Why High-Flying M&A Target Tesaro Recently Lost More Than a Quarter of Its Value

Why High-Flying M&A Target Tesaro Recently Lost More Than a Quarter of Its Value April 26, 2017
By Mark Terry, BioSpace.com Breaking News Staff

There have been a lot of rumors that Tesaro is going to be acquired. There were rumors back in July, and again in February. Company stock took a jump both times.

But since then, company stock has lost a quarter of its value. Cory Renauer, writing for The Motley Fool, discusses what’s going on with this Massachusetts biotech.

The big interest revolves around Tesaro’s new cancer drug. On Dec. 20, 2016, the U.S. Food and Drug Administration (FDA) granted its drug, Zejula (niraparib), Priority Review for the New Drug Application (NDA). Niraparib is a PARP inhibitor, a new form of drug treatment. It is being evaluated for patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer after response to platinum-based chemotherapy. The PDUFA date is June 30, 2017.

One point Renauer brings up is the competition for PARP inhibitors. Although a new class of drug, Clovis Oncology and AstraZeneca , as well as Pfizer are also working on PARPi’s. Renauer writes, ”At the moment, it’s hard to say whether or not Tesaro’s drug will become a multibillion-dollar blockbuster. The company’s market value, though, is still high enough that anything less than a rousing success could lead to serious losses from present levels.”

In 2016, Tesaro lost $387.5 million, and the company predicts higher operating expenses this year. Renauer writes, “For companies still losing money, the price-to-sales ratio comes in handy. On average, biotech stocks trade at prices about 5.8 times higher than their annual sales. Measured with this yardstick, Tesaro’s recent market cap of about $7.3 billion suggests around $1.2 billion in annual sales.”

In order to do that, Tesaro would have to do really well. Tesaro has only one other FDA-approved drug, and it created $5.9 million in sales in 2016. That would be a lot for Zejula to make up.

In 2016, Tesaro inked a partnership deal with Merck & Co to evaluate Zejula in combination with Keytruda, Merck’s immuno-oncology therapy. Analysts think Zejula could bring in $2 billion in sales at its peak. However, because of that deal with Merck, it would have to share revenue.

Renauer writes, “Expectations that Zejula will quickly become a leading treatment for ovarian cancer are the main pillars holding Tesaro’s stock price aloft right now. The efficacy data supporting its approval is impressive, and you can’t blame investors for expecting sales to rocket upwards.”

But AstraZeneca’s Linparza, a PARPi, is on the market for BRCA-positive advanced ovarian cancer. Clovis has a PARPi, rucaparib, in mid-stage trials.

The February rumors spun around a possible acquisition by Paris-based Sanofi . Sanofi had a PARPi that failed a Phase III trial in 2011. Those rumors seem to have died down, however.

One of Zejula’s advantages is a broader prescription label. AstraZeneca’s Lynparza and Clovis’s drugs are indicated for cancer patients with BRCA mutations, but Zejula can be prescribed regardless of BRCA mutation status.

Renauer writes, “Zejula will also benefit from its place in the pecking order. Patients in the middle of their first round of chemo can take Tesaro’s drug. According to their labels, oncologists shouldn’t treat patients with Rubraca unless they’ve relepased after two rounds of chemotherapy, and Lynparza becomes an option after three rounds.”

But AstraZeneca has submitted an application to regulators that would bring Lynparza to second-line treatment status. And the company also hopes for a label expansion later this year.

A lot of the competition appears to hinge on safety issues. PARPi’s tend to cause anemia, and whichever of the PARPi’s for ovarian cancer have the best safety profile may come out winners in which one gets administered first.

And Pfizer may come along to mess up everyone’s race. It acquired talazoparib in 2016 with Medivation and it seems to work like Zejula, but at a lower dosage, which is typically associated with fewer side effects. Pfizer is focused on breast cancer first and late-stage trial data is expected this summer,

Renauer concludes, “It’s still too early to know how well Tesaro’s drug can compete with Clovis Oncology’s and AstraZeneca’s for ovarian cancer patients. Zejula’s label is an advantage now that could quickly evaporate in light of incoming data from competitors.”

Tesaro is currently trading at $140.25.

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