Anyone who has followed Tesaro's (NASDAQ: TSRO) tumultuous journey over the past couple of years might conclude that people familiar with matters that occur behind closed doors at this company have business media outlets on speed dial. Rumors that the cancer drug developer was exploring a sale began circulating before its first drug, Zejula, earned FDA approval in early 2017.
Although Tesaro buyout rumors have cropped up several times since Zejula's approval, the latest hints of an acquisition pushed the biotech stock up 32% in a single day. A buyer willing to pay a premium could push the stock up even higher, but investors have been burned enough times to be extra cautious. Here's what you need to know this time around.
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Approval was the easy part
Tesaro's market cap briefly peaked above $10 billion just ahead of Zejula's FDA approval in early 2017 because investors were excited about compelling ovarian cancer trial results supporting its application. Treatment with Zejula following standard chemo lengthened progression-free survival for a genetically defined group of patients to 21 months compared to just 5.5 months for those given a placebo.
Zejula is a PARP inhibitor that works along the same lines as Lynparza from AstraZeneca (AZN +0.00%), Rubraca from Clovis Oncology, and Talzenna from Pfizer (PFE 1.60%). Despite encouraging data for Tesaro's drug, tussling with AstraZeneca and Clovis for ovarian cancer patients has proven more difficult than expected.
Ahead of Zejula's launch, analysts predicted that annual sales of the therapy would exceed $3 billion. Third-quarter sales that came in at just $63 million suggest initial estimates didn't factor in how tough it would be for Tesaro to launch Zejula on its own amid competing PARP inhibitors.
Why Tesaro is more attractive lately
Tesaro's hammered market cap is the biggest reason a sale seems a lot more likely now. Since Zejula earned its first FDA approval, Tesaro's market cap has tumbled 76% to a far more reasonable level of $2.0 billion at recent prices. Although Tesaro's launch hasn't been terribly successful, there are reasons to believe a bigger company could drive Zejula sales up near $1 billion annually.
AstraZeneca's Lynparza earned an approval to treat breast cancer patients who test positive for BRCA mutations in January, and U.S. sales of the treatment during the first nine months of 2018 jumped 168% compared to the same period last year. Lynparza hasn't reached blockbuster status yet, but it's heading that direction fast. Now that bigger players have seen what a PARP inhibitor can do in the commercial setting, Tesaro's drug of the same class no longer looks like a lost cause.
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What to look for next
Tesaro is testing Zejula in a combination study with its own experimental PD-1 checkpoint inhibitor, TSR-042, and one that's already an enormous success, Keytruda from Merck & Co. (MRK 0.02%). Checkpoint inhibitors work extremely well for some patients, but a majority don't experience much of a benefit.
If Tesaro can show the world that Zejula helps more patients react to checkpoint inhibitors, the stock could regain a great deal of its lost luster. Unfortunately, mixed preliminary data makes it hard to guess Merck's intentions or those of its peers right now. Investors should know that Tesaro originally licensed Zejula from Merck, and the big pharma is entitled to a double-digit royalty percentage in the teens on worldwide Zejula sales.
In June, investigators showed us that tumors among 8 out of 12 patients with triple-negative breast cancer and BRCA mutations shrank following treatment with Keytruda plus Zejula. The Keynote-162 study also enrolled people with ovarian cancer, and follow-up results from the first 56 evaluable patients released in September weren't as encouraging as earlier breast cancer data. Just 11 patients showed a 30% or greater decrease in tumor lesion size. That might be enough to attempt a larger study, but the results aren't worth any excitement.
Tesaro's own checkpoint inhibitor, TSR-042, doesn't look like it's going anywhere either. With this monotherapy for patients with advanced-stage lung cancer, just 15 of the first 47 evaluable patients showed partial responses. While initial data for the candidate isn't bad, it's hardly good enough to expect it to compete with established blockbusters as a me-too drug.
Zejula could have a shot as a prostate cancer treatment, and Johnson & Johnson (JNJ 0.76%) is paying for the studies. Tesaro sold prostate cancer rights to J&J in return for $35 million up front and a tiered double-digit royalty percentage on any prostate cancer sales down the road.
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Don't hold your breath
You shouldn't buy stocks just because you hope they'll be acquired at a premium, but Tesaro doesn't look like a great option for deep-pocketed drugmakers that want to expand their oncology presence. Exclusive rights to Zejula might be worth a few billion to a company such as Bristol-Myers Squibb, but not while the drug is tangled up with Merck and J&J.
Big biopharma companies make terrible decisions from time to time, so I wouldn't rule out the possibility of an offer for Tesaro in the near future. At the moment, though, it doesn't seem likely.
