In April, specialty pharmaceutical company Shire (NASDAQ:SHPGY) snatched up biotech Transkaryotic Therapies (NASDAQ:TKTX) for $1.6 billion. That may seem like a lot to pay for a company that had only $78 million in revenue last year while turning in a $66 million loss, but I think Shire got a great deal.

Transkaryotic has a ton of value in its pipeline with the drugs I2S, Dynepo, and GA-GCB. We recommended the company in our Motley Fool Hidden Gems newsletter in April 2004 -- at the time, we saw the promise of these programs, and that foresight scored us a triple.

Purchasing Transkaryotic's drug portfolio should pay off very soon for Shire. I2S, a drug that treats a rare genetic disorder called Hunter syndrome, tops the list. Though it's not yet on the market, it could launch fairly soon and prove very valuable.

My optimism stems from positive phase 3 trial results that Transkaryotic released yesterday. I2S showed a statistically significant benefit when compared with a placebo in a number of different endpoints. Because the trial clearly shows that the drug works, the company will file for approval in the United States and Europe later this year. There is no approved product on the market for Hunter syndrome, which improves the odds that the FDA will give it the green light, and the clinical package looks similar to comparable drugs already on the market. I expect that I2S will be approved in late 2006.

Although Hunter syndrome affects only an estimated 2,000 patients worldwide, the market size is around $400 million because the costs of enzyme replacement drugs such as I2S are so high. There aren't any other drugs in development to treat Hunter syndrome, so I2S will not face any competition. With such a monopoly, the drug should be able to capture a very large percentage of this market.

If I2S can penetrate 50% of the market, for example, sales will be in the ballpark of $200 million annually -- and such a valuable product will no doubt boost Shire's top line. Add that to the $100-plus million sales potential of Replagal -- which is already approved and doing well -- and Transkaryotic's enzyme replacement drugs will bring in more than $300 million per year in revenue for Shire.

Dynepo and GA-GCB, Transkaryotic's other drugs, are wild cards because their ability to capture market share from the entrenched products in their respective markets is difficult to predict. Dynepo will square off against Johnson & Johnson's (NYSE:JNJ) Procrit and Amgen's (NASDAQ:AMGN) Aranesp, both of which are huge blockbusters. GA-GCB will compete with Genzyme's (NASDAQ:GENZ) Cerezyme, which is an $800 million drug that has been the standard of care for Gaucher disease for years.

With some strong promotional efforts, I'd expect some success from Dynepo and GA-GCB. The markets they target are immense, so even a small market share would go a long way. If they could pull in a combined $200 million, Transkaryotic's drugs have the potential to bring in annual revenues in the vicinity of $500 million.

This is all a very rough sketch, of course, and the actual sales figures over the next few years could vary quite a bit from these estimates. If sales are anywhere close, though, Shire will come out way ahead in the long run.

Investing lesson
Too many biotech investors are attracted to cutting-edge technologies that carry high risk with a minuscule chance of high reward. More often than not, the kinks in those kinds of companies have yet to be worked out -- and there's no sense in hanging around for the troubleshooting.

Instead, I like to go after the "near-sure thing" -- that is, small companies with low-risk R&D programs that have an upside not yet priced into the stock. Such companies have proven drug development technologies and drug targets that are already known to be important for treating the disease. While there are no guarantees that the drug will work, the odds are in your favor.

Transkaryotic was trading at $10.97 when it was recommended to Hidden Gems subscribers. I felt the odds were in our favor then because the company's enzyme replacement therapies were proven approaches for treatment. The icing on the cake was that I2S was not yet built into the company's market cap.

Biotechs (like Transkaryotic) that have one or two solid drugs but an otherwise thin pipeline can be ideal acquisition candidates -- and thus good investments if you spot them early. Large companies looking to pick up a drug to drive growth are very interested in products that are close to launch. And small companies can't live off of the success of its first drug forever. If it lacks a follow-up product, the company will eventually stagnate. So it makes sense to consider merging with a larger company that has a broader portfolio.

If you can spot those companies before a suitor comes along, you'll often see an attractive buyout premium. This happened with Transkaryotic, although I admit I would have been just as happy if the company had stayed independent for a bit longer.

The Foolish bottom line
It is reality that many acquisitions don't work out as intended. However, I think Shire will come out ahead in the long run, despite what was initially viewed as a steep purchase price. Replagal and I2S are clear winners with significant long-term revenue potential. The benefits of Dynepo and GA-GCB are less certain, but if they can gain some traction once they are promoted, they could also be valuable additions to Shire's portfolio.

Transkaryotic exemplifies one trait we look for in small, unknown companies: superb leadership that works to create value for its shareholders. The Hidden Gems approach is simple, and it has beaten the market since the newsletter's inception two years ago. If you'd like to see how it can work for your portfolio, Fool co-founder Tom Gardner is offering a risk-free 30-day trial. You've got nothing to lose. Click here if you'd like to learn more.

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Motley Fool Rule Breakers biotech analyst Charly Travers does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.