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
An FDA notice today seems to have gone almost entirely unnoticed. This is something that should have been a key stand-out event today in the world of cancer treatments even if some may have anticipated this development. Cleveland BioLabs, Inc. (NASDAQ: CBLI) announced that its CBLB502 was granted Orphan Drug status by the FDA. This is a drug under development to treat exposure to radiation for “prevention of death following a potentially lethal dose of total body irradiation during or after a radiation disaster.” The indication is one thing. The ramifications are another.
Today’s Orphan Drug designation qualifies CBLB502 for an accelerated review process, as well as tax credits, financial assistance for development costs, and seven years of marketing exclusivity if it is given FDA approval.
It was just back in July 2010 that Cleveland BioLabs’ CBLB502 was granted fast track status from the FDA for reducing the risk of death following total body irradiation during or after radiation disaster.
We noted that there is a big difference here between the indication and the ramification. There is currently no FDA approved medical counter-measure for this indication. That is the spark or the catalyst. But there is another issue to consider here and that is the potential off-labeling. If you know of any cancer patients who have had to suffer through radiation treatments, you also know about the limitations and the toxicity. Patients can only be given so much radiation. We are not going to jump the gun here, but a potential off-label treatment down the road could be stronger dosages of radiation used with this drug. Ditto for chemotherapy. It is too soon to come to that conclusion at this time, but worth consideration.
Cleveland BioLabs notes that CBLB502 “is a bio-engineered derivative of a microbial protein that potentially reduces injury from acute stresses, such as radiation and chemotherapy.” This mobilizes several natural cell protective mechanisms, including inhibition of programmed cell death, reduction of oxidative damage, and induction of regeneration-promoting cytokines. CBLB502 is being developed by Cleveland BioLabs under the FDA’s Animal Efficacy Rule. This approval pathway requires demonstration of efficacy in representative animal models and safety, pharmacokinetic, pharmacodynamic, and biomarker testing in healthy human subjects.
The Orphan Drug Designation applies to the prevention of rare diseases/disorders that affect fewer than 200,000 people in the U.S., or that affect more than 200,000 people but are not expected to recover the costs of developing and marketing the treatment. The designation also allows for a possible exemption from the FDA-user fee and assistance in clinical trial protocol design.
The company has strategic relationships with the Cleveland Clinic, Roswell Park Cancer Institute, ChemBridge Corporation and the Armed Forces Radiobiology Research Institute. Don’t underestimate that military use. Radiation toxicity is one of those micro-sector treatments that most hope will never be needed. The problem is that when it is needed, it is urgently needed and the raw costs of such treatment become immune from traditional economics.
The company is still rather new as it was just formed in 2003 and it has seen a rather rocky performance since its late-2006 IPO. Shares are actually down on the day by almost 1% at $6.67 versus a 52-week range of $2.80 to $7.24. As the news has been anticipated, there is little reaction on the news. If the efficacy and the safety profile can be proven, the company may get to write its own ticket. Even if the safety profile proves to be less than many approved drugs, that might not assure that approval is still denied. Stay tuned.
JON C. OGG
Inhibitex Inc. (NASDAQ: INHX) may be slightly lower after earnings, but an analyst note is endorsing the long-term merits of the company. Zacks Research’s Jason Napodano, CFA, announced that Zacks is recommending the purchase of Inhibitex (INHX) ahead of two major catalysts which are coming down the pipe in the next few months ahead.
The research notes:
In December 2010, management plans to release top-line data from the ongoing phase II program with FV-100. The trial is designed to show FV-100 superiority to Glaxo’s Valtrex (valacyclovir) in the treatment of herpes zoster (shingles). FV-100, has the potential to be a game changer for the treatment of shingles. The current standard of care, valacyclovir, with an estimated 60% market share, is dosed at 1000mg three times a day. Valtrex has improved lesion healing and pain indication reduction over older drugs Famvir (famciclovir) and Zovirax (acyclovir), but the treatment option can still be improved upon significantly. Inhibitex is developing FV-100, a potential once daily dosing agent, to improve pain scores and speed up lesion healing. Other key endpoints to the trial include reducing incidence of post herpetic neuralgia (PHN) and use of concomitant pain medications. If successful, we believe that Inhibitex’ drug has $500+ million peak sales worldwide. However, even with efficacy only on par with Valtrex, we still believe that FV-100 has commercial potential given the reduction in dosing (improved compliance – especially in the elderly population) from three times daily to once daily. We are optimistic on the data coming next month.
