14 Biotech Buyout Ideas

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 |  Includes: ALXN, BIIB, BMRN, CASC, CELG, CLDX, CVM, GERN, GILD, ILMN, MITI, MYL, VICL, XNPT
by: Investment Underground

By Jack Fuller

Biotech companies are hot right now, and we identified a few to keep an eye on. The following firms either have potential blockbusters in the pipeline or unique niches that make them attractive buyout candidates. One we like is Xenoport Inc. (NASDAQ:XNPT). Xenoport faced concerns of going out of business after receiving questionable marks on many of its clinical products. However, the firm received a huge spark on April 7th after the announcement of FDA approval for its drug Horizant, sending share prices rocketing from $6.38 to $11.34.

Horizant treats restless leg syndrome, and XenoPort plans to aggressively market the drug with partner GlaxoSmithKline (NYSE:GSK) to target the 8 million sufferers of the condition. Some analysts predict the drug could bring in potential revenue of more than $200 million by 2016 with margins over 30%. The $283 million company currently trades at $8.03. Marketwire has noted it as a stock poised for growth, and its recent drop in share prices makes it an attractive buyout option.

Another is Biogen Idec Inc. (NASDAQ:BIIB). We touched on Biogen in our previous article, and the company’s future prospects are heavily dependent on the performance of Tysabri. Biogen concentrates on developing novel treatments for conditions such as multiple sclerosis, and has two steadily profitable drugs in Avonex and Rituxan. However, Avonex will face increased competition from newly released drugs such as Gilenya, and Rituxan begins to lose patent protection in Europe in 2013.

That leaves Tysabri, a treatment for multiple sclerosis, to make up the sales. The drug doesn’t come without risk. Researchers discovered that lengthy treatments of Tysabri could spur the deadly infection progressive multifocal leukoencephalopathy (PML) in patients. Trials have begun investigating the JC virus antibody, which could predict a patient’s risk for developing PML.

If the company can isolate patients susceptible to PML, then Tysabri sales could surpass the $1.2 billion in sales it hit in 2010, and could yield closer to $2 billion in global sales. Biogen trades at $82.85 with a $20 billion market cap. We could also see Mylan Inc. (NASDAQ:MYL) getting bought out. With a total debt of $5.4 billion and Debt/EBITDA ratio of 4.27x, Mylan carries significantly more risk than many companies in the pharmaceutical field. However, the world’s third-largest generic pharmaceutical manufacturer also has many positives that make it a great prospect for a long-term purchase. Mylan expects gross margins to improve from its current 40.4% to 42.5% by 2015 based on greater economies of scale, and many blockbuster drugs will lose their patents in the next few years including Lipitor, Plavix, Lexapro, and Zyprexa, opening up opportunities for Mylan. While Mylan faces pricing pressure in Europe from government-mandated price cuts on generics, Mylan should be able to offset any loss in revenue by capitalizing on growth in international markets where generic use is low. The stock trades at $24.02 and is valued at nearly $10 billion.

Illumina Inc. (NASDAQ:ILMN): Illumina markets DNA sequencing equipment that identify and order bases, and locate variations in the human genetic code. The market for genetic analysis of this kind has already hit $2 billion, and is growing in double-digit figures. Illumina has positioned itself well by selling relatively low-priced equipment and one-time-use consumables with high margins. Illumina’s gross margins as of February were at 65%, while operating margin hit 22% compared to the industry average of 15.5%.

Illumina currently utilizes the bead format, which synthesizes large amounts of genetic information while maintaining a high degree of accuracy. Illumina recently released the HiSeq 2000, which adds high-quality information and commands a premium price tag. Despite Illumina’s great financial numbers, we are concerned with its ability to remain competitive.

Prices for technology drop quickly and dramatically, meaning Illumina will have to continue offering better quality products to justify higher pricing, and thus maintain margins. If another firm can develop better technology quicker than Illumina, the firm’s advantage will quickly disappear. Illumina remains one to keep a close eye on. Shares trade at $66.93 with a P/E Ratio of 63. Another that's interesting is Pharmasset Inc. (VRUS). This mid-stage drug company focuses on the development of novel antiviral compounds. The stock traded at $44.39 at the start of the year, and has exploded to a share price of $101.93 since. Share prices surged on the back of analyst upgrades on the stock and an “uptrend” rating from SmarTrend in early January.

