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
The biotech sector has been full of consolidation and mergers of late, but now we have a new model whereby a smaller company is set to grow by taking a part of a larger company. We cannot exactly call it a reverse merger. Alkermes, Inc. (NASDAQ: ALKS) and Elan Corporation, plc (NYSE: ELN) have signed a definitive pact where Alkermes will merge with Elan’s unit called Elan Drug Technologies.
The drug technologies unit is profitable and is the drug formulation and manufacturing unit. The cash and stock transaction is valued toda at roughly $960 million and Alkermes and the unit will be combined under a new holding company structure that is incorporated in Ireland called Alkermes plc.
Alkermes says this deal will be immediately accretive to cash earnings. It also is said to accelerate Alkermes’ path “to building a sustainably profitable biopharmaceutical company with expertise in developing treatments for central nervous system diseases and a broad, diversified portfolio of products and pipeline based on proprietary science and technologies.”
The deal is a game-changer because on a standalone basis Alkermes was set to have a loss of -$0.31 EPS on $213.27 million in its fiscal year March-2012. The combined company is said to see a growing product, royalty and manufacturing revenues in excess of $450 million annually. Alkermes said it will also become immediately profitable on a cash earnings basis. In short, Alkermes instantly transforms. Now the company will have a revenue stream from 25 commercialized products and its 5 growth products will now be from RISPERDAL CONSTA, INVEGA SUSTENNA, AMPYRA, VIVITROL, and BYDUREON.
For Elan, it gets to cut the debt on its balance sheet and will get to improve its capital structure, increase its operating leverage, and this will allow for additional focus and disciplined investments. It also gets a stake in Alkermes plc that can drive its value ahead.
RISPERDAL CONSTA and INVEGA SUSTENNA are both commercialized by Johnson & Johnson (NYSE: JNJ) as long-acting injectable atypical antipsychotic medications for schizophrenia and bipolar I disorder. Ampyra is an MS drug under Acorda Therapeutics, Inc. (NASDAQ: ACOR). Bydureon is an extended release Typy-II diabetes treatment that Alkermes is in with Amylin Pharmaceuticals, Inc. (NASDAQ: AMLN) and Eli Lilly and Company (NYSE LLY).
Elan is set to receive $500 million plus it will also receive 31.9 million ordinary shares of Alkermes plc common stock. The companies will also enter into a shareholder agreement that contains a lockup, standstill and voting agreement for Elan’s shares of Alkermes plc.
As far as existing Alkermes holders, they will receive one ordinary share of Alkermes plc per each share of Alkermes, Inc. owned at the merger date. The new Alkermes plc shares will be registered in the United States and are expected to trade on NASDAQ. Alkermes plc will be headquartered in Dublin, Ireland The company did note that this transaction is expected to be taxable to existing Alkermes holders and it has obtained a commitment from Morgan Stanley & Co. and HSBC to provide up to $450 million of term loans to finance the transaction.
Revenues are expected to grow in fiscal 2012 and is expected to reach double-digit growth rates in fiscal 2013 and beyond. Pro forma Adjusted EBITDA margins in fiscal 2012 are projected at 15% to 20%, pro forma Adjusted EBITDA is put at $70 million to $90 million, and pro forma adjusted EBITDA margins should expand to 30% to 35% in fiscal year 2013 and beyond. Also noted was that it has identified about $20 million of annual synergies in U.S. operations that can be fully realized by fiscal 2013.
