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Expert Financial Analysis and Reporting

Relypsa: Comments on Takeover Rumors

Reason for Report

Relypsa shares surged from about $15.00 at 1 PM on Thursday April 7 to close at $24.34. This move was based on a report published by Reuters at 12:54 PM.

What the Reuters News Article Said

“Relypsa Inc., a U.S. maker of treatments for blood disorder hyperkalemia, is exploring a sale following a number of overtures from potential buyers, according to people familiar with the matter.

Relypsa is working with investment bank Centerview Partners Holdings LLC to review offers, the people said. The discussions are in their early stages and may not lead to a sale, the people added, asking not to be identified because the talks are private.

Interest in Relypsa has picked up in recent months after the $2.7 billion sale of ZS Pharma to AstraZeneca Plc, the people said. Relypsa and ZS Pharma are the primary competitors in a race to control the market for hyperkalemia treatment, which some estimates say could be worth more than $6 billion.

Several of the companies that unsuccessfully bid for ZS Pharma have reached out to Relypsa, the people said.

Relypsa declined to comment. Centerview did not respond to a request for comment.”

Could There Be Any Basis to This?

I checked with the Company even though I know they can’t say anything. No comment, no surprise.

ZS Pharma is developing a competitive product to Veltassa called ZS-9 which has a PDUFA date of May 26, 2016. ZS Pharma was acquired by Astra Zeneca on November 6, 2015 for $2.7 billion. Relypsa before the big move today had a market value of $626 million and after the surge has a market value of $1.02 billion. If it were to be acquired for $2.7 billion, the stock price would be $65. So how should we think about this?

I would point out is that biotechnology market valuations have plunged since last November when ZS Pharma was acquired. It was a much more robust environment for biotechnology stock prices. In the current environment, the $2.7 billion valuation might appear high.

I have recommended both Relypsa and ZS-Pharma on the basis that I think the hyperkalemia market has huge potential. Here is what I wrote in my February 25th report in which I recommended Relypsa:

“I see Veltassa and ZS-9 as potentially having combined US sales of $12 billion by 2025. If Veltassa were to get 25% of the US market, it would be a $4 billion product. Capitalizing these sales at a four multiple (this is low in comparison to peer companies) would result in $16 billion of market value for Relypsa. In stock price terms this would be $270 (assumes 60 million issued shares in 2025). This estimate also ignores royalties from European sales which would drive the price target well over $300.”

If I were the CEO of a major pharmaceutical firm, I would buy Relypsa in a heartbeat for the current $1 billion market valuation and almost as quickly for $1.5 billion. However, I am not currently the CEO of any major biopharmaceutical firm.

We know that ZS Pharma had numerous suitors so it is natural to think that they would be interested in Relypsa.

There is one other important factor to consider. The mechanism of action of ZS-9 exchanges sodium for potassium and sodium can cause an increase in blood pressure. Many or most of the patients eligible for potassium lowering drugs have high blood pressure and it is possible that ZS-9 could exacerbate this. There has been an enormous amount of speculation and I emphasize the word speculation that this will be an issue for FDA and in the worst case, ZS-9 might only be indicated for acute use. This would be a disaster for ZS-9 as hyperkalemia requires chronic treatment. In this scenario, Veltassa would own the market.

What Do I Think?

Obviously, I have no direct knowledge as to whether these takeover reports are real. However, I give them credence. I think that in the event that concerns about ZS-9 being linked to hypertension are unfounded, the takeover price might be in the $35 to $45 range. However, if news has somehow leaked to potential acquirers that FDA has issues with ZS-9, I could see a takeover price double that or $70 to $90 per share as Veltassa could own the market.

I am holding my shares at this price because of my feeling that there could be some substance to these reports. However, I am not adding to my position.


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3 Comments

  1. TDPeterson123 says:

    Thanks Larry. Based on the timing of the insider purchases in March, I don’t expect anything to solidify on the takeover front until after the ZS-9 PDUFA decision. If there are indeed hypertension/sodium issues with ZS-9, I would expect a delay (more studies/more trial patients) or as you mentioned a restricted label limiting its use to acute settings. I still find it unfathomable that a company would agree to buy ZS-9 for $2.7B prior to the drug being approved and especially with the legitimate and known concerns surrounding the drug and trial structure. There were 4 or 5 serious suitors involved per RLYP’s SEC documents, but apparently all other offers were contingent on the drug being approved and the label being clean. At least one of the suitors for ZS-9 dropped out of the bidding the day RLYP’s drug was approved. I agree that the buyout rumor appears to have legitimacy. Still, I think we’ll see more volatility over the next few months at least.

  2. Insightful comments. Thanks.

  3. TDPeterson123 says:

    Correction on the above, I meant to say “there were 4 or 5 serious suitors involved per AstraZeneca’s SEC documents”. Relypsa has not published anything along those lines in any of their SEC documents.

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