The second major catalyst for Inhibitex is the release of a phase Ib on INX-189, the company’s phosphoramidate nucleoside analogues, also referred to as pronucleotides or protides, which are prodrugs of nucleosides that target the RNA-dependent RNA polymerase (“NS5b”) of HCV. Preclinical and phase I data suggest INX-189 has favorable pharmacokinetics with high potency anti-viral activity. In November 2010, management initiated a multiple ascending dose clinical trial to assess the ability of once-daily INX-189 to reduce hepatitis-C RNA viral loads in treatment naïve patients with chronic genotype-1 HCV, as well as safety, tolerability, and pharmacokinetics, after seven days of treatment. Inhibitex is studying INX-189 both as a monotherapy and in combination with HCV standard-of-care, ribavirin. Preclinical data suggest significant synergy with ribavirin, making INX-189 an intriguing molecule from a partnering standpoint. Data from this phase Ib program should be available early next year.
Management should be in position to advance INX-189 in a phase II, 12+ week clinical trial in combination with standard of care and other complementary direct antiviral compounds by the middle of 2011. We expect that management will partner the candidate for the phase II program in 2011 assuming safety and proof-of-concept have been effectively demonstrated. We remind investors that in March 2009, Vertex Pharmaceuticals paid nearly $400 million to acquire privately-held ViroChem and its HCV non-nucleoside N25b polymerase inhibitor, VCH-222. Inhibitex’ nucleosides N25b polymerase inhibitor looks to offer similar potency with potentially less resistance and improved dosing then VCH-222.
With these two major catalysts on the near-term horizon and the potential to sign two lucrative collaborations in 2011, we recommend investors buy shares of Inhibitex today. Our target is $4 per share. the summary and links can be found here at Zacks.
Our own observation here about the Zacks report is that it is a very optimistic call because of the implied upside. If you compare the $4 target, that is more than 100% higher than today’s price of $1.94. It is also above the 52-week trading range of $0.67 to $2.95.
Inhibitex has a mere $120 million market cap and its cash and cash equivalents were listed as $24.2 million as of September 30, 2010.
Trius Therapeutics, Inc. (NASDAQ: TSRX) managed to come public via an initial public offering this morning. The biotech outfit is “developing innovative antibiotics for serious, life-threatening infections”
Its IPO was 10,000,000 shares of common stock at $5.00 per share. This is a significantly larger number of shares ate a significantly lower share price. That $5.00 pricing is under the prior $12.00 to $414.00 range but that share sale of 10 million shares compares to an original estimate of roughly 6 million shares.
Citigroup was the sole book-running manager, Piper Jaffray & Co. was the co-lead manager, and Canaccord Genuity Inc. and JMP Securities were co-managers for the offering. Trius granted the underwriters a 45 day option to purchase up to 750,000 shares of its common stock at the IPO price to cover over-allotments at the underwriting group’s discretion.
Trius’ first product candidate is called torezolid phosphate, an IV and orally administered second generation oxazolidinone being developed for the treatment of serious gram-positive infections. This indication includes MRSA, a serious infection that hits thousands and thousands of hospital patients.
The company is also conducting two preclinical programs using its proprietary discovery platform to develop antibiotics to treat infections caused by bacteria of the gram-negative and gram-positive categories.
The company’s venture backers were selling shares in the offering:
- Sofinnova Venture Partners
- InterWest Partners
- Versant Venture Capital
- Prism Venture Partners
- Kleiner, Perkins, Caufield & Byers
The reception is muted so far. Shares opened at $5.10 and are currently at $5.00 with over 850,000 shares traded so far as of 10:36 AM EST.
JON C. OGG