In the biotech industry, companies that are successfully developing medicine rarely go bankrupt. These companies are often swallowed up by larger candidates and large pharmaceutical companies. After these types of mergers, the new entity’s share price is traditionally higher than the underlying companies prior to the merger. The promise of a higher share price makes these “takeover targets” attractive investments within the biotech industry. These takeover targets are sometimes hard to identify until the blueprints for a merger have already been drafted, and by then, it is usually too late to buy shares in the smaller company at a discounted price. Therefore investors must try to analyze the patterns and reasonings behind these mergers and acquisitions. When it comes to the biopharmaceutical industry, these takeover targets all share one common trait: valuable intellectual property. Some takeover targets have seen moderate success in their development and sale of medicine and have piqued the interest of larger companies. Other takeover targets have had a more turbulent path and found obstacles in the development and sale of their product, but their ideas and intellectual property show great promise and could benefit from more consistent cash flow and improved resources. Regardless of the reasoning for their acquisition, these smaller biotechs suddenly become blockbuster stocks after their merger with a larger company. Finding these biotechs pre-merger is an imperfect and risky process, but it offers great reward.
1) BioLineRx ($BLRX)
One of these candidates for a possible takeover in the near future is BioLineRx ($BLRX). This company is involved in the oncology market and specializes in the process of ”hematopoietic stem-cell mobilization for autologous bone marrow transplantation in multiple myeloma patients”. BioLineRx is a late-stage clinical company and has not been able to sell any of its products, so its $455 million market cap is based solely off of its intellectual property and its milestones throughout drug development. One of BioLineRx’s main problems in its recent history has been its constant need for cash. This is a very common problem for smaller biotechs that are unable to make money from their product during years of development and research. It has been trying to solve this problem by selling shares of their company but this dilutes the value of each of its shares. BLRX is currently being traded at a relatively cheap price, but could see success soon if a larger pharmaceutical company takes interest in their product. This potential interest could have already begun as one of the more likely suitors for an acquisition of BioLineRx is their current partner Merck ($MRK). Merck is a pharmaceutical giant with a market cap close to $200 billion. They are heavily invested in the oncology industry and have an existing partnership with BioLineRx. If BioLineRx receives FDA approval for any of its potential products a deal could be struck very quickly. In May of 2021, BioLineRx announced positive results from its phase 3 testing of the drug Motixafortide for stem-cell mobilization. If BioLineRx eventually receives FDA approval for this drug, they will need a significant amount of cash to commercialize this asset. Companies like Merck could buy this drug, or even better the entire company, at a huge premium and massively increase its stock value. Taking a gamble on an acquisition like this one is a high-risk investment, but with how close BioLineRx is to FDA approval they can be identified as a takeover target.
2) Ocular Therapeutix
While many blockbuster biotechs are involved in the oncology and rare disease market, there is still billions of dollars to be made in drugs that solve the inconveniences in people’s everyday lives. This could prove true for Ocular Therapeutix ($OCUL), a relatively small biopharmaceutical company that focuses on developing treatment for diseases and conditions of the eye. Ocular Therapeutix is a commercial stage company and has seen recent increases in sales. Even with these recent increases, Ocular Therapeutix finished the year 2020 with a significant net loss because the company is still in its infancy stage. Ocular Therapeutix would greatly benefit from a merger with a larger company that could supply their operations with the necessary cash and resources to continue their innovations within this industry. Ocular Therapeutix is attempting to take advantage of the $24 billion worth of addressable market within the eyecare industry. Their most popular drug is currently Dextenza which has only been approved for post-surgical use. This drug is inserted into the tear duct and releases a steroid called dexamethasone onto the surface of the eye therefore eliminating the need for post-surgical eye drops. This same drug is currently under review (phase 3) by the FDA to also treat allergic conjunctivitis. The company believes the post-surgical use of this drug has the potential to reach $1 billion in revenue in the near future. While Ocular Therapeutix does not have any current partnerships with larger pharmaceutical companies, the continued approval of their post-surgical drugs could be a valuable asset to a company that already dominates the world of cataract and vitreoretinal surgery care industry, such as Alcon ($ALC). The possibilities of these combinations make Ocular Therapeutix a viable takeover target at its current low price.
3) ALX Oncology
ALX Oncology ($ALXO) is another takeover target that is slightly larger than the two previously mentioned. Its market cap of $2.14 billion makes it uniquely expensive for a clinical stage company. ALX is an immuno-oncology company that focuses on fighting cancer by “developing therapies that block the CD47 checkpoint pathway and bridge the innate and adaptive immune system”. This company’s most promising product is ALX148, which has had positive clinical responses during its most recent phases of testing. The most exciting part about the research and development of ALX148 is the combination studies that are occurring with other pharmaceutical giants. Right now ALX is collaborating with Merck ($MRK) and trying to partner its treatment with KEYTRUDA (one of the top five most profitable drugs in the world). They are currently in phase 2 of testing the efficacy of this combination. If this combination were to earn FDA approval, ALX would become an obvious takeover target for Merck.
Not only is ALX working with Merck while searching for effective combinations of its product ALX148, but it has also begun testing combinations with another pharmaceutical giant, Eli Lilly and Co ($LLY). This clinical collaboration consists of a, “randomized Phase II/III study to evaluate the efficacy of ALX148 in combination with ramucirumab, trastuzumab, and paclitaxel”, Eli Lilly will provide the ramucirumab. If this study is successful ALX could once again find itself as a prime takeover target for one of the largest pharmaceutical companies in the world. These two collaborations along with their positive clinical results means ALX Oncology could be acquired during phase 3 or shortly after FDA approval. Their stock price is not quite as low as many other smaller biotechs, but their relationships with larger companies makes the expensive price worth the risk.
As stocks gain and lose momentum in the biotech industry, they become more interesting to potential investors. Those stocks that lose their momentum and hype are often undervalued and have the ability to skyrocket if they exercise the right relationships and are acquired by a larger company. Even those stocks that are performing well have the ability to increase in value if they combine with an even more successful company. These three stocks all have extremely valuable intellectual property and would benefit from a larger budget and more advanced resources. Investing in these companies before a merger would be a great way to see massive returns on your investment.