Tesaro, Inc. (NASDAQ: TSRO) shares are rallying this week on rumors it's an acquisition target. The company, which markets two cancer drugs, recently increased its sales guidance because of growing demand. Given that shares are trading at a steep discount to where they were last year, it could be the perfect time for a suitor to come knocking. Here's what investors should know about this company and why it could be attractive to a buyer.

An important new weapon

Tesaro's first drug to win approval from the Food and Drug Administration was Varubi, for chemotherapy-induced nausea and vomiting. However, the drug that's probably most intriguing to acquirers is Zejula, a poly ADP-ribose polymerase (PARP) inhibitor that's approved to treat ovarian cancer, and that may someday win approval for use in breast cancer patients.

A businessman in a suit points at a dollar sign floating in front of him.


Zejula is one of three FDA-approved drugs designed to keep the PARP enzyme from repairing damaged cancer cells. The first of these drugs to win approval was AstraZeneca's (NASDAQ:AZN) Lynparza, which secured a green light in 2014 following trials that showed it to be effective in ovarian cancer patients with BRCA gene mutations who had received at least three prior chemotherapies. In December 2016, Clovis Oncology's Rubraca became the second PARP inhibitor to win approval, when it got an OK for use following two prior chemotherapies. Tesaro's Zejula won approval for use as a maintenance therapy for patients with ovarian cancer, regardless of BRCA status, in March 2017.

As it stands today, Lynparza boasts the biggest addressable market and the highest sales. Thanks to trials designed to expand its label, Lynparza can be used as a maintenance therapy in patients who are in complete or partial response to chemotherapy, regardless of their BRCA status; as of January 2018, it can also be used in patients with BRCA-positive, metastatic breast cancer. Zejula and Rubraca can also be used in the maintenance setting, but they've yet to win FDA approval for use in breast cancer.

Drug 2017 Change:
2017 vs. 2016
Q1 2018 Change:
Q1 2018 vs. Q1 2017
Lynparza $297 million 35% $119 million 100%
Rubraca $56 million N/A $19 million 163%
Zejula $109 million N/A $49 million N/A

PARP inhibitor revenue. Data sources: Q1 2018 and Q4 2017 earnings releases from AstraZeneca, Clovis Oncology, and Tesaro.

Closing the gap

Lynparza has had a big headstart in this class, but Zejula's trials could help the latter drug catch up quickly.

At the American Society of Clinical Oncology annual conference in June, phase 2 data for Zejula's use alongside Merck & Co.'s PD-1 inhibitor Keytruda in triple-negative breast cancer will be provided in an oral presentation. The abstract for this presentation shows a 29% overall response rate and a 49% disease control rate, which includes patients with stable disease.

The breast cancer data builds upon results reported in March showing that Zejula plus Keytruda may be effective in ovarian cancer. In a phase 2 study, 25% of patients resistant or refractory to platinum-containing chemotherapy had a complete or partial response to Zejula and Keytruda combination therapy, and the disease control rate was 68%. For perspective, overall response rates in platinum-resistant patients have historically ranged between 5% and 18%, and the response rate for refractory patients has been even lower.

Merck & Co. inked co-commercialization rights to Lynparza in 2017, so it's unlikely to be interested in pursuing a Zejula-based strategy. Tesaro won't mind, though, because it's developing its own PD-1 inhibitor, TSR-042. A study of TSR-042 in patients with MSI-high tumors is under way and depending on data, it could get filed for FDA approval in 2019. If it does, then Tesaro would be able to create a wholly owned combination therapy of Zejula plus PD-1 for these patients.

Outside of PD-1, there's also plenty of potential for Zejula's addressable market to increase. The company is evaluating Zejula plus Avastin, a common cancer drug, as a potential replacement for chemotherapy in treatment-naive ovarian cancer patients, and it's evaluating TSR-042 with and without Zejula in non-small cell lung cancer. Johnson & Johnson (NYSE:JNJ) is evaluating Zejula in prostate cancer, too; if that trial goes as planned, J&J hopes to file for approval in 2019.

Who could be interested

When Tesaro reported its first-quarter results, it increased its full-year guidance to reflect Zejula revenue of between $255 million and $275 million, and licensing and Varubi sales of between $55 million and $70 million. At the high end, that would reflect top-line growth of about 55% from 2017.

Zejula's potential expanded use in ovarian cancer, and potential new approvals in breast cancer, prostate cancer, and lung cancer, suggest that peak sales could be much higher, though. Toss in the fact that Tesaro is developing its own PD-1 drug, and the likelihood of a big biopharma being interested in acquiring it becomes even greater, particularly when you consider there are two more cancer drugs in early stage trials: TSR-022 and TSR-033.

Pfizer, AbbVie, Gilead Sciences, and Takeda Pharmaceutical are all on the list of big biopharma companies that have demonstrated a commitment to cancer in the past via acquisitions, so any of those companies could conceivably make an offer. It's also possible that J&J is interested, because it acquired $50 million in Tesaro stock when it licensed rights to Zejula in prostate cancer.

Having said that, it's best to focus on the company's chances to succeed on its own rather than to chase mergers-and-acquisitions rumors. It's anyone's guess whether another company will strike a deal with Tesaro, so investors shouldn't bank on an acquisition. Fortunately, Tesaro's got enough going on that I think owning it in growth portfolios makes sense, regardless of what happens, especially since its market cap has declined from more than $8 billion to less than $3 billion in the past year.

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.