximately $639 million, which values the company's shares at $21.00 each. That represents a massive premium of 159% over yesterday's closing price of $8.10. Both companies' Boards of Directors have already unanimously approved the deal. 

Allergan's management team stated they are acquiring Vitae in an effort to strengthen the company's dermatology product pipeline. Specifically, the company is quite interested in getting its hands on both VTP-43742 and VTP-38543.

VTP-43742 is an oral retinoic acid receptor-related orphan receptor gamma, or RORgt, inhibitor that is in mid-stage testing as a potential treatment of psoriasis and other autoimmune disorders. Early clinical trials suggested the drug may hold a strong clinical edge over other ROR isotopes compounds in treating psoriasis, and the drug's once-a-day oral dosing schedule could prove to be highly attractive to both patients and providers. This drug recently completed a Phase 2a proof-of-concept dose trial and is set to enter 16-week Phase 2 in the near future. 

VTP-38543 is a topical Liver X Receptor beta selective agonist that is being studied as a potential treatment for atopic dermatitis. Researchers believe the drug is capable of decreasing inflammation in damaged skin tissue while it also repairs damage done to the outer layer of skin. The compound is also applied topically, which should make it very easy to use. VTP-38543 is currently in Phase 2a testing.

Given Allergan's massive size, there's no doubt the company can easily afford to fund the transaction, so it's no surprise to see that shares skyrocketed in response to the news today.

Now what?

Psoriasis and atopic dermatitis affect tens of millions of patients in the U.S. alone, so if both drugs can find their way through the regulator approval process, they will be competing in a markets worth billions in annual sales. Given both drugs' ease of use and promising early clinical results, some analysts are projected that both compounds hold blockbuster potential. If that predictions turns out to be true, this deal could look like a steal for Allergan in hindsight.

Given the massive premium Allergan paid to wrap up this transaction, I think the chances of a competing bid coming through is quite unlikely. With Vitae's shares trading within a few pennies of the offer price, investors might want to considering taking a victory lap by selling shares today and putting their capital to work in other promising biotech stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.