As cancer diagnostics firm Neoprobe (NYSE Amex: NEOP) marches toward FDA approval of its “game-changing” radiopharmaceutical Lymphoseek and its share price continues to climb, many of the company’s shareholders are likely wondering when they’ll get the chance to cash out.
There’s certainly plenty of investor interest in the company. Neoprobe’s shares are up a whopping 77 percent on the year, thanks largely to their listing on the NYSE Amex market as of early February. And the company seems to be hitting its major clinical milestones, having reached the accrual goal of a Phase 3 study of Lymphoseek last month.
Perhaps most significantly, the company expects next quarter to file with the U.S. Food and Drug Administration a New Drug Application (NDA) for Lymphoseek, a tracing agent that helps surgeons identify cancerous lymph nodes in patients with breast cancer and melanoma. If the NDA is approved, Neoprobe could begin marketing Lymphoseek and start raking in sales. The company estimates Lymphoseek’s market value at (pdf) $450 million.
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And let’s not forget that another radiopharmaceuticals developer, Avid Radiopharmaceuticals, just cashed in with a sale of up to $800 million to Eli Lilly — albeit for an entirely different clinical indication than anything Neoprobe is pursuing. But the deal shows there’s certainly market interest in radiopharmaceuticals development companies. The market for radiopharmaceuticals in the U.S. and Europe is expected to reach $5.4 billion in 2015, according to a report from Global Industry Analysts.
So what’s not to like about Neoprobe? It’s only a matter of months before strategic acquirers start kicking Neoprobe’s tires, right? Maybe not.
Steve Brozak, president of WBB Securities, said pharmaceuticals companies are far more comfortable making acquisitions of companies that already have sales — even if that means waiting until an acquisition target is much more expensive.
“The pharma industry buys things based on revenues,” said Brozak, who said his company holds equity in Neoprobe.”They’d much rather pay 20x based on current revenues than pay 3x based on future revenues.”
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Plus, big-company CEOs have a very strong reason to avoid making risky deals with pre-revenue companies: job security.
“No one has ever lost their job for saying ‘no’ to a deal, but plenty have lost their jobs for saying ‘yes’ to a deal that didn’t work out,” Brozak said.
If Neoprobe were to be acquired, the most obvious candidate would be fellow Dublin, Ohio, company Cardinal Health (NYSE:CAH). Not only is Cardinal a huge player in the radiopharmaceuticals market, but it’s entered into a distribution deal with Neoprobe for Lymphoseek. Under the terms of the deal, Cardinal will be the exclusive U.S. distributor of Lymphoseek for five years after approval of the NDA, and the two companies would split sales of the drug.
Both well-informed speculators like Brozak and largely uninformed speculators on blogs and stock message boards have long opined that Cardinal is the top candidate to buy Neoprobe, and the deal may well come to fruition some day.
But it looks less likely to happen this year. There’s a good chance Neoprobe won’t generate any sales from Lymphoseek this year as the FDA takes its time reviewing the drug’s application, so — following Brozak’s logic — 2012 would seem a more likely time for a deal. Cardinal competitor Covidien (NYSE:COV) has also been rumored to be a potential Neoprobe acquirer.
For Neoprobe’s part, company executives say exactly what anyone in their position would say: They’re focusing their energy on getting all they can out of the business and don’t spend time thinking about the prospects of an acquisition (or the 6,000-square-foot mansions they’d move into shortly thereafter.)
“The decision as to whether we get sold is in the hands of our shareholders,” CFO Brent Larson said. “Our job is to grow the business, identify pipeline opportunities and enhance shareholder value.”
That’s what Brozak wants to hear, because he would rather see Neoprobe remain on its own. He thinks it’ll better maximize its value by staying independent and raising cash through the public markets. And for Neoprobe to remain independent, one very important thing must happen: “I’m hoping the large pharma companies stay as stupid as they are right now,” Brozak succinctly said.
Isn’t that a bit harsh? Not to Brozak. He suggests — and once again, quite bluntly — that big pharmaceuticals and device companies’ true goal of optimizing their finances costs them when it comes to getting the most out of their clinical innovations.
“The pharmaceuticals industry and medical device industry is not designed to maximize discoveries,” he stated emphatically. “It’s designed to do one thing: Provide maximum EBITDA in the short term.”
A recent report by consulting firm The Hay Group — which found that 80 percent of the metrics used by the largest drugmakers to determine CEO salary incentives were financial measurements, but only 12 percent were tied to progress involving drug development and commercialization — would suggest that Brozak is right.
