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March 20, 2017

10 Takeover Targets for 2017

Biopharma M&A Expected to Rebound After a Down Year

10 Takeover Targets for 2017

The prospect of a hotter buyout market this year has already begun to generate more buzz about biopharma businesses likely to be bought out. [Carlos Delgado; CC-BY-SA]

  • Investor fears that government would curb the price of prescription drugs dampened merger-and-acquisition (M&A) activity in 2016. According to EY, deal volume last year exceeded $200 billion, “in line with the previous two years and signaling a new plateau after nearly a decade averaging well below $100 billion.”

    HBM Partners, however, showed a sharp 35% year-over-year deal dollar drop, down to $148.2 billion in worldwide Biopharma M&A in 2016, compared with $228.1 billion measured by the firm in 2015, even as the number of completed transactions (136) was only one lower than 2015. Less dramatic, but still significant, was a 22% value decrease in the Zephyr Biotech Report, which recorded 1,370 deals totaling $94.62 billion, down from $121.294 billion for 2015. Deloitte, which also focuses more specifically on Biotech M&A, recorded a 23% decrease in deal value from $118 billion in 2015 to $91 billion in 2016, with the number of deals dipping to a six-year low of 326.

    While President Donald Trump continues to promise that his policies will lower what people pay for medication, there are expectations that he will do so through market mechanisms (like allowing Medicaid and Medicare to negotiate prices with drug developers) as well as enact business-friendlier regulations (like his proposal to cut from 35% to 10% the income tax rate of corporations that repatriate profits earned overseas). Such policies will likely drive M&A activity well above last year’s levels, EY concluded in January.

    The prospect of a hotter buyout market this year has already begun to generate more buzz about biopharma businesses likely to be bought out, ten of which are highlighted in this year’s edition of GEN’s annual Takeover Targets list. This year’s list combines six new names with four companies spotlighted in our 2016 list. For each company mentioned, this list explains where talk of acquisitions has surfaced, and why.

    As in past years, small- to medium-capitalization biopharma companies continue to dominate Wall Street speculation by showing promise for reasons ranging from approvals for new products and rising sales to successful clinical programs in indications that are expected to generate billions in new revenues.

  • Biogen

    Biogen has made a lot of moves—most well-received by investors—in the months since finding itself the center of takeover speculation. The Wall Street Journal reported in August that the company had drawn the interest of Merck & Co. and Allergan as a potential buyout target, citing unnamed sources.

    Since then, Biogen has spun off its hemophilia and other rare blood disorders business into a new company called Bioverativ, which began trading its shares in January. "I think they're on the right track—and the move could make Biogen a more attractive acquisition target," Keith Speights wrote in The Motley Fool in October. He noted that the company was among the top three most likely biopharmas to get acquired in a survey of market watchers by Evercore ISI. Also placing Biogen high on his list of takeover prospects is Michael Yee of RBC Capital Markets.

    The spinout of Bioverativ enabled Biogen to refocus on treatments for eye diseases and neurological disorders—such as spinal muscular atrophy, the first treatment for which is Biogen’s Spinraza™ (nusinersen), which won FDA approval in December. Biogen has licensed global Spinraza rights from Ionis Pharmaceuticals, which won a $60 million milestone payment and will receive royalties. One Wall Street watcher (Jay Silverman of the Medical Technology Stock Letter) believes Ionis itself may be bought by a Biopharma giant in the near future as well.

    Another reason Biogen has attracted buyout buzz is its dominance of the market for multiple sclerosis (MS) drugs, led by Tecfidera®, which generated $3.968 billion last year, up 9% over 2015. Another MS drug, Plegridy (peginterferon beta-1a), saw its year-over-year sales zoom 42% in 2016, rising to $482 million. The company finished 2016 with net income of $3.703 billion (up 4% from 2015) on revenues that rose 10% year-over-year, to $11.449 billion. “There's definitely a lot to like about the biotech. Biogen's multiple sclerosis franchise is impressive, led by Tecfidera, with Plegridy growing sales quickly,” Speights added.

  • BioMarin Pharmaceutical

    What would a list of Biopharma takeover targets be without BioMarin? The rare disease drug developer has appeared on every such list compiled by GEN—from the first such list published in 2013, when Roche was said to have cast its eyes on the company, through last year’s edition.

    This year, Michael Brush, publisher of the stock newsletter Brush Up On Stocks, named the company one of his five “prime buyout candidates” in MarketWatch, based on comments by RBC Capital Markets analyst Michael Yee. And the company was another of those top three most likely Biopharma buyout prospects in the Evercore ISI survey.

    Both cited BioMarin’s combination of marketed drugs and pipeline candidates. BioMarin finished last year with a 26% jump in revenue over 2015, to $1.117 billion, and impressive double-digit gains for two of its marketed drugs: Morquio A syndrome enzyme replacement therapy Vimizim® (elosulfase alfa) saw its 2016 net product revenue grow year-over-year by 55%, generating $354 million; while Kuvan (sapropterin dihydrochloride), the first and only FDA-approved phenylketonuria (PKU) treatment, racked up $348 million, up 46% over 2015. Despite these strong numbers, BioMarin finished last year with a $630 million loss, up from a $172 million net loss in 2015.

