Biotech ETF IBB Could Get A Boost From A Potential Gilead Merger Or Acquisitions

|
About: iShares Nasdaq Biotechnology ETF (IBB), Includes: AMGN, BMY, CELG, GILD, RHHBY, VRTX
by: Ed Wijaranakula
Summary

IBB tumbled on August 24 after Hillary Clinton's EpiPen tweet but may now be heading for a breakout.

Gilead's top priority should be to acquire an asset that has immediate impact on top-line growth to offset declining revenue from its hepatitis C drugs.

A potential GILD takeover of BMY got a bit easier since Opdivo concerns have brought the price of BMY far off its high this summer.

Gilead's potential acquisition targets, including VRTX, have seen significant drops in market cap and are still cheap.

IBB top holdings AMGN and CELG are breaking out.

The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks the Nasdaq Biotechnology Index (NASDAQ:NBI), and shares of Mylan N.V. (NASDAQ:MYL) tumbled 3.36% and 5.41%, respectively on August 24, after Hillary Clinton, the Democratic nominee for U.S. President, tweeted at 2:02 p.m. EST the following: Hillary Clinton (@HillaryClinton) - EpiPens can be the difference between life and death. There's no justification for these price hikes. t.co/O6RbVR6Qim -H.

IBB Technical Chart

Mrs. Clinton's tweet was in response to a more than 400% price increase over the last several years of Mylan's EpiPen (epinephrine injection, USP) Auto-Injector, for the emergency treatment of anaphylaxis. Senators Susan Collins (R-Maine) and Claire McCaskill (D-Mo.), the chair and ranking Democrat of the Senate Special Committee on Aging, sent a letter to Mylan CEO Heather Bresch seeking information on the company's pricing practices, but no public hearing has been scheduled thus far by that committee.

IBB received a 1.43% boost on Tuesday and may be heading for a breakout after Allergan PLC (NYSE:AGN) said that it agreed to acquire Tobira Therapeutics Inc. (NASDAQ:TBRA), in a deal worth as much as $1.7 billion, to gain access to products that treat nonalcoholic steatohepatitis, or NASH, a common liver disease associated with obesity and type-2 diabetes. The news also sent shares of Gilead Sciences (NASDAQ:GILD), IBB's top holding with a weight of 7.93%, surging almost 4%, as Gilead's pipeline of NASH assets remains quite undervalued, according to Michael Yee, an analyst at RBC Capital who specializes in the healthcare sector.

Gilead Sciences Technical Chart

On September 15, Gilead announced the pricing of senior unsecured notes in an aggregate principal amount of $5 billion, maturing between the years of 2022 and 2047. The offering is expected to close on September 20. According to the press release, "Gilead intends to use the net proceeds from the offering for general corporate purposes, which may include the repayment of debt, working capital, payment of dividends, the repurchase of its outstanding common stock pursuant to its authorized share repurchase program and future acquisitions."

Jefferies analyst Brian Abrahams said in a note to clients last Friday that the debt deal would give Gilead approximately $29.5 billion in cash, and that potential acquisition targets would be several small to medium-sized deals focused on oncology, liver disease, fibrosis, and rheumatology. Abrahams would not rule out Gilead moving into a new field, such as orphan diseases. We think that Gilead's top priority should be to acquire an asset that will have an immediate impact on top-line growth to offset declining revenue from its hepatitis C drugs.

A Gilead and Bristol-Myers Squibb Co. Merger Might Get a Bit Easier

Last September, Bloomberg Intelligence analyst Asthika Goonewardene speculated that Gilead could take over Bristol-Myers Squibb Co. (NYSE:BMY), as Gilead's growth has stalled and the market was worried about future growth prospects. Gilead has been working to enter the oncology market with its chronic lymphocytic leukemia drug Zydelig (idelalisib), which generated sales of just $132 million in the entire 2015. The takeover of Bristol-Myers would expand Gilead's portfolio of antiviral and oncology drugs, particularly by gaining treatments for cancer immunotherapy.