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
Top BioHealth Research Calls of the Week (MNKD, PDLI, ILMN, CLDA, MRK, PFE, LLY, BMY, ALXN, SVNT, AMGN)
There were some key research calls in biotech and biohealth shares this week. Over in our “top five analyst calls of the week” at 24/7 Wall Street we noted how one firm came out in defense of MannKind Corporation (NASDAQ: MNKD) on its implosion this week and another call was highlighting the potential upside value that remains in PDL BioPharma, Inc. (NASDAQ: PDLI) despite its patent fight concerns. There were many other standout calls though in analyst coverage this last week in biohealth:
Illumina Inc. (NASDAQ: ILMN) has remained impressive after having been one of our “Best of Big BioHealth in 2010″ and was also at the start of the year listed as “an overvalued biohealth names with peers.” This week brought an analyst duel. Citigroup raised its rating to BUY from Hold and the new price target is $85.00 per share. Thomson Reuters has a consensus price target of $66.87 and the Citi target appears to be the street-high price target. Elsewhere, RBC Capital Markets lowered the rating to Sector Perform from Outperform due to valuation. Illumina’s 52-week range is $34.25 to $71.07, and at $68.75 it has a market cap now of $8.6 billion.
Clinical Data Inc. (NASDAQ: CLDA) will be one to watch this coming week after the FDA approved its antidepressant drug to be sold under the brand name Viibyrd. Shares closed at $15.03 on Friday but were much higher after the news and the 52-week trading range is $10.87 to $22.39. What is interesting is that analysts already see peak sales above $2 billion as this antidepressant is believed to not interfere with sexual desire as much as in some rival drugs. The consensus price target is already $29.67 per Thomson Reuters data.
This week came a standout call in Big Pharma from Wells Fargo as the firm raised the sector to “Overweight.” Wells Fargo raised Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) to Outperform ratings and also noted Eli Lilly & Co. (NYSE: LLY) and Bristol-Myers Squibb Company (NYSE: BMY) in the call.
Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) closed the week out at $84.43 and has a 52-week range of $44.86 to $87.14. There was an analyst duel this week. Gleacher & Co. raised its rating to Buy while UBS cut its rating to Hold.
Savient Pharmaceuticals, Inc. (NASDAQ: SVNT) hit new 52-week lows this last week and closed at $10.20 versus a 52-week range of $10.16 to $23.46. Its shares were downgraded to “Underperform” over at Bank of America Merrill Lynch after previous news in its business update of reports of batch failures with its new gout medication called Krystexxa.
Amgen Inc. (NASDAQ: AMGN) is set to report earnings on Monday and Thomson Reuters has estimates of $1.10 EPS and $3.8 billion in revenues; for the next quarter estimates are $1.31 EPS and $3.67 billion in revenues. At $56.97 shares are actually down slightly from 90-days ago and the 52-week range is $50.26 to $61.26. This stock is getting toward its higher end of a 3 year trading band, so we expect that analyst will have to make some adjustments after earnings. Thomson Reuters has an average price target above $65.00 currently.
At the end of December, we gave a list of Big Biotechs With teh Most Upside in 2011.
Those are definitely not all of the research calls of the week in biotech and biohealth names, but this was a fairly busy week.
JON C. OGG
Sangamo Biosciences Inc. (NASDAQ: SGMO) may not be the biggest name in the biotech world, but it is among the latest with buyout rumors driving its share price.
Rumors of a potential bid interest from Eli Lilly & Co. (NYSE: LLY) drove shares higher all day on Monday. The rumor is that the drug developer is being looked at by Lilly.
The rumors may be tied to data from the last couple of weeks after it presented Phase II clinical data from its 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.
Its presentation data from study SB-509-801 demonstrated that the drug was well-tolerated in subjects with ALS and that 40% of SB-509 treated subjects had delayed deterioration of toe and ankle muscle strength as measured by manual muscle testing. That 40% figure compared to 23% of baseline-matched historic controls. Positive improvements in electrophysiological measures of motor nerves were observed in a subset of treated subjects were also observed.
Shares closed up 9.6% on Monday at $4.54 versus a 52-week range of $2.81 to $6.82. The volume was also more than 1 million shares, making this about 5-times normal trading volume.
Sangamo’s market cap is $205 million and the development stage company has cash and short-term securities as of September 30 of $62.7 million.
