Are These The Next Biotech Buyout Targets?
For biotech investors, the year has started with a bang.
First, it was Bristol-Myers Squibb’s (NYSE: BMY) enormous $74 billion bid for Celgene (Nasdaq: CELG), one of the largest biotech companies in the world. Right on its heels came a smaller but still significant move — the announcement on Jan. 7 of Eli Lilly’s (NYSE: LLY) intended $8 billion acquisition of Loxo Oncology (Nasdaq: LOXO).
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I think we can expect even more deals as the year progresses. And that, of course, is potentially great news for investors…
There are several industry-specific factors making it imperative that the flow of deals continues.
For several years now, large pharma has been facing a crisis of sorts. The business model of drug companies has long been based on having a few blockbuster drugs that generated massive cash flow and profits. These drugs’ exclusivity, and therefore their profitability, have long been protected by patents.
#-ad_banner-#Many pharma companies have therefore had to contend with patent expirations. As a drug patent expires, competition enters the market and revenue generated by that medicine tends to decline sharply. Hence, the term “patent cliff” has come to symbolize the dangers of large pharma’s revenue and profits related to patents expiring en masse. Because so many new medicines were discovered in the 1990s, the 2010s have become a patent-cliff decade.
As a result, many large pharmaceutical companies have been actively acquiring other companies, as well as merging with each other, in order to preserve their future. After all, by growing (or buying or merging) to a larger size, it’s a lot easier to compete and get your hands on promising new medicines.
Second, thanks to the corporate tax cut of 2017, many companies, including big pharma, have received significant tax savings. This has resulted in larger corporate coffers and an increased motivation to spend.
This is why I think pharma and biotech companies will continue to be actively seeking new targets to merge with or to acquire. One likely condition: a target company must have a new, already-approved, medicine and/or a pipeline of new drugs that makes it attractive for a large pharmaceutical or biotech company.
Potential Biotech Buyout Targets
Today, I’d like to concentrate on identifying potential cancer-related biotechs. While there is no practical way to predict whether a company can be attractive to others, the stocks on this list also have significant potential as stand-alone entities, all thanks to their proprietary formulae and technologies. And because every company on the list is smaller than $10 billion in market capitalization and with little or no debt, they are “affordable” as far as a potential purchase price is concerned.
While most of the companies on the list have, quite understandably, rallied in 2019, they still have a long road ahead to compensate for the share-price weakness of the last two to three years. Let’s take a deeper look…
Blueprint Medicines (Nasdaq: BPMC), similarly to Loxo, is working on cancer medications that can target different mutations, and target them with precision. No wonder the stock rallied more than 14% this year, and that’s on top of the share-price more than doubling in the last three years. By 2020, BPMC plans to have two products already on the market, with four more pending. This company could certainly become a target for a larger peer, especially if its 2020 plan remains on track.
Patrick J. Mahaffy, CEO and president of Clovis Oncology (Nasdaq: CLVS), said at the recent 37th Annual J.P. Morgan Healthcare Conference that the company is “open for sale.” But the stock’s 33% year-to-date rally had happened prior to this Jan. 8, 2019 proclamation.
The market has clearly assessed CLVS as one of the likely M&A candidates. And there has been a bit of good news, too. Clovis’s ovarian cancer drug Rubraca is expected to break from the flat revenue pattern of the first three quarters of 2018 and sell more than $30 million worth in the fourth quarter.
Another company on the list is one my Fast-Track Millionaire readers will be familiar with… Nektar Therapeutics (Nasdaq: NKTR), whose immuno-therapy drug candidate NKTR-214 has already generated interest from BMY, recently announced that, together with partner Bristol-Myers, it will be proceeding for testing its flagship drug in two new Phase 3 trials for lung cancer. Moreover, NKTR is also collaborating with Gilead (Nasdaq: GILD) for its other pipeline drug, NKTR-255.
Nektar has long been speculated to be an acquisition target; all this recent news helps to solidify the case.
The only company on the list with a single-digit year-to-date return, BeiGene (Nasdaq: BGNE), seems to stand to lose from BMY’s bid for Celgene. That’s because the future of its partnership with CELG is now in question.
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In the summer of 2017, CELG made a deal worth $1.4 billion with BeiGene for the right to be a part of BGNE’s tislelizumab (an immuno-oncology drug and a competitor to BMY’s Opdivo). This does not mean that BGNE is suddenly worthless. It’s quite likely, thanks to tislelizumab, that the company will be able to find another partner. With more than $2 billion in cash on its balance sheet, BGNE can become an M&A target, too.
Finally, Bluebird Bio (Nasdaq: BLUE) has long been thought as a potential acquisition target. Still a clinical-stage company without a marketable drug, BLUE’s potential lies with its proprietary technology and its focus on gene therapies. Up more than four-fold since its June 2013 IPO, BLUE has all the hallmarks of an industry leader.
Remember: Investing in biotech stocks can be risky — and it requires a lot of research. That said, the potential rewards are worth it.
So with this in mind, consider the stocks in this list as a starting point for additional research. If I find a worthy candidate in this list, my Fast-Track Millionaire readers will be the first to hear about it.
In the meantime, I’d like to invite you to check out some of the research we’ve been doing over at Fast-Track Millionaire…
I just recently released a report on the breakthroughs being made in something called “personalized medicine.” There’s a lot to learn about things like genetic editing that I simply don’t have the space to cover today. But to put it simply, I think personalized medicine is going to spark a new wave of stock gains. It will create countless millionaires but it will also disrupt conventional medicine… and hurt a lot of existing healthcare businesses.