The stock has risen nearly 120% since the Uptrend alert was issued. Pharmasset has multiple Hepatitis C treatments in the pipeline, PSI-938 and PSI-7977, and 15 of 16 patients (94%) treated with the drugs had undetectable levels of Hepatitis C after 14 days. If the drugs reach market, they would replace interferon, a treatment that causes extreme discomfort to patients and has many side effects. That makes the treatments potential blockbusters, and makes Pharmasset one to watch.

Alexion Pharmaceuticals Inc. (NASDAQ:ALXN): Alexion focuses on the development of drugs for the treatment of life-threatening diseases, and currently has one product on the market, Soliris. Soliris treats paroxysmal nocturnal hemoglobinura (PNH), a genetic disease that destroys red blood cells, and causes half of those suffering from it to die within 15 years. Soliris inhibits destruction of the cells and is the first and only treatment for PNH. As such, Alexion can charge premium prices and has a seven-year period of marketing exclusivity. Alexion will be profitable, but the only question is whether it can diversify its portfolio to expand and maintain profitability once Soliris loses patent-protection. The firm has multiple compounds in the works to treat diseases such as chronic lymphocytic leukemia and multiple myeloma, and Soliris is in phase II trials for neurological and kidney disorders. If any of these drugs are approved and Alexion puts in solid marketing efforts, watch for the stock to rise. Alexion trades at $98.17.

CEL-SCI Corporation (NYSEMKT:CVM): CEL develops drugs and vaccines to empower immune defenses against cancer and infectious disease. CEL’s leading drug candidate, Multikine, gained Phase III approval this month, and does not rely on the need to isolate the patient’s own tumor antigens, a new approach to cancer vaccines. In phase II trials, the product eliminated tumors in 12% of subjects in less than a month, improved patients’ overall survival by 33%, and was both safe and well tolerated. The drug could become first-line standard care in the treatment of head and neck cancer. That, combined with CEL’s immunotherapy products in the pipeline to treat H1N1 and rheumatoid arthritis, means the stock has explosive potential. With shares trading at $.66 and a market cap of $136 million, this one could come cheap for the right buyer.

Celldex Therapeutics Inc. (NASDAQ:CLDX): Celldex is a biopharmaceutical company based out of New Jersey, and it utilizes its Precision Targeted Immunotherapy platform to develop pipeline candidates to target cancer and other difficult-to-treat diseases. As far back as 2007, Celldex was considered the “next big thing” in biotechs with promising results in early trials for lead drug candidate CDX-110.

The drug, now named Rindopepimut, has reached Phase III trials after showing great results in tackling brain cancer in Phase II. Survival increased to 26 months vs. the 15 month average for patients on drug Temodar. Temodar currently earns about $1 billion a year in revenue, meaning Celldex and Rindopepimut have big potential. Celldex trades at $4.10.

Geron Corporation (NASDAQ:GERN): This therapeutic and diagnostic biopharmaceutical drug maker is developing a series of drugs targeted towards various forms of cancer, in addition to products developed from embryonic stem cells targeted towards multiple diseases. Needham & Company placed a “hold” on Geron, citing a lack of significant events over the next 12 months that could drive the stock higher. However, we are bullish on Geron’s long-term prospects.

Geron’s phase I trials for GRNOPC1 were accelerated because of its efficacy in the treatment of spinal cord injuries, and it has received great results from multiple products in Phase II trials. The stock spikes whenever good news emerges about its stem-cell offerings, and analysts have a $10.13 price target for the stock compared to the $4.86 it trades at at the time of this writing. There is huge upside for this stock, and it’s one wave we’re willing to ride. Expect larger firms to take interest once more products hit Phase III trials.

