Sarepta CEO Departure Tests Buyout Hypothesis

(Bloomberg Gadfly) -- In a biotech M&A desert, investors go crazy for any sign of water. 

That makes it tempting to dismiss the burst of M&A speculation around Sarepta Therapeutics Inc. that erupted on Friday. The company announced CEO Ed Kaye's planned departure in September, which spurred rumors of a possible buyout, pushing Sarepta shares up as much as 13 percent. 

Along with "canceled a scheduled appearance at an obscure biotech conference," CEO departures are a common source of takeout rumors. Given how much biotech valuations rely on the possibility of a deal, bullish investors are inclined to grab onto any reeds they can find. Many of these rumors amount to nothing. But regardless of what one thinks of Sarepta, this bio-meme may have some merit. 

There are plenty of recent examples where blindly following the "CEO departure = buyout" formula has disappointed investors. Shares of both Biogen Inc. and Alexion Pharmaceuticals Inc. jumped at different points in the past year due to deal speculation spurred by CEO departures, only to retreat after no deals followed.

But there's at least some logic to this brand of speculation. In the absence of a new or permanent CEO and a long-term strategy for a business, a company's board may be open to other options. If a CEO is pressured out by a company's poor performance, then it might be a signal for buyers of a potential bargain. Sometimes activists in search of a payday are behind a CEO's ouster and a deal-friendly new hire. And any new leader could be more favorably disposed to a deal, either constitutionally or because they have less of an attachment to the business than a long-time incumbent.

Since 2014, there have been at least four deals worth more than $2 billion announced within 13 months of a new CEO's appointment -- or, in the case of Salix's purchase by Valeant Pharmaceuticals International Inc., a CEO's accounting-scandal-related retirement. 

When it comes to Sarepta, there are points for and against taking this speculation seriously. The company has the only drug of its type on the U.S. market for a rare muscle-wasting disease, which may make it attractive to larger drugmakers. And with a market capitalization of less than $2 billion, it's a comparatively cheap option for big biopharma firms that have griped recently about the price of drug assets.

On the other hand, the approval of Sarepta's drug in September 2016 was extremely controversial, and its commercial potential has yet to be determined. The drug generated just $16.3 million in sales for Sarepta in the first quarter; the company believes it will exceed $95 million in sales for the full year. The prospects for other drugs in the company's research pipeline are also uncertain. 

But if an acquirer can talk themselves through those doubts, then Sarepta's CEO transition period might be the time to strike. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.