As more key drugs come off of patent protection, one of the central themes in biotech this year is the buyout. Companies like AstraZeneca plc and Eli Lilly, that have been deeply stricken by the so-called patent cliff, will undoubtedly be on the lookout for new drugs or pipelines to compensate for falling revenue.

Fortunately, there are a fair number of smaller biotechs that could fill this need without breaking the bank. Chief among them, Chelsea Therapeutics (NASDAQ: CHTP) and InterMune, (NASDAQ:ITMN.DL) have bubbled to the top of many buyout lists. So, with this idea in mind, let's consider which company offers potential suitors the best opportunity. 

Chelsea offers its orphan drug Northera
Last month, the U.S. Food and Drug Administration, or FDA, approved Chelsea's drug Northera as a treatment for dizziness stemming from symptomatic neurogenic orthostatic hypotension, or NOH. The good news is that this is the first approved treatment for NOH.

The bad news is that the potential market is fuzzy because: NOH is poorly diagnosed, the FDA is requiring a large postmarketing study, and Northera's label will contain a black box warning about the increased possibility of hypertension. So, while analysts have suggested Northera could see peak sales anywhere from $300 million to $450 million, numerous hurdles lie ahead.

Because of these issues, Chelsea is said to be actively seeking either a partner to help commercialize Northera, or a buyer for the entire company. If management can't find either, the current plan is to launch Northera sometime in the second half of 2014.

That said, I think Chelsea is wise to seek a buyout here. At the end of the day, it would have to raise significantly more capital than the $45 million on hand to transition into a commercial operation and pay for a postmarketing study. Launching new drugs is expensive in its own right, and doubly so for companies brand new to this part of the business.

Besides Northera, Chelsea offers potential suitors an experimental drug, CH-4051, for Rheumatoid Arthritis that is currently in a mid-stage trial. 

InterMune counters with its orphan drug Esbriet
InterMune reported top-line data from a pivotal late-stage trial for Esbriet last month, where the drug easily met its primary and secondary endpoints as a potential treatment for idiopathic pulmonary fibrosis, or IPF. Investors and patients alike rejoiced over this news because IPF is a fatal disease with no treatment options approved by the FDA. InterMune shares have now risen 117% on the back of this stellar news, and the buyout rumors have started to swirl. Consequently, InterMune's market cap has ballooned to $2.8 billion, meaning that a buyout wouldn't come cheap. 

Why is InterMune a buyout target? Put simply, Esbriet is an orphan drug that is expected to become a blockbuster. Goldman Sachs analyst Terence Flynn believes Esbriet will see peak sales of around $1.3 billion. Beyond Esbriet, however, InterMune doesn't have a lot to offer a potential suitor. So, a deal would center chiefly around Esbriet's commercial value. 

Foolish wrap up
While I am optimistic about the upside potential of both companies, I think InterMune is a more attractive buyout candidate at the present time. Esbriet has a clearly defined target market and had stronger clinical trial results than Northera.

Presently, there are too many unknowns surrounding Northera's commercialization to get a good feel for how Chelsea should be valued. And I think the stock's volatile trading pattern, since Northera's approval, reflects this high degree of uncertainty.

That said, I think Chelsea would garner a higher premium than InterMune in a buyout scenario. Chelsea appears to be trading at a deep discount even under a pessimistic scenario for Northera's commercial prospects, which is probably because the market is anticipating a large secondary offering. In sum, I wouldn't be surprised if both companies end up getting bought out, but InterMune is this Fool's pick in a head to head comparison.


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