Expert Financial Analysis and Reporting

On Friday, November 9, 2015 Astra Zeneca entered into a definitive agreement to buy ZS Pharma in an all-cash tender offer for all outstanding shares of ZS Pharma common stock at a price of $90 per share. This values the Company at $2.7 billion or $2.5 billion if you subtract out $200 million of cash that ZSPH has on hand.

ZS Pharma was the subject of an initiation report by SmithOnStocks on April 25, 2015  in thinking about a price target, I said” ZS-9 could reach $1 billion of US sales in five years. This could lead to a market capitalization of $5 to $10 billion which compares to the current $1.1 billion and foreign sales through a licensee could add significantly more to that valuation level.” However, for reasons stated in that report, my recommendation was tepid because of the current price and in retrospect, I wish I had been more aggressive.

In my last summary of stock recommendations on August 17, I wrote that there are three companies I really want to buy I am deterred by the current price from being aggressive. However, you couldn’t pry these companies out of my portfolio with a crowbar. I am looking for an opportunity to be more aggressive. Repligen has the best business model that I have seen in biotechnology. ZS Pharma and Chimerix have novel products (not quite paradigm changers) that should be approved in late 2016.

I had been looking for an opportunity to be more aggressive, but the price kept running away from me. After it held up through the biotechnology stock correction earlier this year, I was actually in the process of becoming more aggressive even though the price had moved up substantially from when I issued my initiation report in April. Then it was reported on September 11 that Actelion was in discussions to buy ZS Pharma. This caused the stock price to spike from $58 to $75 and I put my pen (actually computer keyboard) down.

I am chagrined that ZS Pharma is being taken out so early. I thought this was a company and stock that would emerge as one of the real success stories in biotechnology and could be bought steadily over time. However, at this takeover valuation I can understand why management chose to sell. Would you take $2.7 billion of cash now or go through the ordeal of building a commercial operation and all the uncertainties that entails with the potential to create value of $5+ billion five years down the road. I also regret on my part for making a price judgment that caused me to be so tepid and take only a modest position in the stock of a Company whose business prospects I liked so much. This is out of character for me and why I said DARN in the title of this report.

I think that one takeaway message from this acquisition is that there is an enormous appetite on the part of big biopharma for companies with novel products that have gotten into the proof of concept stage or have completed phase 3 trials with positive results. Clearly, there was a bidding war for ZS Pharma. This will influence my price thinking going forward on other companies.

You may ask if in view of this acquisition, I might step up on Relypsa which has a competitive product to ZS Pharma’s ZS-9 called patiromer. My original thinking was that ZS-9 was the better product and that it would get two-thirds of the market and patiromer would get the remainder (still a huge opportunity). However, the recent approval of patiromer included a black box warning about interaction with other drugs. This is a huge competitive disadvantage if ZS-9 does not have a similar warning in its label. Wall Street analysts are dueling on the issue of whether ZS-P will get a black box also. If so, Relypsa could be a very interesting stock. I have not reached a conclusion and will need to do more work on Relypsa and patiromer.