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3 biotechs with big pipelines that could become M&A targets

July 3, 2017

Speculating on M&A possibilities in biopharma is a common hobby among investors and analysts. The last year or so has made it especially entertaining with political debates over drug pricing, President Trump’s unpredictable leadership-communication-by-tweet, and the GOP-led House and Senate’s so-far unsuccessful attempts to “repeal and replace” Obamacare, also known as the Affordable Care Act (ACA). Joseph Hogue, writing for Nasdaqlooks at three biopharma companies that might be top takeover targets in this dynamic M&A environment.

1. Alexion Pharmaceuticals

Based in New Haven, Conn., Alexion Pharmaceuticals (ALXN) is a rare disease company. It’s perhaps best known, at least this year, for a number of controversies, mostly related to its drug Soliris. Soliris is used to treat a rare blood disease called atypical hemolytic-uremic syndrome (aHUS), which affects about 1 in 500,000 people annually. It is priced from $500,000 to $700,000 for a year’s treatment.

It has other problems as well. In May 2015, it received a subpoena regarding an investigation by the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) asking for information related to grant-making activities and compliance with the Foreign Corrupt Practices Act (FCPA) in several countries. After an internal investigation based on the whistleblower allegations, the company’s chief executive officer, David Hallal, and chief financial officer, Vikas Sinha, were forced out. And in May, the company’s offices in Sao Paulo, Brazil were raided by Brazilian authorities as part of an investigation into its sales practices. It has also faced scrutiny over its high-pressure sales practices and use of laboratory data to identify potential patients.

Hogue doesn’t mention any of the problems, but says, “Revenue has more than doubled since 2013 and the company is strengthening its balance sheet with over $1.3 billion in cash. Shares trade for 8.8 times trailing sales, almost half the five-year average of 16.5 times. The increase in valuation hasn’t been lost on management, with the CEO buying more than $1.1 million in shares on June 14.”

Alexion stock is currently trading for $121.98.

2. Biogen

Biogen (BIIB) has been the target of takeover speculation for several years—and when not being talked up to be bought, investors and analysts urge the company to buy something. It’s dominant in the multiple sclerosis (MS) market, although its weakening from patent expirations and increased competition. It has one of the top prospects for Alzheimer’s in its pipeline and recently had Spinraza approved and launched for a rare disease called spinal muscular atrophy (SMA). In the first quarter, Spinraza brought in $47 million, more than 50 percent over expectations, and is likely to hit $1 to $2 billion in peak annual sales.

Hogue writes, “Shares trade for 5.3 times trailing sales, a 21 percent discount to the average 6.7 multiple for the industry and well under the company’s average five-year multiple of 7.8. Biogen has also seen increased insider buying recently with board member Alexander Denner purchasing more than $20 million in shares at $278.48 per share in April.”

Biogen stock is currently trading for $273.41.

Gilead Sciences

Gilead Sciences (GILD) is another company that is a constant target of M&A speculation. It’s no secret why, either. The company’s dominant hepatitis C franchises are faltering, a victim of its own success—the drug is so successful it basically cures the disease, which creates fewer patients to sell to. There’s also increased competition from other companies. But Gilead’s HIV franchise is very healthy. The list of possible takeover targets for Gilead to buy is lengthy, including Kite Pharmaceuticals (KITE), Incyte (INCY), Vertex Pharmaceuticals (VRTX), Puma Biotechnology (PBYI), Portola Pharmaceuticals (PTLAN), and Arrowhead Research Corporation (ARWR).

Companies that could buy Gilead tend to be on a shorter list, but includes Merck (MRK) and Pfizer (PFE).

Hogue writes, “Shares are priced for the worst, trading at just 3.2 times trailing sales against a five-year average of 6.9 times sales. However, first-quarter 2017 HCV sales held up well and the company boosted balance sheet cash to $14.1 billion. That’s more than 15 percent of the market cap and could signal a big deal coming to bolster its pipeline.”

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