Micromet Inc. (NASDAQ:MITI): Micromet develops drugs that mobilize the body’s T cells, the body’s most potent killers, to detect and destroy normally unrecognizable cancers. Micromet’s stock has dropped since January, but recently, share prices have been on the upswing. Share prices jumped 10% on April 6th, and multiple analysts including RBC Capital Markets and MP Advisors recently upgraded the stock to “outperform”. The upgrades come on the heel of positive news from Micromet’s leading drug candidate, MT-103, which showed positive results in trials for the treatment of leukemia. We think that Micromet’s positive showings from MT-103 and unique but effective treatment methods make it a buyout target. Shares currently trade at $6.01 off its 52-week high of $8.63.

Oncothyreon Inc. (ONTY): This $123 million drug developer based in Seattle is a clinical-stage pharmaceutical company focused on the treatment of cancer. Oncothyreon’s products simultaneously stimulate the immune system to attack cancer cells and introduce molecular compounds that inhibit cancer-related protein activity. The firm’s leading drug candidate is Stimuvax, a vaccine that causes the immune system to attack cancer cells that express a protein antigen called MUC1. MUC1 tends to be over-expressed in lung cancer, breast cancer, and colorectal cancer, making the drug’s potential impact very promising.

The drug has shown great efficacy in phase II trials, extending median survival from 13.3 months for patients receiving best supportive care to 30.6 months for patients receiving Stimuvax. The drug began Phase III trials for breast cancer in 2009. The efficacy of Stimuvax, combined with other promising Phase II products, makes us bullish on Oncothyreon. Shares trade at $4.09.

Vical Incorporated (NASDAQ:VICL): Vical researches and develops vaccine therapies for the prevention and treatment of cancer and other infectious diseases, with five active clinical and preclinical programs in development. Vical share prices have been fluctuating between $2.88 and $3.30 this month, with good news coming recently with European patent approval for treatment TransVax. We’re high on Vical’s prospects because of its use of DNA vaccines, which offer less risk and more efficient manufacturing compared to traditional pathogen-induced vaccines. The technology allows Vical to provide vaccines in weeks instead of months or years without ever having to handle the pathogen. Based on Vical’s effective products in the pipeline, lack of debt, and reserves of cash to last it through 2012, we see Vical as a strong buy. Shares currently trade at $3.20. We think shares could reach closer to $6 by year’s end with initiation of Phase III trials for multiple drugs.

Celgene Corp (NASDAQ:CELG): Celgene boasts an extremely strong portfolio with the acquisitions of Pharmion, Gloucester, and Abraxis, and its blood cancer drug Revlimid is a blockbuster, with global sales growing 45% in 2010 to reach $2.5 billion. The $26.32 billion market cap company is pushing the drug in Japan, and applied for first-line multiple myeloma approval in Europe. Sales of Revlimid outside the U.S. grew 55% in 2010, and global sales could equal U.S. sales in a few years. Celgene’s strong growth and profitability make it a potential takeover target for a large firm (though only few could afford it at this point) looking to expand its oncology portfolio. The only worries we have with Celgene concern the impact Medicare reimbursements will have on revenue, and the approval status of drug Abraxane for the treatment of lung-cancer. These are small concerns, however, considering the strength of the company, and we think Celgene has a very profitable future. Shares trade at $56.60.

Biomarin Pharmaceutical Inc. (NASDAQ:BMRN): Share prices for Biomarin have increased 6.2% since the last time we covered it, increasing from $25.36 to today’s share price of $26.94. Biomarin has two strong products currently on the market, with a third, recently approved product that has plenty of potential. Biomarin expects sales of Aldurazyme to surpass $200 million by 2012 and sales of Naglazyme to surpass $250 million by 2012. Kuvan, the most recently approved drug, has the most promise, with approval to treat mild to moderate phenylketonuria, one of the most common metabolic disorders in the world.

The drug had a slow launch amidst concerns from physicians related to cognitive function in patients, but neurological data to be released in 2012 should spur the drug’s growth. Biomarin also has a solid array of products in its pipeline, making it a very attractive takeover target. Despite a “hold” from analysts at Deutsche Bank (NYSE:DB) in February and weakness in some of its technicals, we think Biomarin has plenty of promise. Biomarin has a market cap of $2.99 billion.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.