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Should Investors Take A Chance On Savient?
Savient (Nasdaq:SVNT) shareholders have been on a wild ride of late. While the stock languished for months in the low-to-mid teens as this company navigated the tricky FDA approval process for its gout drug Krystexxa, formal FDA approval sent the stock rocketing up into the low-$20s. Now the roller coaster is taking another swoop down, though, as the company announced that it was unsuccessful in its efforts to auction itself off.
The Deal That Could Have Been
Savient management had made no secret of its intention to try to sell the company upon receiving approval for Kyrstexxa. Although the drug could be quite profitable, Savient has no sales force and no pipeline. That made the decision to seek a sale of the company a quite rational decision on the part of management.
Unfortunately, however rational it might have been, there were no takers - or at least no takers at a price that the board deemed acceptable. Investors will probably never know all of the details of the process, but it was widely thought that both Novartis (NYSE:NVS) and Bristol-Myers Squibb (NYSE:BMY) had some level of interest. Clearly a deal could not be struck, though, and the stock has responded poorly to the news. (For related reading, check out Stocks On Drugs: What It takes To Get High.)
What's the Problem?
A large part of Savient's problem in selling itself could very well be the huge range of opinion concerning the sales potential of Krystexxa. Credible and competent industry-watchers have speculated that the drug could sell as little as $200 million a year worldwide, or close to $1 billion. Not only is that an enormous divergence of opinion, but it shows just how many unknowns there are with this new drug - unknowns concerning the real eligible patient population, the pricing power of the drug, and to what extent doctors (or patients) might be put off by some of the side-effects.
Given that large span of potential outcomes, buyers probably offered the sort of the deal that they usually do in such circumstances - a modest up-front payment and the possibility of earn-outs in future years if the drug's sales reached certain breakpoint targets. Those deals can get complicated, however, and it is hard for the selling company to ensure the buyer's best efforts; accordingly, it would not be all that surprising if Savient rejected such a deal. (For related reading, check out Can Savient Soar On One Specialty Drug?)
Where Does Savient Go from Here?
Unable to sell the company for a satisfactory price, Savient would seem to have no choice but to move forward, build out a sales force and sell the drug itself. Eventually, if the drug does sell well, there will be interested buyers willing to make another bid. After all, companies like Forest Labs (NYSE:FRX) are seemingly always looking for new drugs to add to their roster.
Investors can take some solace in the fact that Savient should be able to get this drug on the market. Gout is generally treated by rheumatologists, and there are not that many of them - meaning that Savient should be able to get by with under 100 sales reps. Moreover, the years of multiple layoffs at other pharmaceutical companies like Pfizer (NYSE:PFE) and Merck (NYSE:MRK) should mean that there are plenty of available candidates. Better still, perhaps Savient could sign up with a company like PDI (Nasdaq:PDII) and outsource some meaningful percentage of their sales and promotion burden.
The Bottom Line
With the future of Krystexxa so much in doubt, assigning a fair value to the shares is brutally difficult. Some small drug companies get valuation multiples as low as one- or two-times sales, and that represents a lot of downside risk in Savient if sales underperform. On the other hand, multiples can also go in excess of five-times sales, which would mean tremendous upside if Krystexxa delivers on the upper range of estimates. Taking all of that into consideration, this stock really is a gamble, unless investors have a very firm conviction about how Krystexxa will perform in the market.
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The Deal That Could Have Been
Savient management had made no secret of its intention to try to sell the company upon receiving approval for Kyrstexxa. Although the drug could be quite profitable, Savient has no sales force and no pipeline. That made the decision to seek a sale of the company a quite rational decision on the part of management.
Unfortunately, however rational it might have been, there were no takers - or at least no takers at a price that the board deemed acceptable. Investors will probably never know all of the details of the process, but it was widely thought that both Novartis (NYSE:NVS) and Bristol-Myers Squibb (NYSE:BMY) had some level of interest. Clearly a deal could not be struck, though, and the stock has responded poorly to the news. (For related reading, check out Stocks On Drugs: What It takes To Get High.)
What's the Problem?
A large part of Savient's problem in selling itself could very well be the huge range of opinion concerning the sales potential of Krystexxa. Credible and competent industry-watchers have speculated that the drug could sell as little as $200 million a year worldwide, or close to $1 billion. Not only is that an enormous divergence of opinion, but it shows just how many unknowns there are with this new drug - unknowns concerning the real eligible patient population, the pricing power of the drug, and to what extent doctors (or patients) might be put off by some of the side-effects.
Where Does Savient Go from Here?
Unable to sell the company for a satisfactory price, Savient would seem to have no choice but to move forward, build out a sales force and sell the drug itself. Eventually, if the drug does sell well, there will be interested buyers willing to make another bid. After all, companies like Forest Labs (NYSE:FRX) are seemingly always looking for new drugs to add to their roster.
Investors can take some solace in the fact that Savient should be able to get this drug on the market. Gout is generally treated by rheumatologists, and there are not that many of them - meaning that Savient should be able to get by with under 100 sales reps. Moreover, the years of multiple layoffs at other pharmaceutical companies like Pfizer (NYSE:PFE) and Merck (NYSE:MRK) should mean that there are plenty of available candidates. Better still, perhaps Savient could sign up with a company like PDI (Nasdaq:PDII) and outsource some meaningful percentage of their sales and promotion burden.
The Bottom Line
With the future of Krystexxa so much in doubt, assigning a fair value to the shares is brutally difficult. Some small drug companies get valuation multiples as low as one- or two-times sales, and that represents a lot of downside risk in Savient if sales underperform. On the other hand, multiples can also go in excess of five-times sales, which would mean tremendous upside if Krystexxa delivers on the upper range of estimates. Taking all of that into consideration, this stock really is a gamble, unless investors have a very firm conviction about how Krystexxa will perform in the market.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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