For The Real Relypsa Puzzle Look Beyond The Takeover

| About: Relypsa, Inc. (RLYP)

With AstraZeneca’s (NYSE:AZN) $2.7bn purchase of ZS Pharma and its hyperkalaemia project ZS-9 turning increasingly sour, its rival Relypsa (RYLP) became a prominent acquisition target. So the real surprise is not that Relypsa was sold, which happened this morning, but that its buyer should be the low-profile Swiss company Galenica (OTC:GNHAY).

This is not a perfect deal: Galenica investors have sent out a clear sign that the price is too high, while many Relypsa shareholders might actually be miffed that they are not getting more. Though the takeover has been approved by both companies, some might wonder whether it could flush out a more generous buyer.

Obvious potential acquirers include Astellas (OTCPK:ALPMY), which has an interest in hyperkalaemia, and Actelion (OTCPK:ALIOY), which had tried and failed to buy ZS Pharma (NASDAQ:ZSPH) and reported a decent set of second-quarter numbers today. Actelion’s failure to buy ZS was a blessing, and even ZS’s eventual buyer, Astra, might swallow its pride and look at Relypsa.

Overrated

That ZS-9 was not all it was cracked up to be became clear just a day after Astra announced its $2.7bn acquisition, and the other shoe dropped with a US complete response letter in May (Astra’s reckless $2.7bn deal hits the regulatory buffers, May 27, 2016).

One of ZS’s biggest cheerleaders was the Morgan Stanley analyst Andrew Berens, who published a short thesis on Relypsa and called ZS Pharma best in class. An amazing 40% of Relypsa’s float was held in short positions, according to the latest Nasdaq data, and Relypsa short sellers must be wondering what has hit them this morning.

Still, while Galenica’s takeout values Relypsa at about $1.5bn, and the $32-per-share deal gives investors a 60% return overnight, some longs might want more. Relypsa traded above $32 under a year ago, and those who bought into its secondary offering at $38.50 in March 2015 might be particularly unhappy.

Based on EvaluatePharma’s calculation of sellside forecasts ZS-9 has an NPV of $3.2bn, and its originator was bought out at an enterprise value of $2.5bn. Relypsa’s US-marketed rival, Veltassa, has a $1.9bn NPV, and including $300m of cash and $150m of debt Galenica is buying the group at an enterprise value of $1.3bn.

Relypsa today opened just under $32, suggesting that investors think this is a done deal. One possible deterrent to other bidders might be that Galenica already has a hold on Veltassa via an ex-US and Japan licensing deal it signed last year, worth $40m up front.

Springboard

One reason behind the takeover is therefore to give Galenica full rights to Veltassa, but an even more important one is to act as a springboard for Vifor Pharma, the business Galenica hopes to split off next year.

Earlier this year Søren Tulstrup, Vifor’s chief executive, boasted to EP Vantage of a $1bn+ war chest (Vifor Pharma bets on portfolio before potential split, May 9, 2016). However, just weeks later Mr Tulstrup quietly left the company; today Galenica said Relypsa marked the final stage of its separation into Vifor and Galenica Santé.

Galenica is noteworthy for having been last year’s top riser in EP Vantage’s mid-cap pharma universe, though the Relypsa deal is in cash, financed with a loan from Credit Suisse; Galenica hopes to refinance this with the proceeds of a flotation of Galenica Santé.

Despite the promise Galenica was off 8% today, showing investors’ view that Relypsa is overpriced. Jefferies, which rates Galenica underperform, expressed surprise that Galenica was putting all its eggs into the Veltassa basket, especially as US launch has been sluggish and it is unclear how the drug would be sold given Relypsa’s existing deal to use Sanofi’s (NYSE:SNY) nephrology sales force.

Indeed, a bearish view is that ZS-9’s troubles at the FDA only spell more scrutiny for Veltassa, which already carries a black box warning of drug-drug interactions that Relypsa has applied to change. This is one of several issues that anyone considering trumping Galenica will need to think about carefully.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.