There is an old joke among sell-side research analysts that if you are going to make predictions, you should make a lot of them to increase your odds that you will make at least a few correct guesses. With that in mind, I am predicting that we are going to start seeing a wave of acquisitions in the biotech space as larger companies need to recharge their pipelines and better leverage their infrastructure and smaller companies find it increasingly onerous to launch drugs on their own.
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Sanofi Goes for the Esoteric
Sanofi-aventis (NYSE:SNY) announced a relatively small deal on Wednesday, telling investors that the company is buying privately-held TargeGen for $75 million in cash. Should TargeGen's compounds hit certain milestones (in other words, if the drugs work), the payout could increase to up to $560 million.
TargeGen's lead compound is an oral JAK-2 inhibitor that is being tested in myelofibrosis. If you do not know what that is, do not feel bad - myelofibrosis is a rare bone marrow disorder that causes abnormal blood cell production. It also happens to be quite rare - maybe 2 in 100,000 people have the condition.
This deal is interesting because it highlights one of the peculiarities of the biotech market, particularly as it relates to oncology. Drugs that treat rare disorders often get generous reimbursement; a fact that has been a boon to biotechs like Genzyme (Nasdaq:GENZ), Alexion (Nasdaq:ALXN), and Biomarin (Nasdaq:BMRN). So if Sanofi-aventis could secure a price of say $75,000 per year per patient (not unreasonable at all for a rare disease drug), that could be worth over $250 million a year in revenue (assuming 50% market share).
A (Slightly) More Conventional Deal For Celgene
On first glance, Celgene's (Nasdaq:CELG) acquisition of Abraxis Bioscience (Nasdaq:ABII), also announced Wednesday, would seem to make even more sense. After all, Celgene is an oncology drug company and Abraxis's drug Abraxane is not only a successful breast cancer drug - over $300 million in revenue in 2009 - but could become even more successful as the company has seen encouraging clinical data on indications in melanoma, lung and pancreatic cancer.
Celgene is going to be paying about $2.9 billion, split between $58 per share in cash and roughly 0.26 shares of Celgene for each share of Abraxis. Should the acquired drugs hit certain milestones, Celgene will kick in as much as $6 a share more down the road. Given that Celgene expects at least $1 billion in revenue contributions from this deal in 2015, that is not such a bad price (even if those projections inherently assume success ... which is never a given in this sector).
Here is the interesting thing about this deal to me. Abraxis is not really an oncology drug company in the traditional sense. What Abraxis has done is find a delivery system (the nab system) that delivers already-proven drugs to tumors more effectively. That could be a value asset to Celgene, as it could allow the company to reformulate drugs and avoid generic competition for longer - Teva (Nasdaq:TEVA) is already trying to pursue a generic for Celgene's Thalomid. (For related reading, see Pharma Patent Trolls: Cheap Drugs At A Steep Price.)
More To Come
As I suggested in the beginning, we are going to see more biotech deals this year. There are numerous biotechs out there with a barbell-shaped pipeline (one late-stage drug and a bunch of early-stage candidates) and/or a single approved drug. Given the expense of not only developing drugs but marketing them, those are appealing targets for large pharmaceutical or biotech companies that can easily leverage that single drug across their pre-existing salesforce.
Bottom Line
I would never suggest that an investor buy a stock solely in expectation of acquisition. At a minimum, make sure you can live happily with a stock even if it does not get that hoped-for bid. By the same token, if you can find a biotech company with a very solid drug that is close to approval - like, say, Arena Pharmaceuticals (Nasdaq:ARNA) - the notion of a larger company buying them up certainly should not hurt the valuation. (For more, see The Ups And Downs Of Biotechnology.)
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