Here's the Reason Behind TESARO Inc.'s Sudden 12% Move Higher

By Sean Williams Markets Fool.com

Image source: Getty Images.

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What happened

Shares of TESARO (NASDAQ: TSRO), a biopharmaceutical company that's primarily focused on developing therapies to treat cancer, surged as much as 12% during Thursday's trading session after reports surfaced that French drugmaker Sanofi (NYSE: SNY) may be interested in acquiring it.

So what

Sanofi has been on an acquisition hunt for quite some time, and it's been beaten to the punch on both of its recent targets. Earlier today, Johnson & Johnsonannounced that it was acquiring Swiss-based lung drug specialist Actelionfor $30 billion after two separate discussions with Sanofi never resulted in an amicable buyout offer for both parties. Likewise, Pfizerwound up offering the winning $14 billion bid to acquire Medivation, the co-developer of advanced prostate cancer drug Xtandi. Sanofi has to be feeling as if it's been left out of the party, and TESARO, which is considerably more affordable than Actelion or Medivation were based on enterprise value, could be its ticket.

The primary allure in TESARO's product portfolio and pipeline is niraparib, a PARP inhibitor being targeted at various types of ovarian and breast cancers. In particular, niraparib has shown incredible benefits for patents with the BRCA mutation (the gene that increases the risk of ovarian and breast cancer development in women). In a 553-patient ovarian cancer trial that included 203 patients with the BRCA mutation, the niraparib arm generated a median progression-free survival of 21 months compared to 5.5 months for the placebo.

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According to sources familiar with the matter, investment firm Morgan Stanleyis said to be advising on the potential buyout, but as is usually the case with rumors, there's no semblance of the price point Sanofi would be willing to pay. Critically, there's also no indication that a deal will be reached or that TESARO is even open to discussing a takeover, meaning it's anyone's guess at this point.

Image source: Getty Images.

Now what

On one hand, it's clear as day that niraparib has put TESARO on the map. Its ovarian cancer study suggests that it could wind up displacing the only Food and Drug Administration-approved PARP inhibitor for ovarian cancer, Lynparza, which was developed by AstraZeneca (NYSE: AZN). AstraZeneca believed its PARP inhibitor had $2 billion in peak sales potential. This would imply that TESARO's niraparib could now have a floor of around $2 billion in peak annual sales, making it an attractive addition to any portfolio.

The other side of the equation is that it's never a good idea to buy into a stock with the sole hope that it'll be acquired. It's possible that Sanofi and TESARO will fail to work out a deal and that today's big jump could be fleeting.

What investors in TESARO will want to focus on is the clinical data generated by niraparib. This drug is the ticket to the success of TESARO and its shareholders, not buyout speculation.

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Sean Williams has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.