Why These Two Firms Downgraded ZS Pharma Stock

• ZS Pharma Inc ZSPH shares have gained 114 percent year-to-date, and are trading close to the high-end of their 52-week range of $34.35 - $89.40.
• Credit Suisse’s Vamil Divan and Morgan Stanley’s Andrew S Berens have downgraded their ratings on the company.
• The downgrades follow the company’s acquisition by AstraZeneca plc (ADR) AZN in a deal that is considered fairly valued and at low risk of failure.

On November 6, AstraZeneca announced that it had inked a definitive agreement to acquire ZS Pharma for $90 per share, or $2.7 billion, in an all-cash deal.

Well Valued Conclusion

Credit Suisse’s Vamil Divan downgraded the rating on ZS Pharma from Outperform to Neutral, while raising the price target from $67 to $90.

“We view this as a rational deal with ZSPH being valued at a reasonable price and AZN now able to incorporate ZS-9 into their global Cardiovascular and Metabolic business and leverage what we see as a drug with ~$1.5Bn probability-adjusted peak sales potential,” Divan wrote.

The analyst expects the acquisition to close by the end of this end. On September 10, there was an announcement of ZS Pharma being in preliminary discussions with Actelion for a potential strategic transaction, but no potential buyers had surfaced over the last couple of months prior to the former’s Board accepting AstraZeneca’s offer.

Divan believes that ZS Pharma is well positioned for robust growth in the long term by developing “novel drugs from their proprietary “ion-trap” technology, most notably ZS-9 for treatment of hyperkalemia (high potassium).”

Stock Pegged To Deal

Morgan Stanley’s Andrew Berens downgraded the rating on ZS Pharma to Equal-Weight, while maintaining the price target at $90.

Based on AstraZeneca’s conference call, the deal appears likely to close before the end of this year, at the current terms. “We see no risk to the deal from additional data from the ongoing '005 trial or the ZS-9 regulatory process, which is carved out in the Material Adverse Effect language in the merger agreement,” Berens said.

AstraZeneca estimated the overall global market for ZS-9 at around $1 billion. Berens mentioned that there is increased confidence of ZS-9 emerging as the best-in-class potassium binder, and capturing about 85 percent of branded drug revenues in the episodic and chronic hyperkalemia market.

“We model ZS-9 ultimately capturing 95% of the episodic market due to the drug's superior onset of action and planned widespread distribution, and ~80% of the chronic market…We model ZS-9 peak sales of $1.3bn globally, and we see the entire hyperkalemia market as ~$1.5bn,” the Morgan Stanley report stated.

Berens added, however, that ZS Pharma’s shares are no longer “trading on fundamentals,” and are instead “pegged to the deal terms.”