Sprout Pharmaceuticals, a privately held drug company out of Raleigh, North Carolina, made headlines on Tuesday when its female libido-boosting drug, Addyi, was approved by the Food and Drug Administration. Two days later, pharmaceutical giant Valeant (VRX) bought the company for $1 billion.
Not a bad week for ol’ Sprout.
While the acquisition may sound like a no-brainer given the incredible commercial success of Pfizer’s (PFE) Viagra and Eli Lilly’s (LLY) Cialis, there are still some concerns that the “little pink pill” might not be the cure-all for VRX stock.
Shares of Valeant, which were already up 70% this year before Thursday’s open, are trading modestly lower after the Addyi deal.
That said, let’s take a look at why VRX decided to consummate its relationship with Sprout in the first place:
“Anything You Can Do I Can Do Better”
In the spirit of the old Mia Hamm and Michael Jordan Gatorade commercials, Addyi has a classic “battle of the sexes” vibe behind it. At least, that’s how Sprout has been marketing the drug.
From the Wall Street Journal:
“Addyi was approved for premenopausal women by the Food and Drug Administration on Tuesday, after a lobbying campaign partly supported by Sprout that highlighted the opportunity to ‘even the score’ with men who have access to sexual-dysfunction drugs, such as Viagra and Cialis.”
You can’t blame Sprout for trying to make the comparison; last year, Viagra revenue clocked in at $1.7 billion and sales of Cialis came in at $2.3 billion.
Addyi has the added benefit of not being a generic, meaning higher margins and patent protection for years to come. Cialis revenue enjoys the boost that comes with being patent-protected, but Viagra’s $1.7 billion in sales last year came after the drug had gone off patent, so we can see pretty clearly how lucrative the male sexual enhancement market can be.
VRX, which will pay $500 million in cash now, and $500 million next year for the acquisition, also has distribution abilities that Sprout could only dream of.
While the drug seems like a guaranteed home run, there are still some concerns with Addyi. Namely, the FDA said the drug could cause low blood pressure and fainting when combined with alcohol, which may or may not be involved in the run-up to the bedroom.
Still, by hopping on Addyi first just days after its FDA approval, VRX and its shareholders could’ve gotten a killer deal. The drug is expected to hit the markets in the fourth quarter, though it may take until 2016 before we know how much of a turn on the little pink pill is for investors.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