    On the pipeline front, BioMarin faces a Prescription Drug User Fee Act (PDUFA) goal date of April 27, 2017, for an FDA decision on its Batten disease candidate Brineura, which is also under regulatory review in Europe. Also during the second quarter, the company expects to file a Biologics License Application for pegvaliase in phenylketonuria expected in the second quarter of 2017. The company ended 2016 by launching a Phase III trial of its achondroplasia candidate vosoritide in children ages 5–14, based on positive Phase II results.

    "I suspect bigger companies could be drawn to BioMarin, largely because the company develops drugs for indications that few other biotechs are targeting. With this competitive moat, BioMarin, in my view, is a very likely takeover target," Keith Speights of The Motley Fool wrote on October 11.

  • Bristol-Myers Squibb (BMS)

    The pharma giant is squarely in the sights of at least two activist investors, fueling speculation about a possible takeover. One is Carl C. Icahn, who has neither confirmed nor denied a February 21 report in The Wall Street Journal that he has bought a stake in BMS. A week later, Icahn signaled a larger role as a biopharma activist by hiring gene transfer pioneer Richard C. Mulligan, Ph.D., as a portfolio manager.

    While Icahn has stayed mum, Jana Partners became a shareholder in the company late last year, owning 3.9 million BMS shares valued at $226 million, a stake well below 1%, as of December 31. That stake “substantially increased” this year, but remains under 1%, Reuters has reported, citing unnamed sources. Jana’s investment, followed by months of dialogue with the company, paid off last month when BMS named to its board three new independent directors.

    Behind all the investor activism is a pair of stinging disappointments. In August, BMS acknowledged that its marketed cancer immunoptherapy Opdivo® (nivolumab) failed a Phase III trial assessing its effectiveness as a monotherapy in patients with previously untreated advanced non-small cell lung cancer (NSCLC). Shares of BMS have fallen 23% since that announcement, from $75.32 to $58.32. And on January 19, BMS said it would not pursue an accelerated regulatory pathway for the combination of Opdivo plus Yervoy® (ipilimumab) in first-line lung cancer in the U.S.

    The Motley Fool analyst Todd Campbell on February 23 named five potential buyers for the company: Amgen, Gilead Sciences, Pfizer, Roche, and Sanofi. StreetInsider also named Gilead, Pfizer, and Roche as possible suitors, along with Novartis.

    “A deal, if pursued, could be valued at as much as $120 billion, or $72 per share,” StreetInsider said, citing unnamed sources.

    BMS management is unlikely to rule out a takeover: “if Bristol can get paid out for an assumption, they will own lung cancer,” according to an email to clients by analyst Mark Schoenbaum of Evercore ISI that was reported by Barron’s.

    Added Max Nisen of Bloomberg Gadfly, “Bristol investors better hope someone is feeling bold. Buyout speculation may be the only case for optimism about the company's shares right now.”

  • Exelixis

    Fortunes can turn fast in Biopharma. Just a year after Exelixis was among Wall Street Losers of 2015, the company finished in the right direction last year, becoming one of GEN’s Top 10 Wall Street Winners of 2016. That turnaround has also added the company to another list—that of attractive takeover candidates.

    Last year, Exelixis basked in the glow of a series of positive developments for Cabometyx (cabozantinib), starting with positive Phase III results in comparison to Novartis’ everolimus in renal cell carcinoma (RCC). In April, Cabometyx won FDA approval, followed in September by European marketing authorization approval.

    Writing in Seeking Alpha, Bret Jensen in January identified a potential buyer for the company, calling it one of two possible acquisition targets for Gilead Sciences: “Purchasing Exelixis, while costly, would dramatically expand Gilead's footprint in the oncology space and give it a potential blockbuster oncology drug as well.”

    Also in January, Arpita Dutt of Zacks named the company one of “four Biotech stocks that could find themselves on the radar of companies on the lookout for acquisition targets [this year]. Cabometyx is experiencing rapid and broad uptake in the market, with label expansion opportunities leaving room for upside,” she wrote.

    Dutt’s words proved even truer on February 27, when Exelixis reported net product revenues for Cabometyx of $44.7 million in the fourth quarter and $93.5 million for all of 2016. The product accounted for most of the revenues generated by the company’s Cabozantinib franchise ($51.9 million in Q4, $135.4 million in 2016), which includes Cometriq® capsules for medullary thyroid cancer.

    That success helped lower Exelixis’ net loss for the year to $28.124 million, from $121.421 million in 2015.

    Also cited by Dutt was Exelixis’ pipeline, which includes a potential new indication for cabozantinib as a treatment for previously untreated patients with advanced RCC, based on positive data from the CABOSUN Phase II trial. The company expects to file for approval with the FDA in the third quarter.

    Also in the pipeline are additional indications for Cotellic® (cobimetinib), co-promoted in the U.S. with Genentech, a member of the Roche Group. Genentech is advancing the cobimetinib clinical development program, which includes three ongoing or planned Phase III pivotal trials of combination regimens including cobimetinib for forms of colorectal cancer and advanced melanoma. Another compound, the Daiichi-Sankyo-partnered CS-3150 [esaxerenone (r-INN)], is in Phase III for hypertension.

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