Bristol-Meyers Squibb Co. Technical Chart

The proposed merger would have been almost impossible back then, as BMY was trading near $60 and the stock was about to breakout. Now, things are different as the stock is trading near the $55 level, after reaching an all-time high of $77.12 this summer, on concerns about growth prospects of Bristol-Meyers' flagship oncology drug Opdivo (nivolumab) and recent rollout of a Roche (OTCQX:RHHBY) anti-PD-L1 (programmed death-ligand 1) cancer drug.

Shares of Bristol-Myers Squibb Co. tumbled over 15% on August 5 following the company announcement that CheckMate -026, a trial investigating the use of anti-PD-1 (programmed death receptor-1) immuno-oncology drug Opdivo as a monotherapy, did not meet its primary endpoint of progression-free survival in patients with previously untreated advanced non-small cell lung cancer (NSCLC) whose tumors expressed PD-L1 at = 5%.

Investors might have hoped for a better outcome from the CheckMate -026 trial after Merck & Co., Inc. (NYSE:MRK) announced on June 16 that the rival anti PD-1 drug Keytruda (pembrolizumab), met its primary endpoint in the KEYNOTE-024 trial in patients with previously untreated advanced NSCLC whose tumors expressed high levels of PD-L1, tumor proportion score of 50% or more.

Bristol-Myers Squibb's Opdivo, approved by the U.S. Food and Drug Administration, or FDA, in November 2015 for treatments of an advanced form of kidney cancer, generated sales of $840 million in the second-quarter 2016. So far, the FDA has also approved Opdivo for treatment of advanced melanoma, classical Hodgkin lymphoma and metastatic NSCLC, whose disease progressed during or after platinum-based chemotherapy. According to the company's financial statement, Opdivo's revenue now accounts for over 50% of the company's oncology product portfolio, compared to just under 5% a year ago.

Merck's Keytruda was approved by the FDA for treatment of advanced melanoma in September 2014 and for metastatic NSCLC in October 2015. In the second-quarter 2016, Keytruda generated sales of $314 million, less than half of Opdivo's revenues. On August 8, Keytruda received the latest FDA approval for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. GlobalData forecasts that Keytruda will achieve peak sales of almost $500 million by 2024, in head and neck cancer treatment alone.

To make matters worse for Opdivo, South San Francisco-based Genentech, a member of the Roche Group, said in May that the FDA granted accelerated approval to its PD-L1 inhibitor drug Tecentriq (atezolizumab) for the treatment of people with locally advanced or metastatic urothelial carcinoma, or mUC, a specific type of bladder cancer.

At the end of August, Genentech said its cancer immunotherapy Tecentriq met its co-primary endpoints in the Phase III study, OAK, and showed a statistically significant improvement in overall survival, or OS, compared with docetaxel chemotherapy in people with locally advanced or metastatic NSCLC whose disease progressed on or after treatment with platinum-based chemotherapy. Genentech's Biologics License Application, or BLA, for NSCLC was granted Priority Review with an action date of October 19, 2016.

Gilead's Potential Acquisition Targets Are Still Cheap

Analysts and investors have been pressuring Gilead executives about M&A over the past few quarters, and several analysts noted that Gilead plans to ratchet down its share buybacks and thereby leave more free cash for M&A activities, according to FiercePharma.

Vertex Pharmaceuticals Technical Chart

One name that came up in the analyst's list as a potential takeover target is Vertex Pharmaceuticals (NASDAQ:VRTX), one of IBB's top 10 holdings with a weight of 3.7%. The Vertex second-quarter earnings report was released on July 27, beating Wall Street expectations on robust sales of its cystic fibrosis drug, Orkambi. Orkambi is the follow up drug to Kalydeco and combines that drug with a new ingredient, lumacaftor. The combination drug was approved in July 2015 for the most common form of cystic fibrosis.

According to a released statement, Vertex Pharmaceuticals reiterated 2016 guidance for Orkambi product revenues of $1.0 to $1.1 billion and Kalydeco product revenues of $685 to $705 million. Analysts are expecting a diluted net income per share of $1.00 on revenues of $1.75 billion. This will be the company's first full-year profit year since 2011. Shares of Vertex have been trading in a descending chart pattern, after plunging almost 40% since it hit an all-time high of $143.45 per share in July 2015.

