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"Pay no attention to the man behind the curtain!"

L. Frank Baum, The Wonderful Wizard Of Oz

For a company that owes about 45% of its post-March 28 market cap to buyout rumors, biopharma Amylin Pharmaceuticals (AMLN) continues to be stubbornly silent on the question of whether or not the company is for sale, at what price, and potentially to whom. Management not only refused to address the rumors on its first quarter conference call, but likewise at the annual shareholder meeting.

That leaves investors in a curious position - investors are ostensibly finding out more about what's going on at Amylin from Bloomberg than they are from their own management team. All we really know for certain is that Carl Icahn decided to drop his suit against the company after a private chat with the CEO; the rest is rumor and information from people "familiar with the matter".

Past The First Round, Or Not Even Playing?

Bloomberg was the first to break news that Amylin had rejected a $22 per share bid from Bristol-Myers (BMY) in late March. Now the financial news provider is reporting that a host of well-known Big Pharma names have expressed interest in the company, and have signed confidentiality agreements to access more information on the company and its key drug Bydureon, a once-weekly follow-up to the very successful 2x/day Byetta.

Bloomberg's reporting certainly has the ring of truth to it. Reportedly Pfizer (PFE), AstraZeneca (AZN), Merck (MRK), Sanofi (SNY), Takeda, Roche (OTCQX:RHHBY), and Bristol-Myers all want to kick the tires. The only name missing from that list that would seem to me like a logical candidate would be GlaxoSmithKline (GSK).

As I've written before, almost any company with an existing diabetes salesforce could easily justify paying $30 a share for Amylin. Beyond that point, it's a question both of the sales potential of Bydureon and the desperation of the buyer. AstraZeneca, for instance, badly needs a near-term boost. On the other hand, if Sanofi can combine Bydureon with its own insulins, that could lead to a much higher ultimate sales number for Bydureon, a more easily-defended insulin franchise for Sanofi, and a higher bid for Amylin shareholders.

Of course, there's at least a chance that there's no real action at all. Publicly, management seems much more interested in finding a distribution partner for Bydureon in Europe. What's more, Credit Suisse is reportedly one of the banks Amylin has hired to manage the bidding/sales process, but analyst Catherine Arnold continues to publish research reports with an "Outperform" recommendation. That said, I'm frankly not sure what the rule about research restrictions is today - I believe the restriction only comes into play if an investment bank's role has been publicly acknowledged and/or if the analyst comes into that knowledge on their own.

Is Metreleptin An Under-Appreciated Asset?

While Amylin reported disappointing first quarter results a few weeks ago, I don't think too many investors really care. Sales of Bydureon were about one-quarter light relative to Street expectations, and COGS and SG&A were both higher than expected. Although this may raise valid questions about the long-term profitability of the Byetta-to-Bydureon switch among the bear camp, compared to the M&A buzz it's like holding a match next to a stadium floodlight.

Along similar lines, I wonder if the potential of the company's metreleptin product is getting overlooked in the glare. A lot of Amylin longs seem inordinately optimistic about the company's potential in obesity, but this orphan drug for rare forms of lipodystrophy could have more potential than investors think.

There aren't a lot of patients in the target market - maybe a thousand or so in the U.S. and likely a similar number in Europe - but that is true for drugs sold by the likes of Alexion (ALXN), BioMarin (BMRN) and Sanofi (Genzyme) as well. Interestingly, while the going rate for most rare orphan drugs seems to be about $250,000 to $350,000 per year, most expectations for metreleptin pricing fall around $100,000.

Now I don't want to suggest that metreleptin is another Soliris in the making. The company may never get more than very limited labeling, pricing may in fact be around $100K, uptake may be unimpressive and so on. But even low-end estimates would seem to point to $100 million in revenue potential and perhaps double or triple that with better pricing.

A Bid Solves A Lot Of Problems

If Amylin is seriously considering a sale, and as a shareholder I hope they are, it would certainly solve a lot of challenges for the company. The relatively limited resources of Amylin has played a role in the underwhelming initial launch of Bydureon, despite the fact that the drug has very attractive efficacy not only in controlling blood glucose, but in losing weight and improving long-term cardiovascular health as well.

Moreover Amylin is not going to see the road ahead get easier. Breaking up with Lilly (LLY) came at a cost not only in terms of marketing, but financial obligations as well. What's more, Bydureon would certainly be a more compelling drug if it were available in a pen (which it should be by year-end) and/or if it were available in combination with insulin.

A Bydureon-insulin combo may be difficult for Amylin to do on its own, though. With competing GLP-1 programs, there are no compelling reasons for Sanofi, Lilly, or Novo Nordisk (NVO) to cooperate with Amylin on such a combo. While these companies couldn't prevent Amylin from studying combinations on its own, they could throw up a lot of roadblocks in terms of transfer pricing, copyright/trademark, and so on.

The Bottom Line

The more I think about it, the more I think Sanofi would be a great home for Amylin - not only would there be synergies with the insulin business, but Bydureon would replace Sanofi's inadequate GLP-1 drug, and Genzyme would certainly know how to handle a metreleptin rare disease launch. That said, I'm not dismissing suitors like Takeda, Roche, Bristol-Myers, or Astra - every one of these companies would make a certain amount of sense as a buyer - I just think Sanofi can probably justify a better price.

I would never recommend buying a stock on M&A speculation, and I'm not changing my mind now. I do believe that Amylin could be worth $30 in a sale, and maybe $35 to some bidders. I also believe, though, that the stock is overpriced on the basis of what management can do on its own. As a shareholder, I'm willing to take the risk of that M&A premium vanishing, but I won't advise others to follow me.

In the meantime, a little more clarity from management would be welcome. I can respect an honest "no comment", but there's a huge elephant in Amylin's boardroom and sooner or later they are going to have to acknowledge it and tell investors what they mean to do about it.

Source: Amylin Goes A Little Wizard Of Oz On Shareholders