Shire's Potential Offer For NPS Pharma Is Too Low

Jun.11.14 | About: NPS Pharmaceuticals, (NPSP)

Summary

Rumors that Shire is set to acquire NPS Pharma have sparked a nice rally in NPS' share price.

Although NPS Pharma said that it is not talking, it does not mean it will not talk soon.

$40 per share is too low, as I believe that NPS is worth more.

NPS is still trading at a discount over its peers, despite the stock being an acquisition candidate.

NPS Pharma (NASDAQ:NPSP) has been a victim of a vicious sell-off in the biotech sector (NASDAQ:IBB), but the stock is now 50% higher than it was a month ago, although it is still more than 10% off its early-March highs. NPS is up 20% since rumors surfaced that Shire (NASDAQ:SHPG) is about to acquire NPS for $40 per share. Although NPS management said that the two companies are not talking, this does not mean that the deal will not happen in the future. However, I believe that a $40 price tag is far too low and that Shire would need to raise the offer significantly in order to acquire the company. I believe that anything below $55 is a bargain for Shire and a loss for NPS shareholders.

Rumors

On May 30, rumors surfaced that Shire is preparing a $40/share bid to acquire NPS Pharma. Shire has allegedly set up a $5 billion loan facility to buy a company in the U.S. NPS' management has denied that the two companies are talking. Shire itself might be an acquisition target, and this might be a way for the company to avoid a hostile takeover. Although there is no official confirmation about the potential offer, it does not mean that it is not happening. However, I believe that NPS is worth more than $40 per share, and Shire would need to significantly improve its offer in order to buy the company.

NPS is worth $58 or more

In my previous article on NPS, I said that my price target for NPS is $62. The main thesis for my bullish price target was the strong revenue growth since the launch of Gattex, which still has more room to expand significantly. The other important part of the thesis is the late-stage drug, Natpara. The PDUFA date for Natpara is October 24, 2014, and Natpara should be approved before the end of 2014. Natpara has potential to exceed Gattex, and I stated in my previous article that peak sales should be above $900 million if the company penetrates just 10% of the market for hypoparathyroidism.

The situation has changed slightly since the article was written. NPS reported Q1 earnings and revenue that were below analyst estimates. NPS experienced lower demand in Q1, mostly because of bad weather, and the company trimmed its FY 2014 Gattex revenue guidance from $110 million-$120 million to a $100 million-$110 million range.

My $62 price target was based on a 2015 P/S ratio of 15, which I thought appropriate given the comparisons with its peers Alexion (NASDAQ:ALXN) and Biomarin (NASDAQ:BMRN), which had 2015 P/S ratios above 15 at the time. I still believe that NPS should be trading at a premium over its peers, and the premium should be based on NPS' higher growth prospects. At the current valuation levels, NPS is still undervalued to Biomarin and Alexion, and should rise 20% to catch up to Biomarin's 2015 P/S ratio and 40% to catch up to Alexion. The growth expectations for NPS have been lowered in the last couple of months, as the company trimmed its 2014 revenue guidance (mostly due to adverse weather conditions in Q1), and my new price target for NPS is $58. This is the minimum price that Shire would need to pay, and anything below that would not be satisfactory for NPS shareholders.

Source: Yahoo Finance

Conclusion

Based on the current estimates and forward valuation, NPS is still undervalued when compared to its peers. This also means that Shire's potential $40 offer is too low and needs to be raised significantly. I believe that NPS is worth at least $58 per share, which translates into 65% upside from the current price. The growth prospects are promising, Gattex sales are encouraging and Natpara has potential to exceed Gatex's peak sales.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in NPSP over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.