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Teva, Horizon See Growth In Orphan-Drug Takeovers

Drugmakers showed their appetite for orphan-disease drugs, with two billion-dollar-plus deals sending stocks soaring Monday. Israeli drug giant Teva Pharmaceutical Industries (TEVA) agreed to pay $101 a share in cash for Auspex Pharmaceuticals (ASPX), which has no drugs on the market but plans to apply for approval of its Huntington's disease treatment SD-809 in the next few months. Auspex is also developing treatments for other central-nervous-system (CNS) diseases such as tardive dyskinesia and Tourette syndrome.

"The acquisition of Auspex is a significant step in strengthening Teva's leadership position in CNS and advances us into underserved movement disorder markets," said Teva CEO Erez Vigodman in a statement. "We look forward to accelerating the development and commercialization of the Auspex portfolio based on our infrastructure, capabilities and strong commercial and R&D position in CNS.

Teva has made a bundle in CNS with its multiple-sclerosis drug Copaxone, but that drug is losing its patent protection and also is facing competition from oral MS drugs like Biogen's (BIIB) Tecfidera.

EPS Boost In 2017

The deal value was "$3.2 billion in enterprise value and approximately $3.5 billion in equity value," Teva said. It expects the deal to be mildly dilutive to earnings at first, but become accretive in 2017 as SD-809 sales ramp up.

"Further, given Teva's existing CNS infrastructure, management expects the deal to become accretive with just $150 million in annual revenues and the company expects to generate $2 billion of net sales over the next five years," Sterne Agee analyst Shibani Malhotra wrote in a research note Monday. "Note that this $2 billion assumes an indication in tardive dyskinesia as well as Huntington's disease.

Auspex's stock jumped 41.5% to 100.36, more than eight times its February 2014 IPO price. Teva rose 0.9% to 62.52.

Meanwhile, top-rated specialty drugmaker Horizon Pharma (HZNP) said it will pay $46 a share cash, or $1.1 billion, for Hyperion Therapeutics (HPTX). Since 2013, Hyperion has marketed two drugs that cut ammonia levels in the blood, a complication of urea cycle disorders, designated as orphan diseases. Their sales totaled $114 million last year.

Horizon's total revenue from four drugs was $297 million, including $25 million from orphan-disease drug Actimmune, which it just acquired in September.

Atypically, the buyer's stock rose more than the target's: Horizon jumped 18.2% to 25.78, hitting a new high. Hyperion closed up 7.6% to 45.98. But it had shot up 45% in March through Friday, defying a recent drug stock sell-off, partly on buyout buzz.

Everyone Loves Orphans

Horizon stock has also been strong, with an IBD Composite Rating of 98, but it has been hunting for new drugs since its best-sellers Vimovo and Duexis were bumped off this year's preferred formularies of pharmacy benefits managers (PBMs) Express Scripts (ESRX) and Caremark CVS (CVS).

Orphan-drug makers have become popular targets lately, especially as tax-inversion deals have diminished. Shire (SHPG) has become a specialist in such deals, most recently buying NPS Pharmaceuticals and Meritage Pharma. On Friday, rumors had Shire in talks with BioMarin Pharmaceuticals (BMRN), another serial acquirer of orphan drugs. That drove the latter's stock up more than 11%.

Paul Yook, manager of the biotech ETFs BioShares Biotechnology Products (BBP) and BioShares Biotech Clinical Trials (BBC), says that laws shielding orphan drugs from competition let drugmakers set their prices high, making up for the small size of their markets. At the same time, they aren't targets of the PBM cost-cutting that hit Horizon, among others.

"There's a lot of talk about the PBMs and price containment on some of the big areas — oncology, multiple sclerosis," Yook told IBD. "Orphan drugs are generally thought to have some insulation from the PBMs simply because the patient numbers are so small. They're not really at the top of the radar screen."