Shares of small-cap orphan drug developer Raptor Pharmaceutical (NASDAQ:RPTP) surged 24% in Wednesday trading, after Reuters reported that investment bankers have been brought on board to discuss a sale of the company.
Raptor has declined to comment on the rumors, however, and with Raptor stock now down 5% in Thursday morning trading, enthusiasm for the development may already be waning. But could it be that today's 5% retracement is giving investors a chance to take a second bite at the apple on Raptor Pharmaceutical stock?
Here are three things you need to know to decide.
Thing No. 1: This deal would be a good deal (for Raptor)
Confirming Reuters' report yesterday, analysts at Oppenheimer commented early this morning with comments that Raptor selling itself to an acquirer is a "good idea." Oppenheimer believes that a deal could raise Raptor's share price as high as $7 or $8 a share.
Raptor currently costs just $5 and change, the implication being that if the rumors are true, Raptor Pharmaceutical stock could soon be good for a 45% profit.
Thing No. 2: The rumors may be true
A second analyst, JMP Securities, has chimed in to suggest that any of Horizon Pharma (NASDAQ:HZNP), Shire (NASDAQ:SHPG), or even Allergan (NYSE:AGN) could potentially be interested in acquiring Raptor.
According to the ratings watchers at TheFly.com, JMP is even more gung-ho for this deal than Oppenheimer. Not only does JMP assign a higher price target to Raptor stock -- $9 per share -- but it's also enthusiastic enough about the deal that JMP is upgrading Raptor stock to buy (whereas Oppenheimer still has the stock at perform).
Thing No. 3: JMP's likely suspects actually aren't entirely unlikely
With Raptor stock currently selling for just $5 and change, the entire company is valued at a market capitalization of just $460 million. Posit a buyout price of $9 a share, and the entire company would cost at most $767 million. So how likely is it that any of the three firms JMP named as likely suitors could afford to buy Raptor Pharmaceutical?
Actually, pretty likely. The smallest of the firms named, Dublin-based Horizon Pharma, is 6 times Raptor's size today, and has $860 million on its balance sheet -- plenty of money to accomplish an all-cash buyout should Horizon be so inclined. Shire has less cash on hand, but at nearly $36 billion in market cap, Shire could conceivably make an all-stock bid for Raptor (or finance a buyout with debt). Allergan, meanwhile, is the biggest of the three firms named. With $96.5 billion in market capitalization and with $1.11 billion in the bank, Allergan could go either route, paying in cash or in stock.
The most important thing
The bigger question is whether any of these firms would want to own Raptor Pharmaceutical, which after all isn't currently profitable. That's not necessarily an obstacle, as Raptor has a decent pipeline of products in development, and an established business to boot, bringing in $94 million in annual revenue. But lack of profits would still be a disincentive to an acquirer. The valuation on the stock could be another.
At today's 5.2 times sales valuation, Raptor is currently cheaper than either Shire (5.6 times sales) or Allergan (6.4 times sales). It's more expensive than Horizon, however, which at 4 times sales would have to pay a very big premium to its own P/S ratio to acquire Raptor -- and dilute its own profitable business with Raptor's money-loser in the process. Accordingly, I'd say Horizon is probably the least likely of the three bidders JMP named to make a bid for Raptor.
That leaves Shire and Allergan -- profitable, big businesses both -- as the most likely suitors. Whether either one would want to own Raptor, however, remains anybody's guess.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 290 out of more than 75,000 rated members.
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