JON C. OGG
Amylin Pharmaceuticals Inc. (NASDAQ: AMLN) is getting pounded this morning. Shares are effectively cut in half after the FDA declined to approve Bydureon as a potential diabetes drug with the request that it and partners need to do more testing..
The FDA requested a thorough QT study to analyze the effect on heart rates. Also requested was the evaluation of the efficacy and the labeling of the safety and effectiveness.
Eli Lilly & Co. (NYSEL LLY) and Alkermes Inc. (NASDAQ: ALKS) plan to respond to the FDA request, however the release said “by the end of next year” and that this was pending FDA discussions. The requirement for this additional data will requiring a six month review.
Amlylin’s Bydureon is the once a week injectable treatment of Byetta.
Amylin also gave preliminary data on revenues showing that revenues were approximately $154 million versus $192.9 million in the same quarter a year ago.
Amylin shares are down a whopping 48% at $10.65, under the 52-week trading range before of $11.01 to $24.21. Eli Lilly is down 4.2% and Alkermes is down 23% at $11.05 in pre-market trading.
JON C. OGG
When you hear the term ‘erectile dysfunction’ tied to the world of drugs and pharmaceuticals, chances are that the drugs that come to mind are VIAGRA and CIALIS. After all, Pfizer Inc. (NYSE: PFE) and Eli Lilly & Co. (NYSE: LLY) have spent billions combined and had untold efforts getting those ED drugs to be your first choice. VIAGRA broke records, then came ‘the weekender’ in Cialis.
But there is a second tier of ED treatments that never really caught on in the same manner. VIVUS, Inc. (NASDAQ: VVUS) has had its MUSE treatment on the market since 1997 and it has decided to sell off MUSE.
The company has entered into an asset purchase agreement with Meda for MUSE where Meda will acquire the MUSE assets (including the United States and foreign MUSE patents, existing inventory and the manufacturing facility located in Lakewood, New Jersey). Existing VIVUS employees that are MUSE dedicated are expected to join Meda and VIVUS will retain all of the liabilities associated with the pre-closing operations of the MUSE business.
VIVUS has already been business partners with Meda in Europe for MUSE since 2000, so it seems a natural fit here on the surface. VIVUS now plans to focus its efforts on the commercialization of QNEXA as a treatment against obesity and the development of avanafil for erectile dysfunction.
The terms of the deal call for an acquisition price of up to $23.5 million. the deal terms are for a cash payment of $22 million and VIVUS is eligible to receive a one-time milestone payment of $1.5 million based on future sales of MUSE.
MUSE has been on the market since 1997 as the first minimally invasive therapy for erectile dysfunction approved by the FDA. The drug is delivered locally to the erectile tissues and was meant to minimize chances of systemic interactions with other drugs or diseases.
VIVUS still has Qnexa and avanafil for erectile dysfunction under development stages today. Shareholders seem to not care about the transaction. VIVUS shares are down 0.45% at $6.55 in light volume trading.
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)
According to Reuters, Eli Lilly & Co. (NYSE: LLY) won a major battle against Teva Pharmaceutical Industries Limited (NASDAQ: TEVA), which had been petitioning for a generic version of Lilly’s drug, Evista. The court upheld the patent on Evista, which is used to treat Osteoporosis.
-Michael B. Sauter
Facing the loss of patent protection for eight high-profile drugs by 2017, including its flagship product Zyprexa in 2011, biopharma company Eli Lilly & Co. (NYSE: LLY) is looking to its pipeline it make up for the inevitable loss of revenue. According to CEO John Lechleiter, quoted in a USA Today interview, the company has “the most exciting pipeline today in our history.” Hopefully this is the case, as the eight patent-losing drugs currently account for approximately three quarters of Lilly’s current revenue.
The company currently has has about 70 different molecules in clinical development, including eight pharmaceutical molecules in Phase III drug trials and two Alzheimer’s medicines in late stage development. The company recently reported 9% revenue for second quarter revenue.
-Michael B. Sauter