Who Will Buy Relypsa, And At What Price?

| About: Relypsa, Inc. (RLYP)

Summary

Small biopharma Relypsa soared last week as Reuters and others reported the company was seriously considering putting itself up for sale.

Interest should be high given the huge premium competitor ZS Pharma fetched in November, and the fact that the company has the first new drug for the hyperkalemia market in several decades.

In this article, we run down the most logical list of suitors and at what price Relypsa would likely be acquired.

The company will do fine as a stand-alone entity, even if value would be created more quickly in the likely scenario of being purchased by a larger player.

A small biopharma stock called Relypsa Inc. (NASDAQ:RLYP) has been in the news this week. The stock soared more than 65% on Thursday on news from Reuters and other sources that the company was seriously considering putting itself for sale. The stock gave back some of those gains on Friday, but ended the week approximately 50% higher than last Monday.

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These shares are likely to be volatile in the coming weeks and months and any buyout talks and rumors around them will ebb and flow driving the stock up or down as they do. However, as I have stated many times on these pages starting in January; Relypsa being acquired by a larger player in the industry makes too much sense not to have at least a 50% chance of occurring in the foreseeable future.

There are a couple of reasons I believe this to be the case. First, the company's primary competitor in the hyperkalemia market ZS Pharma (NASDAQ:ZSPH) was acquired at a large premium in a $2.7 billion purchase by drug giant AstraZeneca (NYSE:AZN) in early November. The company's drug ZS-9 should be approved shortly or if the FDA wants to wait for more safety data sometime late this summer. Relypsa's Veltassa was approved late in 2015.

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Both drugs have been shown in trials to be effective in treating hyperkalemia, which is a buildup of potassium in the blood stream and believed to be a $2 billion annual market according to analysts. These are the first new compounds to treat this condition in several decades. Both drugs have pros and cons. Veltassa obviously has first mover advantage being on the market since January and demonstrating a solid acceleration of script growth. It also appears to be working better on patients with hypertension and peripheral edema, a good portion of the hyperkalemia population.

ZS-9 is slightly faster acting and does not appear to bind with other drugs which got Veltassa a black box label that should be reduced or eliminated in the future as the company provides more drug interaction data. This label affects a small portion of potential patients and does not seem to be affecting sales growth. I expect ZS-9 to garner the majority of the Acute part of the hyperkalemia market thanks to its faster-acting nature. Veltassa should be a winner in the larger Chronic part of the space.

For the sake of argument, let's project that over the long run, the two drugs split this $2 billion a year market. So who are the likely bidders for Relypsa? Obviously, the losers in the bidding war for ZS Pharma seem likely to look at Relypsa as well. Wedbush's Liana Moussatos, a five-star ranked analyst (TipRanks), that has been dead on so far in following Veltassa's path to approval and rollout; reiterated her Buy rating and $52 price target on Relypsa on Thursday.

She believes Sanofi (NYSE:SNY) is the most likely acquirer noting "We previously looked at the phosphate binder market and based on Symphony Health estimates for total prescriptions, we calculated Renagel and Renvela (both have the sevelamer polymer as the active ingredient) together have over 80% of the total phosphate binder annual prescriptions and that Sanofi has been clearly successful in our view at counter detailing metal-based phosphate binders. Sanofi and Relypsa have a two-year co-detailing contract for Veltassa and we believe Sanofi's involvement - especially with their salespeople's presumed long-term relationships with nephrologists who prescribe phosphate binders - is likely to accelerate Veltassa uptake. Because Veltassa is a non-metal polymer like Sanofi's phosphate binders, we see it as a great addition for their salespeople. Consequently, we would not be surprised if Sanofi is the eventual acquirer."

Merck (NYSE:MRK) and GlaxoSmithKline (NYSE:GSK) also have been mentioned as interested parties and both have sales forces in the cardiovascular markets so this would make sense. In addition, Allergan (NYSE:AGN) and Pfizer (NYSE:PFE) should both be on the prowl to build out their pipelines now that the government has kiboshed their $150 billion merger.

An acquisition would solve Relypsa's challenge of building out its own salesforce as Veltassa is its first commercialized product on the market. A larger player could just fold the product along with the others in its product portfolio and train its existing sales representatives to just add it to its arsenal. This would obviously allow for much faster sales growth and garner market share in a rapid fashion as well.

So what is Relypsa worth if we believe it will split the hyperkalemia market between these two firms? Taking out the cash on ZS Pharma's balance sheet at the time it was acquired; AstraZeneca paid two times the $1 billion in annual sales ZS-9 should eventually garnered in this scenario. Relypsa has a market cap of just over $700 million after subtracting the current cash on its balance sheet. At a similar valuation to ZS Pharma, the acquiring price would be in the mid to high $60s.

Sentiment now on the sector is not as "risk-on" as it was back when bidding was going on for ZS Pharma as the biotech/biopharma sector is just coming off its deepest bear market since the financial crisis. Let's put a 25% to 35% discount on Relypsa's valuation, this gives us a buyout range from the low to high $40s. Substantially above $22.50 a share, the stock currently sells for at the moment.

To conclude, I think Relypsa will do just fine as a stand-alone entity and I plan to hold even if nothing comes out of these acquisition talks. This is why it will remain in my list as well as the Biotech Forum portfolio. However, its full value would be reached more quickly in a buyout and given the potential of Veltassa; I still think that it is the most likely scenario.

Disclosure: I am/we are long AGN, RLYP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.