It seems that if there is one segment that everyone agrees will continue to see consolidation, it is the biotech, drug, and specialty pharmaceutical sector. A report this week from UBS has highlighted several possible deals that it could imagine from its universe of analysts and there were four possible deals in biotech and pharma that were touted and which we think were worth mentioning.
The companies covered as possible targets were Incyte Corporation (NASDAQ: INCY), Celgene Corporation (NASDAQ: CELG), Cadence Pharmaceuticals Inc. (NASDAQ: CADX), and Salix Pharmaceuticals Ltd. (NASDAQ: SLXP). We have sort of handicapped each scenario with our own outlook and shown how these compare to an overall analyst consensus.
Incyte Corporation (NASDAQ: INCY) is called a biotech takeover target as it is partnered with Eli Lilly Co. (NYSE: LLY), a larger company which has shown a past appetite for making deals with partners. On LLY-104, Lilly owes Incyte $616 million in remaining milestones and which it splits operating profits equally. The firm believes that Lilly could acquire Incyte in order to consolidate economics on a key product in the pipeline. With a typical premium of about 50%, that would imply a price of at least $30.00 per share based upon a $20 price target. If you include the current pipeline and technology platform, the belief is that $30.00 would be a floor. Another Incyte partnership is with Novartis (NYSE: NVS) on ruxolitinib, but the outlook is less dependent on that product and partnership. At $18.58, the Thomson Reuters consensus price target is $22.57 and the 52-week range is $10.21 to $21.15.
Both Incyte Corporation (NASDAQ: INCY) and Celgene Corporation (NASDAQ: CELG) are rated Buy at UBS.
Celgene Corporation (NASDAQ: CELG) is one biotech we do not really agree with UBS on, but only because we imagine it being an acquirer to grow its enterprise. After all, its market cap is almost $27.5 billion. Still, UBS noted that Celgene is trading below an estimated intrinsic value if the company achieves success on its pipeline and receives its milestones. The idea here is a Big Pharma buyer somewhere under $80.00 per share with a value of $40 billion or so. UBS did at least note that the absolute likelihood of a deal happening here is not very high but it is more attractive compared to other large biotechs when considering patent terms, growth, and its strategic positioning. At $59.39, Thomson Reuters has a consensus price target of $66.91 and the 52-week trading range is $48.02 to $63.46.
Cadence Pharmaceuticals Inc. (NASDAQ: CADX) was given a very short write-up in the specialty pharmaceutical sector. It was noted as being that Hospira Inc. (NYSE: HSP) could drive significant SG&A synergies by leveraging its own sales force. UBS also only has a neutral rating, but this is in that sweet spot with a market cap of $585 million. We would note that the consensus Thomson Reuters data shows revenues growing from about $21.5 million in 2011 to just over $110 million in 2012. With shares around $9.22 today, the 52-week range is $6.41 to $10.00 and Thomson Reuters has a price target of $10.14 from its analyst pool.
Salix Pharmaceuticals Ltd. (NASDAQ: SLXP) is also only given a Neutral rating at UBS, but its $2.24 billion market cap is one that UBS could be driven higher on synergies by leveraging its sales force to juice sales in Xifaxan. It is hard to get excited about the deal size projected too with a likely value of $2.5 to $3.0 billion.
As a reminder, just because M&A deals are dreamed about does not mean that a deal is imminent or even in the works. It is our take that some of the broad list of over 40 companies throughout many sectors not tied to healthcare or biohealth may have more attractive candidates for M&A. That is what makes a market.
JON C. OGG
Icagen Inc. (NASDAQ: ICGN) is one of the smaller biohealth companies out there and it is often overlooked by investors. When headlines hit that Pfizer Inc. (NYSE: PFE) may be interested in acquiring the company, you know what happened… Shares skyrocketed.
What we want to know is if the deal could be worth it now that the biotech outfit has seen shares more than double in a single session.
Pfizer has said it was considering a strategic transaction with the company, and it needs to be known that Pfizer already is a stakeholder in the company. Icagen is also reportedly engaged in discussions.
What is amazing is that Icagen had a market capitalization of only about $18 million before the news, and now that is listed as $38.9 million after a 116% gain to $5.19. MILLION… not billion.
Icagen is based in the notorious Research Triangle Park, North Carolina. The two companies have collaborated in a development partnership with Pfizer’s capital for exclusive rights for drugs that come from the partnership.
The company’s description is as follows: “orally-administered small molecule drugs that modulate ion channel targets. Its drug candidates include ICA-105665, a small molecule compound that targets specific KCNQ ion channels for the treatment of epilepsy and pain, which is in Phase II clinical trial stage; and a compound that targets the sodium channel Nav1.7 for the treatment of pain, which is in Phase I clinical trial stage.” It was also noted that Icagen is conducting R&D in epilepsy, pain, and inflammation.
