As the philosopher Plato used to say, “Necessity is the Mother of Invention.” In the case of Biotech giants, if your inventions aren’t working, then you will have the necessity to engage in mergers and acquisitions. Luckily, plenty of cash is available for a biotech shopping spree this spring. Here are some likely acquirers and some potential buyout targets to watch as the frost of winter gives way to a hot deal making season…
1) Biogen: Rebounding from Tragedy?
$BIIB’s loss could wind up being someone else’s gain. Just last week the biotech stalwart announced the discontinuation of it’s phase 3 study for the Alzheimer’s compound aducanumab. An independent scientific advisory committee indicated that the trial was unlikely to produce the hoped for results based on an examination of preliminary data. Many million of dollars in R&D investment vanished into thin air in just a few rough business days. $BIIB lost around $10 Billion in market capitalization in a few short hours.
Despite the devastating setback in share price, and the frustrating write off of a big R&D investment, the real challenge facing Biogen is “what to sell next?” Despite five consecutive years of rising revenues and earnings, the company’s two main cash producers are coming under competitive attack. Tecfidera, a blockbuster multiple sclerosis drug that produces almost 30% of the company’s revenue, is suffering a patent attack from Mylan Pharmaceuticals. Spinraza, a successful drug for Spinal Muscular Atrophy, could encounter a serious problem when Novartis’ gene therapy Zolgensma launches in the near future. Spinraza treats the symptoms of SMA; Zolgensma is a one time gene therapy meant to cure the crippling disease. What could be a miracle for patients may wind up being a disaster for Biogen.
Luckily for $BIIB shareholders, the company is still in a powerful position to regroup and recover from the disappointment of aducanumab. $BIIB generated just over $6 Billion in operational cash flow in 2018, holds roughly $3.5 Billion in cash, and has only used debt modestly up until now. Most biotech market watchers believe that Biogen will wipe away it’s tears and engage in some good old fashioned “retail therapy” to restock it’s now shaky pipeline.
LIKELY ACQUISITION TARGETS FOR BIOGEN:
Sage Therapeutics ($SAGE):
Sage has just received approval for a brand new way of treating postpartum depression. Also, Sage has an additional rapid acting treatment for depression that may be just a few quarters from approval. In addition to these two “quick hits” to Biogen’s revenue producing pipeline, $SAGE has a rich pipeline of neurology/psychiatry related drug candidates. This pipeline would dovetail quite nicely with Biogen’s already pre-existing neurology related sales force and infrastructure. WIth a current market capitalization of $7 Billion to Biogen’s $44 Billion, this would be a manageable purchase for $BIIB to digest…
Minerva Biosciences ($NERV):
This small biotech has a treasure trove of research related to a wide variety of Central Nervous System diseases (CNS). The company’s most advanced drug candidate is a treatment for Schizophrenia, now in phase 3 testing. $NERV also has other programs targeting very unmet needs such as Parkinson’s and Depression. If any of these drug candidates turn out to produce strong clinical outcomes, they could really benefit from Biogen’s much larger financial heft and sales force. With a market capitalization of just $324 Million, $BIIB could snap up this pipeline with little risk.
Neurocrine Biosciences ($NBIX):
This company offers a rich pipeline of treatments at the crossroads of CNS and Endocrine disease. Having just launched its first few commercial products in the last few years, $NBIX has lately demonstrated growing revenue and even turned a profit. With a market capitalization of $8 Billion, Biogen could still purchase this promising growth pipeline without straining it’s own finances too much.
2) Gilead: The Dawn of a New Era?
It’s very likely that, when biotech analysts look back at 2019, they will be able to circle the year 2019 as the year that everything changed for Gilead Sciences, Inc. ($GILD). After an epic run of success pioneering widespread treatments for both HIV and Hepatitis C, Gilead’s entire founding team is sailing off into the sunset. New ceo Daniel O’Day has his work cut out for him.
In many ways, Gilead is simply a victim of its own success. It’s HIV medications have been such a success that they will soon be going generic, and it’s branded offerings have attracted competition. Gilead’s Hepatitis C offering has cured so many sick people that the total addressable market has shrunk, while competing biotech giants have introduced their own, bargain priced, Hep C agents. The result has been tumbling revenue; the company has gone from $32 Billion in sales in 2015 to just $22 Billion in 2018. As you can imagine, the stock price has been punished accordingly.
