The Biotech M&A Landscape

Feb. 04, 2019 6:31 PM ETALXN, AMGN, BMRN, CELG, CLVS, EXEL, FOLD, GSK, LOXO, TSRO29 Comments7 Likes

Summary

  • The biotech sector is off to a fast start in 2019 helped by two major acquisitions to kick off the New Year.
  • M&A across the industry looks likely to significantly exceed the relative dearth of deals in 2018 for a variety of reasons.
  • We take a look at the M&A landscape in biotech and look at some rumored and logical tie ups in the paragraphs below.
  • Looking for more? I update all of my investing ideas and strategies to members of The Biotech Forum. Start your free trial today »

"A cynic is a man who, when he smells flowers, looks around for a coffin." - H.L. Mencken

Stocks ended January on a high note with the major indices up just under one and half percent last week. It was the best start to a New Year since 1987 for investors after a dismal fourth quarter.

The biotech sector has been a strong performer so far in 2019. This area was boosted nicely by the big acquisitions of Celgene (CELG) and Loxo Oncology (LOXO) to kick off the New Year. While there have been no further significant buyouts over the past three weeks, the sector has continued to rise largely inline with the overall market.

Today we revisit the M&A landscape for the industry and offer up some predictions for the months ahead.

The Need For Acquisitions Remains Strong:

Buyout activity was largely dormant throughout 2018 even as drug/biotech giants have a constant need to replenish their pipelines. Cash at the ten largest pharmaceuticals companies increased $15 billion in the third quarter of last year to $155 billion and that cash flow has to be put somewhere.

Those funds are likely to find their way into new acquisitions. A good article came out late in December. Based on a recent survey, R&D ROI dropped to just 1.9% at the twelve largest pharma players in 2018. This is the lowest on record and down from 10% in 2010. One of the easiest ways to increase ROI is to scoop up small and mid-cap concerns where it is higher, especially after the fourth quarter's huge declines. Acquisitions always seem to be 'lumpy' in this space, but I expect when all is said and done, the dollar amount of deals will easily be 50% more in 2019 than the dearth of transactions we saw for the industry in the prior year.

Alexion Pharmaceuticals Will Be A M&A Player

Last week Bernstein speculated than Amgen (AMGN) would be a logical suitor for Alexion Pharmaceuticals (ALXN) whose earnings and revenue growth has been powered by the blockbuster Soliris and recently had its successor Ultomiris, a long-acting C5 complement inhibitor, to treat adults with the ultra-rare blood disorder paroxysmal nocturnal hemoglobinuria late last year by the FDA.

Alexion and BioMarin Pharmaceuticals (BMRN) have also been offered up as a rare disease combination that would have myriad synergies over the years. New management at Alexion certainly has not been adverse to doing deals, making several small purchases. In November, the company completed its $1.2 billion buyout of privately held Syntimmune.

Another smaller rare disease name that might make sense for Alexion would be Amicus Therapeutics (FOLD). The company has one compound already approved for Fabry Disease and will be presenting preliminary Phase 1/2 data for its compound to treat the rare affliction Pompe Disease at the WORLDSymposium on Wednesday. FOLD has a current market cap of approximately $2.3 billion.

Whichever way Alexion decides to go, I think it will be a player in the M&A space in 2019. The company reported strong Q4 results today. We recently provided a more in-depth article on Alexion here on SA as well.

Another Significant Acquisition Coming

I believe we will see at least one if not multiple $5 billion plus deals in the Biotech space before the end of the first half of this year. Oncology has been one of the major focus areas for acquisitions for years including the two big deals so far this year. This should continue to remain the case.

Clovis Oncology (CLVS) has been on a roll since fellow PARP inhibitor Tesaro (TSRO) was purchased for just over $5 billion with large buyout premium by GlaxoSmithKline (GSK) late last year. An activist investor has also been pushing the company to sell itself. Clovis could be had for approximately $2 billion including decent purchase premium.

Going larger, Exelixis (EXEL) would also makes sense as a larger acquisition. The company's current market cap is just over $7 billion. Its recently approved CABOMETYX is rapidly garnering market share in its niche and the company is targeting other indications. The company is already profitable and should do over $800 million in revenues in FY2018. Exelixis reports Q4 results this week.

And that how the biotech M&A landscape looks to us as the first full trading week of February begins.

"A poet more than thirty years old is simply an overgrown child." - H.L. Mencken

Bret Jensen is the Founder and author of articles on The Biotech Forum, The Busted IPO Forum, and The Insiders Forum. To receive these articles as published on Seeking Alpha, just click the appropriate link and hit the orange follow button.

The biotech sector has gotten off to a solid start in 2019 after deep losses in Q4. M&A has picked up as two major acquisitions happened early this year. We just provided our 2019 Outlook to Biotech Forum members. It contains what we expect in this high beta sector for the rest of the year, as well as a couple of possible logical takeout candidates. To get it, access to our model portfolio and our investment analysis archives, sign up for your free 14-day trial of The Biotech Forum by clicking here. Hope to see you on Live Chat soon!

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Disclosure: I am/we are long ALXN, AMGN, BMRN, CELG, CLVS, EXEL, FOLD. 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.

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