After the new 52-week high today, the new 52-week trading range is $0.96 to $5.75. Icagen’s most recent balance sheet lists about $11.01 million in cash and almost no significant long-term debt. While it has revenues, those appear to be R&D based sales.
Icagen used to have a significantly higher value than this, but that was long before the recession. This could be a huge deal for Icagen’s newer investors but this is so small that it would not even be a line-item expense for Pfizer with its near-$160 billion market cap.
JON C. OGG
If you would have said ten years ago that Celera Corporation (NASDAQ: CRA) would be acquired by Quest Diagnostics Inc. (NYSE: DGX), most investors would have said that you were off your rocker. Celera was a leader in genomics at the time and it had a huge mountain of cash that made up much of its value.
Celera’s Berkeley HeartLab unit has a proprietary lipid testing technology, esoteric testing capability, advanced therapy guidelines and patient support services. The company is also focused on personalized disease management where it is “developing tests and services that identify a person’s inherent risk for a disease and may also characterize its biological basis, aiding selection among treatment options and monitoring treatment effectiveness.”
The value of the buyout is $657 million based upon an $8.00 buyout price. Interestingly enough, the buyout cost is actually much lower because Celera has roughly $327 million in cash and short-term securities on its balance sheet. Quest expects only a 1% revenue boost in 2011 revenues.
Celera was deemed by some to have some of the next-generation testing that goes back to when investors were all gung-ho on genomics. Think testing for personalized medicine. That day is not yet here but it is getting closer. The promise goes back to the late-1990s and early 2000s.
What Quest is getting is a deal on the cheap that could offer huge upside when you consider that Quest is much more dominant and prominent than Celera. Quest was almost 20-times its size in market cap and somewhere around 50-times its size in revenues.
We would perhaps highlight several other genomic stocks out there based in part on this deal. Human Genome Sciences, Inc. (NASDAQ: HGSI) is now in the drug phase and we all know that it has risen from the ashes back to the genomics days.
Affymetrix, Inc. (NASDAQ: AFFX) is in genetic analysis in the life sciences and clinical healthcare markets and it has been considered a buyout target in the past.
Genomic Health Inc. (NASDAQ: GHDX) has breast cancer testing and is worth $675 million in its market capitalization.
Complete Genomics, Inc. (NASDAQ: GNOM) develops and commercializes a DNA sequencing platform for human genome sequencing and analysis and it worth nearly $190 million in market cap.
Rosetta Genomics Ltd. (NASDAQ: ROSG) develops microRNA-based diagnostic and in Israel, but its market cap is so small that most may forget that it is even there.
HELICOS BIOSCIENCES (HLCS) is pink-sheet listed now, but it is the one that was aiming for the $1,000 genome map.
JON C. OGG
M&A Bonanza For Drug & Biotech in 2011 (MRK, PFE, ALXN, DNDN, HGSI, CEPH, UTHR, CADX, AMAG, SNY, GENZ, AMGN, BEC, TEVA, SGMO, LLY, ALTH, CBST, VVUS, AUXL, VRTX)
The game of predicting mergers and acquisitions in the biotech and in pharma sectors is not a new one. The talk heats up, then it dies down. A deal comes, followed by another deal, and the activity goes quiet. This next week is likely to have at least more chatter in the biohealth sector for possible mergers and acquisitions after Barron’s gave a cover story called “The New Doctor in the House: Consolidation.”
Barron’s noted that “as big drug firms buy up smaller, specialty outfits and their most innovative products, better pipelines and sales-force efficiency will boost profits.” Here is the thing to consider: Barron’s did not really offer anything new or ground-breaking this weekend. It will have rekindled some hope that M&A is coming in the space. At issue: pipeline fatigue. A note we’d throw in as well, dead-dead stocks. We are going to at least address some of the Barron’s roster, but we want to show you many others which are just as or even more likely acquisition targets. Some of ours have even been in-play before.
Barron’s threw in Merck & Co. (NYSE: MRK) and Pfizer, Inc. (NYSE: PFE) as the largest of the Big Pharma players and it threw out biohealth names with stock-market values below $10 billion:
- Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) with a $7.5 billion value after a hueg run-up;
- Dendreon Corporation (NASDAQ: DNDN) for Provenge for prostate cancer (and future cancers) with a $5 billion market value today;
- Human Genome Sciences, Inc. (NASDAQ: HGSI) for its Benlysta in patients with severe active lupus nephritis and CNS lupus and a $4.5 billion market cap;
- Cephalon, Inc. (NASDAQ: CEPH) is one we have rarely looked as since things quieted down there;
- United Therapeutics Corporation (NASDAQ: UTHR) for its treat pulmonary arterial hypertension and an almost-$4 billion value;
- Cadence Pharmaceuticals Inc. (NASDAQ: CADX) was noted for its pain medication without the addiction aspects of morphine and its value is only $369 million;
- AMAG Pharmaceuticals, Inc. (NASDAQ: AMAG) was called a value stock despite its recent weak sales and despite its cash burn with a $368 million market cap.
