Tesaro Takeover Premium Will Probably Disappoint

(Bloomberg Gadfly) -- It's been almost exactly a year since a positive trial result for ovarian-cancer drug Zejula doubled Tesaro Inc.'s share price. Since then, the company's stock has soared even more on near-constant takeover speculation, given another boost by a Wall Street Journal report Wednesday afternoon that it has asked for initial offers.

But the prospect of competition for the firm's lead drug and the sheer audacity of its valuation combine to make a deal exceedingly unlikely at the price it probably wants. Interest is "lukewarm," according to the Journal, and it's likely to stay that way. 

Your view of Tesaro's takeout prospects depends on which side you take in a religious war. Investors and analysts are divided on whether Zejula is the best of a group of drugs called PARP inhibitors, or if there isn't all that much difference between the drug and two on-market competitors, Lynparza from AstraZeneca PLC and Rubraca from Clovis Oncology Inc. Tesaro's initial stock-price boost came from trial data last summer suggesting its drug works better and in a larger population than expected. It then netted a rapid and broad FDA approval to treat ovarian cancer.

But recent positive data from AstraZeneca weakened the belief Zejula will be the runaway leader in this drug class. And results are expected soon from a trial of Rubraca in a population of ovarian-cancer patients similar to the one Zejula is approved to treat, posing an even bigger threat. 

Tesaro's valuation -- and particularly the idea of paying a premium on top of it -- arguably rests on the drug dominating the others in its class for years to come. That's far from a settled conclusion. 

Tesaro arguably has some advantage even if Zejula's competitors are relatively similar. The company has suggested the drug's launch is off to a great start, and it has an aggressive program of trials designed to extend its use to other cancers and in combination with other drugs. But neither its trial strategy nor its short head start in treating some patients justifies its premium to its competitors.

There's a vastly cheaper avenue into the PARP market via Clovis, for any buyer that thinks these medicines are similar and is confident a future development plan and marketing can close any gap. At a 30 percent premium to its current share price, Tesaro would cost 8 times its expected revenue in 2020, compared to 5 times for Clovis. At a 60 percent premium, which SunTrust suggested was a possibility in a research note Thursday, Tesaro would cost nearly 10 times its expected 2020 revenue. Unless Clovis's Rubraca flops badly in its ovarian cancer trial, this comparison will weigh on Tesaro's premium hopes.   

Nothing can be ruled out in pharma M&A, where a lot of cash-rich companies are hungry for deals, and there's a storied history of overpaying for assets. But having cash isn't an excuse to be profligate.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.