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Analyst Sees Big Risks Lurking in Possible Biotech Buyout

Jon C. Ogg

ViroPharma Inc. (VPHM) has become the latest and greatest biotech buyout candidate after it announced that it was exploring alternatives. We saw some 11 million shares trade hands on the day the news broke, versus 1 million shares on average. The stock rose about 30% on the news and rose further each of the following two days. Now we have a report from Bank of America/Merrill Lynch that effectively nullifies any great super-premium buyout for ViroPharma.

In a research report from Wednesday, the Merrill Lynch team downgraded ViroPharma shares to Underperform from Neutral. It also assigned a $34 price target, versus a $40.78 closing price on Tuesday. The research report said:

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ViroPharma shares have increased 33% in response to a media article written September 12 speculating that the company has engaged an advisor to consider an auction of the business, and naming Sanofi (SNY) and Shire PLC (SHPG) as two potentially interested acquirers. While a ViroPharma acquisition could be financially attractive, we believe a number of longer term risks on the company's core product, Cinryze, could affect any such acquisition.

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The biggest risk to Cinryze’s value was listed as a successful development of BioCryst Pharmaceuticals Inc.'s (BCRX) oral HAE drug's proof of principle data in 2014. Shire PLC (SHPG) has a market cap of $22.1 billion, and Sanofi (SNY) is listed as having a $129 billion market cap. Either could afford the deal on the surface, but it boils down to how many times-revenues each is willing to pay.

The Merrill Lynch team represents that the current $40+ share price for ViroPharma stock reflects "a not insignificant chance" of the company being acquired. Still, the firm said it was struggling to see any basis to increase its $34 price target. The team said that its fair value under a takeout scenario is in the range of $41 to $49 per share, but that assumes substantial tax savings and an additional 20% to 65% in SG&A synergies.

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Maybe a biotech buyout can still happen here. The premiums that big drug companies are willing to pay have been sometimes astonishing. That being said, Merrill Lynch believes that the bulk of the premium in ViroPharma already has been seen.

The consensus price target from Thomson Reuters for ViroPharma is $36.32. We also see that it is now worth $2.63 billion in market cap, while Thomson Reuters has sales estimates of $445.94 million in 2013 sales and $561.19 million in 2014 sales. It is expected to lose $0.78 in earnings per share in 2013 and earn $0.74 in earnings per share in 2014.

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