Much of the biotech M&A game hinges on Sanofi-Aventis (NYSE: SNY) in its chase to acquire Genzyme Corporation (NASDAQ: GENZ). The latest talk is that a work-out could come to $80 all-in if certain milestones were achieved but the deal is still south of there officially. As noted above, we have our own opinions on which biotech companies and drug companies could find their way into the hands of a larger acquirer.
Amgen Inc. (NASDAQ: AMGN) is likely to continue being an acquirer. The company recently announced a deal worth potentially $1 billion to acquire privately-held BioVex. Last year the company said it was aggressively looking for new targets and its $52 billion market cap is the largest of all the independent biotechs in America. The company has more tricks up its sleeve.
Beckman Coulter Inc. (NYSE: BEC) went into play in early December with private equity firms being the likely acquirers of the portfolio of biomedical testing equipment and supplies. We argued at the time of the premium that it seemed shares fully reflected that value, and shares are actually lower now.
And don’t forget Sangamo Biosciences Inc. (NASDAQ: SGMO), where shares rallied in November on rumors of a potential bid interest from Eli Lilly & Co. (NYSE: LLY). It had good news on ZFP Therapeutic program to develop SB-509, a zinc finger protein transcriptional activator (ZFP-TF) of the vascular endothelial growth factor (VEGF)-A gene as a treatment for ALS and the news flow has continued to propel shares higher. It went above $4.50 on the rumors but now shares trade at $7.39. The market cap is still low here at $334 million.
Allos Therapeutics, Inc. (NASDAQ: ALTH) has been another name floated out there for M&A possibilities, but things are looking less and less bright for the company. Shares hit a 52-week low just on Friday.
Cubist Pharmaceuticals Inc. (NASDAQ: CBST) has not really gone anywhere as it is deemed a mature company, but it is one we thought for sure that would find its way into being part of a larger company. Its Cubicin is on the market and it fights severe hospital-induced infections and the market cap is $1.3 billion here.
VIVUS Inc. (NASDAQ: VVUS) remains a wild card due to the FDA. Diet and weight-loss pills have not been given any real love by the FDA. The exception here is that Qnexa does have serious benefits. There are side effects, particularly in cases of pregnancy. We would ask this though: How many pregnant and soon-to-be-pregnant women really diet? Most doctors don’t even want pregnant women taking supplements, let alone drugs. IF the FDA approves Qnexa, that $680 million market cap may be worth far more.
Teva Pharmaceutical Industries Limited (NASDAQ: TEVA)… We have also noted Teva’s mega-cap ambitions, and making more acquisitions would generally get there.
Last year, Morningstar put out a list of three favorites that it sees as acquisition targets in the biohealth space: Auxilium Pharmaceuticals Inc. (NASDAQ: AUXL), Human Genome Sciences Inc. (NASDAQ: HGSI), and Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX). FULL ARTICLE
This should at least give you a better and more concise list of possible deals and deal-makers for 2011. Just remember this, regardless of what Barron’s or other media outlets try to tell you: not all biotechs have to be acquired, not at all.
JON C. OGG
Genzyme Corporation (NASDAQ: GENZ) may have some signs of life. On what felt much like a directionless Friday, the biotechnology company under a turnaround and under an M&A tree may actually have some interest.
The company rose Friday on news that it expects to meet the November 28, 2010 deadline to move the finishing and filling operations out of its Allston, Massachusetts plant for U.S. products.
Genzyme has suffered as a result of a virus and contamination at its Allston plant, which is one of the key factors that bruised the stock over the last year before Sanofi-Aventis (NYSE: SNY) stepped in with a buyout offer.
Reports were out this week that GlaxoSmithKline plc (NYSE: GSK) wasnit interested in making a competing bid for Genzyme.
While a $1.00+ gain might not be out of the ordinary, this stands out like a sore thumb for M&A investors. Genzyme wants more than $69 from Sanofi-Aventis and the news flow on other potential bidders has been fairly mum.
The $1.04 gain to $71.31 is the highest closing price since November 5 when it closed at $71.69. The trading volume of 4.583 million was also the highest since November 5.
