Tesaro (NASDAQ: TSRO) is the latest biotech to see rumors swirl of potential mergers and acquisitions. On the heels of launching Zejula earlier this year, the company could fetch as much as $10 billion in a deal, according to industry watchers. Whether this company gets sold, and at what price, is anyone's guess, but given the company's run by Lonnie Moulder, a proven leader with one successful deal already under his belt, it wouldn't shock me if Tesaro's on the block.
What's for sale
Tesaro's two commercial-stage drugs are Varubi and Zejula, and both of them arguably have nine-figure sales potential.
Varubi, a nausea and vomiting treatment for chemotherapy patients, was the first of the two to win FDA approval, and sales of it have been small so far. But that could change if the FDA approves an IV formulation that opens up its use to more patients.
Meanwhile, Zejula won the FDA's nod for use in ovarian cancer patients in March, and while it competes against drugs from AstraZeneca (NASDAQ:AZN) and Clovis Oncology (NASDAQ:CLVS) that work similarly, it has the broadest label, and a competitive price tag, so it could wind up being the top seller in its class.
In Q1, Varubi's sales were only about $2 million. However, the company has submitted an application for approval for an IV solution that -- if approved -- could cause that number to grow much bigger. Varubi is licensed to Tesaro by Opko Health, and it's designed for use alongside common anti-nausea and anti-vomiting drugs, such as Zofran, to control delayed-onset nausea and vomiting.
Perhaps, Varubi's most comparable competitor is Merck & Co.'s Emend, which like Varubi, is a NK-1 antagonist. Emend's been around since 2003, and its sales in the first quarter were $133 million. While Emend can be effective, it's contraindicated for use in some patients taking medicines that interact with a liver enzyme, and it can require dose adjusting for patients taking dexamethasone, a corticosteroid that's used alongside drugs such as Zofran.
It remains to be seen if Varubi can elbow away market share and grow sales, but its expected to become available in Europe this quarter, and an approval of an IV formulation could provide it with a dosing advantage that allows its use in more patients.
Zejula's potential, however, could be even greater. It's the only drug in its class to win FDA approval for use in ovarian cancer patients regardless of their BRCA-mutation status, and its $9,833-per-month pricing (for 200 mg) appears to undercut AstraZeneca's Lynparza and Clovis Oncology's Rubraca. According to research by America's Health Insurance Plans, the wholesale acquisition cost of 300 mg of Lynparza is $134,400 per year, and Rubraca costs about $164,880 per year.
The combination of a larger addressable patient population than these other two drugs (BRCA positive mutations account for only 15% to 20% of ovarian cancer patients), plus competitive pricing (depending on dose adjustment), could mean Zejula outsells Lynparza and Rubracra. For comparison, Lynparza sales clocked in at a $228 million annual clip in Q1, and Rubraca racked up $7 million in sales during its first quarter on the market.
How much is it worth?
Cancer drug development isn't easy, and the failure rate of clinical trials in the indication is high. As a result, drugmakers have been willing to pay handsomely to acquire cancer drugs that have already made their way through the FDA gauntlet.
That's undeniably premium pricing, and biotech M&A has cooled off a bit lately amid worries of push-back on drug prices, but that hasn't stopped some industry watchers from putting Tesaro's value in a deal at lofty levels. The company's shares already give it a market cap north of $7 billion, and Wall Street's rumor mill is guesstimating a deal price of about $10 billion.
Contributing to that rich valuation is the potential to expand Zejula earlier in ovarian cancer treatment and a chance for use in breast cancer patients someday. Tesaro's also working on a PD-1 inhibitor it can use alongside Zejula, and that's particularly intriguing because PD-1 checkpoint inhibitors that are currently on the market are bringing in multiple billions of dollars per year in sales.
Ultimately, there's no telling what kind of offers Moulder and his team may be fielding. Sanofi was outbid by Pfizer in the Xtandi deal, so it could be kicking Tesaro's tires. Gilead Sciences has been saying for a long time that it wants to make a big push into oncology, and it's got a mountain of cash to do a deal. Pfizer could still be willing to cut another deal, and I wouldn't count out other big-cap pharmaceutical companies, either. For example, Johnson & Johnson recently did a deal to buy Actelion that zapped some of its cash, but it still has enough financial flexibility to make a bid.
Overall, buying Tesaro's stock solely on the potential for a deal isn't smart. Instead, investors should only consider owning Tesaro on its merits as a standalone company. Fortunately, its fundamentals appear to back up owning it, regardless of whether a suitor emerges, so this company could be a good addition to risk-tolerant investors' portfolios.