But $GILD remains a cash printing machine. Even on 2018’s greatly reduced revenues, the company still produced $8 Billion in operating income. Ceo O’Day has roughly $30 Billion in cash to work with, with only modest debt to manage. Many would envy the new ceo’s position; however the cash is his to invest successfully or to burn. His career depends on the wisdom of his choices.
The other part of O’Day’s inheritance are two nascent franchises. The first is a flurry of late stage research related to the wide spread, chronic liver disease N.A.S.H.
(Nonalcoholic steatohepatitis or “fatty liver”). The other is a portfolio of novel anti-cancer treatments known as Car-T, which O’Day’s predecessors acquired when they bought Kite Pharma just a few years ago. Currently, there is not yet an approved treatment for NASH on the market, while the Car-T market has it’s first few approved agents jockeying for early position.
How might Gilead’s new leader choose to invest all of that cash?
Madrigal has generated significant buzz (and a sky high stock price) due to some promising early results for it’s main pipeline candidate, known as MGL-3196. This company is dedicated exclusively to the study of the liver, and NASH.
Based solely on the early strength of this one agent, $MDGL has achieved a market capitalization of around $2 Billion. This may seem like an awfully high price to pay for a company with no revenue and no approved drug. But given the size of Gilead’s cash pile, the price for this promising agent could look like a rounding error to O’Day.
Intercept Pharmaceuticals ($ICPT):
This biotech has a number of positive attributes that have probably landed it right at the top of Gilead’s shopping list.
First, Intercept does all liver, all the time. Between Gilead’s existing Hepatitis C franchise, and nascent NASH division, Intercept’s R&D would fit in nicely.
Second, $ICPT has just reported positive stage three data for its anti-liver scarring agent, Ocaliva. This means that Intercept is currently in the process of filling FDA paperwork to sell Ocalive specifically for NASH patients, a milestone in the field.
Lastly, it’s easy to see how Gilead’s bean counters would decide that, “the price is right.” With a market capitalization of $3.4 Billion, Intercept would still be a bite sized acquisition for $GILD. A lot of upside, for not that much risk. Corporate chiefs tend to like those kinds of propositions….
Allogene Therapeutics ($ALLO).
The field of cancer immunotherapy is literally exploding with innovation. The discovery that your own body can fight off cancer (with just a little help) may eventually be just as crucial as the discovery of electricity or the internet. But we are still in very early days. Do you think that when the Wright Brothers managed to a launch a collection of balsa wood and bicycle parts into the air that they ever envisioned us flying to the moon just sixty years later?
Much like the Wright brothers, our Car-T therapies today are a critical proof of concept, but they are still clunky and cumbersome. Gilead’s current offering, Yescarta, must be individually manufactured for each unique cancer patient, and the logistical and financial challenges for each patient are substantial.
Allogene is working to create a kind of therapy called, “Off the Shelf” Car-T. This would allow cancer killing immune cells to be manufactured, stored, and transported in a much more efficient, more industrialized way. Presumably cost would come way down while access and efficacy would go way up. Theoretically. Currently $ALLO has no revenue, and only one agent entering phase 1 testing. Although the young company already has a multi-billion dollar price tag, it won’t produce revenue for years, if at all.
Whether or not this kind of purchase appeals to Gilead really depends on whether CEO O’day finds himself with the luxury of long term thinking. New CEO’s brought in as highly paid employees rarely have the same kind of timeline that the founding C-suite had. If he feels that he needs to turn revenue around today, then he may pass over Allogene. On the other hand, he may pay up for $ALLO simply to keep this next generation technology out of a competitor’s hands. Anyone who knows for sure must have an excellent crystal ball…
3) Abbvie: Ready or not, here it comes…
Abbvie’s outlook over the next few years may well be the kind of scenario that makes pharma execs wake up in a cold sweat. Simply put, Abbvie’s billion dollar baby is going away.