The $72.50 NOV10 CALLS expired worthless on Friday and we saw more than 10,000 of those contracts trade. Here was the action in the DEC10 CALLS:
Strike Volume OpInt
70.00 3,613 20,711
72.50 6,999 22,428
75.00 4,020 8,934
Even the JAN11 $75 CALLS traded 3,202 contracts versus an open interest of over 81,000 contracts.
This might not seem like much to major screening efforts, but for M&A and special situation and turnaround investors, it feels like something may be coming down the pipe soon. Stay tuned.
JON C. OGG
MannKind Corporation (NASDAQ: MNKD) is not without controversy. So what happens when you hear ‘buyout rumors’ driving the stock higher?
Barron’s reported a rumor first being published by TheFlyOnTheWall that MannKind could be a takeout buyout candidate. Eli Lilly & Co. (NYSE: LLY) was noted as the buyer, and $12.50 was the price hinted at.
The problem is that it is still an outstanding issue over whether or not MannKind will get its inhaled insulin approved by the FDA. The company has raised money and it has even gone as far as changing the name for AFREZZA.
To make matters even more complicated, MannKind is a highly-shorted stock. The most recent settlement date of September 15, 2010 showed that the short interest was down to 14.215 million shares. That was actually the lowest short interest since mid-April, but that represented 13 days to cover at the most recent time.
Recent financing has not been without criticism, and share lending arrangements are often hated by shareholders. The big catch here is that the inhalable insulin market will be huge if the safety risks can ever be overcome. Imagine no more needles for diabetics taking insulin. Pfizer Inc. (NYSE: PFE) has gone down this path before. It failed.
Novo Nordisk A/S (NYSE: NVO) has one monster insulin franchise, and it would likely do anything it could to protect its market share and its market cap is a whopping $57+ billion. Not bad for a Danish company, not bad at all. Its shares hit a new 52-week high of $99.75 today.
Options trading has been elevated today as well in MannKind trading, but the options expirations of JAN-2011 are the first month where the options start to price in any FDA event decisions.
In late-day trading, MannKind shares were up over 8% at $6.59, but the 52-week trading range is $4.76 to $11.12. The bet is an obvious one: inhalable insulin, if ever approved, is an easy blockbuster treatment.
Keep in mind that rumors have been out on MannKind before. Of course, most rumors turn out to be nothing more than unfounded rumors. The risks of acquiring a company without FDA approval are often too large for a large for a Big Pharma player. With a sub-$1 billion market cap, anything is possible.
JON C. OGG
September 29, 2010 (3:30 PM EST)
What is the oldest trick in the book when you need a share price up after it challenges 52-week lows? Float a a takeover rumor… Allos Therapeutics, Inc. (NASDAQ: ALTH) is up big on more than triple-normal the trading volume. A fresh article from FORBES got the rumor going that Allos could be a takeover stock based upon a screen from biotechnology analyst Geoffrey Porges of Sanford C. Bernstein. The claim is that 10,000 companies were screened to find a list of 25 that look like possible takeout candidates, and then Porges picked 4 of those which he thinks could get scooped up.
On Allos, Porges noted that it sells the cancer drug Folotyn. While the stock has not performed well ( big understatement), the ultra-orphan cancer niche would give a new team something that would appeal to buyers. Frankly, there was very little meat to the argument.
Three other names floated out there were ViroPharma Incorporated (NASDAQ: VPHM), Geron Corporation (NASDAQ: GERN), and Pharmacyclics Inc. (NASDAQ: PCYC).
Allos was the stock that investors took most to heart in a very short description article today. With about 90 minutes to the market close, shares are trading up 8.3% at $4.31 on more than 3.85 million shares. The 52-week trading range is $3.58 to $8.79 and average volume in the last 90 days has been roughly 1.1 million shares. That $3.58 low in Allos was just seen as recently as August 31.
Unfortunately, Geron is now too embattled in this ban on embryonic stem cells that is not yet resolved; Geron was down 2.3% at $5.15.
ViroPharma was up less than 1% at $13.19 and Pharmacyclics was up 4% at $7.73 on the notation that a buyout could come their way too.
JON C. OGG
For the past several months, rumors and reports have flown about French pharmaceutical behemoth Sanofi-Aventis (NYSE: SNY) devoting heavy resources to acquiring American research company Genzyme Corporation (NASDAQ: GENZ). The firms have gone back and forth on offers since early last month. Today, the Genzyme rejected Sanofi’s latest effort. Genzyme CEO explained his company’s actions, decrying an “unrealistic starting package” and said their offer “dramatically undervalues our company.”
Shares of GENZ are up 3.77 today on much higher than average volume. SNY is up .24% on average volume.
-Michael B. Sauter