The list of potential takeover targets, that have seen a significant drop in market capitalization since summer 2015, include rare-disease drug developers, Alexion Pharmaceuticals, Inc (NASDAQ:ALXN) and BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) as well as oncology drug developer Incyte Corp. (NASDAQ:INCY).

IBB's Top Holdings are Breaking Out

Shares of Amgen (NASDAQ:AMGN), one of IBB's top holdings with a weight of 7.74%, has already broken out the multi-year $164 head resistance and made a new all-time high at $176.64, after the company posted better-than-expected results for the second-quarter 2016, driven by strong sales of its flagship rheumatoid arthritis drug Enbrel (etanercept). Sales of Neulasta (pegfilgrastim), its second blockbuster drug, saw lower demand but was offset partially by higher pricing in the U.S., while Neupogen (filgrastim) sales plugged 23% to $196 million amid increased competition.

Amgen Technical Chart

Both Enbrel and Neulasta are facing the threat of biosimilar competition from Sandoz, a Novartis (NYSE:NVS) subsidiary, Samsung Bioepis and Apotex, a Canadian pharmaceutical company, as well as from Baxalta, now Shire (NASDAQ:SHPG), and Coherus Biosciences (NASDAQ:CHRS). Sandoz's cancer treatment drug Zarxio, a biosimilar of Amgen's Neupogen, received approval from the FDA in March 2015, and launched in the U.S. in September 2015 at a discount of 15% to the brand-name.

Sales of cholesterol-lowering drug Repatha (evolocumab), approved in August 2015, came in at just $27 million, despite that CVS Health (NYSE:CVS) will provide preferred access to Repatha through its CVS/caremark commercial formularies. In June, Amgen said the top-line results from their FOURIER outcomes trial designed to evaluate Repatha, whether the addition of evolocumab to statin therapy reduces cardiovascular morbidity and mortality in patients with vascular disease, will be available in the first-quarter 2017.

Celgene Techncial Chart

Shares of Celgene Corp. (NASDAQ:CELG), an IBB top holding with a weight of 7.72%, broke out the bearish descending triangle chart pattern in July and pulled back from the $118.50 head-resistance level and are now bouncing off the trendline support at the $106 level. While the U.S. Presidential election may put a political dark cloud over the healthcare sector, CELG should be able to break out the $118.50 level since the Celgene second-quarter 2016 earnings report came in better-than-expected and the company raised its full-year guidance for net product sales and adjusted diluted EPS.

From our viewpoint, significant revenue generation for Celgene could come from the new oral drug Ozanimod (RPC1063) for the treatment of ulcerative colitis, or UC, and multiple sclerosis, or MS, with estimated peak annual sales of $4-6 billion. The drug was developed by Receptos Inc., a company that Celgene acquired in July 2015 for $7.2 billion.

Conclusions

Shares of IBB tumbled on August 24 after Hillary Clinton's EpiPen tweet but may now be heading for a breakout. IBB recently received a boost after Allergan made an acquisition to gain access to products that treat nonalcoholic steatohepatitis, or NASH. The news also sent shares of Gilead Sciences, IBB's top holding, surging since Gilead's pipeline of NASH assets remains quite undervalued.

Gilead has been under pressure lately about M&A, as growth has stalled and the market is worried about future growth prospects. A potential Gilead takeover of Bristol-Myers Squibb Co., to expand Gilead's portfolio of antiviral and oncology drugs, just got a bit easier considering that concerns about Bristol-Myer's cancer drug Opdivo has now brought the price of BMY far off its high this summer. Gilead's potential acquisition targets, including Vertex Pharmaceuticals and others, have seen significant drops in market cap and are still cheap.

We think that Gilead's top priority should be to acquire an asset that will have an immediate impact on top-line growth to offset declining revenue from its hepatitis C drugs.

IBB's other top holdings, AMGN and CELG, have already or should be breaking out, as both have posted better-than-expected results for the second-quarter 2016, despite the political dark cloud over the healthcare sector from the upcoming U.S. Presidential election.

Disclosure: I am/we are long CELG, SHPG, AGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.