If you own a TV, Radio, or computer, you have probably heard of Humira. Humira, an injection used to calm a wide range of autoimmune diseases, is the best selling drug of all time, bringing in a whopping $19 Billion in sales in 2018. This figure represents about 60% of Abbvie’s revenue. Year after year, Abbvie has seen it’s topline expand almost effortlessly. For the first time, 2020 sales should be down significantly.
You can tell the size of the party by the strength of the hangover the day after. Humira already faces generic competition in Europe, and the same will happen in the USA by 2023.
How do you replace $19,000,000,000 in highly profitable sales? The path that Abbvie’s C-Suite has chosen runs principally in two directions. First, they are continuing their work in the autoimmune sector, and have several advanced candidates in that field. Second, they have conjured up an impressive oncology pipeline from scratch. Both programs have several potential blockbusters in phase 3 development that should start to replace Humira soon.
But $19 Billion is more than the annual budget of many American states, so no doubt $ABBV is still on the prowl for mature pipelines that could provide revenue growth soon. Here are some potential targets…
Puma Biotechnology ($PBYI)
This small biotech focuses on cancers related to women’s health. The company has recently received european marketing approval for NERLYNX, a treatment for certain kinds of breast cancer. The company has lately debuted positive data for the same agent in the treatment of cervical cancer. Puma’s revenue jumped from $27 Million in 2017 to $250 Million in 2018. This asset would fit very nicely into Abbvie’s rapidly growing oncology program, and with Abbvie’s substantial resources behind it, who knows how fast Nerlynx’s growth could accelerate…
Seattle Genetics ($SGEN)
One of the oldest tricks in the Big Pharma playbook is to “flip the script.” This usually involves making a bold, brash move that looks sexy, balance sheet be damned. In the case of Abbvie, the idea would be to snag an acquisition with a pipeline so sexy that analysts will forget all about sagging Humira sales.
One target that might fit the bill would be Seattle Genetics. This biotech has a robust cancer pipeline and rapidly growing revenue. Many of $SGEN’s phase 2 research projects would fit nicely with Abbvie’s own advanced programs. In this scenario, Abbvie would be rebranding itself as THE cancer powerhouse for the 21st century.
Unfortunately, others have also seen tremendous promise in $SGEN, so buying this potential would not come cheap. With a current market capitalization of approximately $12 Billion, this purchase would be a reach for Abbvie. $ABBV already has $40 Billion in debt on it’s books; pushing debt above $50 Billion would make this acquisition a “bet the company” play. But with 60% of Abbvie’s current revenue in imminent danger, many would say that drastic measures are needed….
Immunomedics, Inc. ($IMMU)
One important aspect of the oncology franchise that Abbvie is building is the impressive array of financial and infrastructure resources that will give it a competitive advantage over smaller companies. Many medical innovations don’t simply fly off the shelf just because they have posted strong data; they need to be sold. Likewise, a lot of worthwhile breakthroughs never see the light of day if they are not nurtured by a team with deep pockets. One thing that $ABBV can offer a potential acquisition target is the potential to “turbo charge” already promising research and business development.
One such company that might fit well into Abbvie’s infrastructure is Immunomedics, Inc. $IMMU has a juicy pipeline in both oncology and autoimmune disease, Abbvie’s two strongest programs. Rather than traditional drug development, $IMMU has focused on pioneering a platform that serves as an advanced “targeting system” for delivery of cancer and autoimmune medicines. This should allow greater efficacy with less side effects, and could be applied across a broad spectrum of illness, eventually opening up revenue possibilities with a vast TAM (total addressable market).
If Abbvie were going to leverage it’s impressive resources to turbo charge a new drug platform, this one might make sense.
The absolute price for $IMMU would be low relative to Abbvie’s available financial firepower. At $3.5 Billion, Abbvie could easily afford to take this risk. However, Immunomedics currently has no revenue at all, so if this acquisition failed, it would be a black eye for Abbvie. Whether this materializes or not, you can bet that $ABBV and others will be kicking the tires….
Pharmaceutical Executives hate to take risks. But sometimes they just have to. That is when the fun starts! Keep your eye on Biogen, Gilead and Abbvie to make sure you get your piece of the action…
DISCLOSURE: The Sick Economist owns shares in $GILD