Remember the days when the mindset of Big Pharma was to just do deals? It didn't matter what you did -- you just had to do something.
According to the pundits at PricewaterhouseCoopers' Health Research Institute, 2016 was supposed to continue that trend. In fact, they projected this year to be "the year of pharma merger mania." Instead, after the Treasury Department played Whac-A-Mole with what would have been the biggest pharma deal of all time -- the $160 billion merger between Allergan and Pfizer -- the M&A frenzy vaporized almost overnight.
Still, the death of that deal doesn't spell the death of all M&A activity. In fact, two key phenomena that drove deal volumes to record levels in 2014 and 2015 haven't changed. First, ultra-low interest rates spell an abundance of cheap, easy-to-access debt. Second, many of the big-name pharmaceutical companies are sitting on hordes of cash and still need deals to refill their faltering pipelines.
But what companies fit into the M&A sweet spot right now? Currently, our Motley Fool contributors see three logical acquisition targets. All could demand significant premiums in a buyout scenario -- and, importantly, since you should never buy a company purely becuase you think it will be acquired, all three companies are attractive as stand-alone entities as well.
Poised for growth
Brian Feroldi: One company that's likely to be on Big Pharma's watch list is Acadia Pharmaceuticals (NASDAQ:ACAD). Acadia recently won FDA approval for its first drug, called Nuplazid, which has been approved to treat Parkinson's disease psychosis, or PDP.
Since there aren't currently any good treatment options for PDP, Acadia should have this market all to itself. Roughly 40% of the 1 million people in the U.S. who have Parkinson's disease suffer from PDP. With a wholesale price tag of $23,400 per year, it's not hard to believe that Nuplazid could turn into a blockbuster.
So why hasn't Big Pharma moved in on Acadia yet? It's possible that the industry is waiting to see how the drug performs on the market for a few quarters. These companies might also have reservations because during Nuplazid's late-stage trials, there was an uptick in the number of deaths among patients who used the drug compared with the control group. That fact might keep some providers from recommending the drug, which could suppress demand.
My hunch is that the healthcare community will still embrace Nuplazid with open arms because PDP places a huge burden on caregivers, but only time will tell. In the meantime, I think Acadia's stock could be an interesting opportunity for any investor with a high tolerance for risk.
Big Pharma ought to be lining up
Cory Renauer: One company I can see on the receiving end of a buyout offer is bluebird bio (NASDAQ:BLUE). Its stock has been mercilessly hammered and is now more than 70% lower than where it stood a year ago. Its odds of success, however, are as strong as ever.
The company is developing unique cellular treatments for inherited disorders in three diseases, with Lenti-D for childhood cerebral adrenoleukodystrophy (CCALD) in the lead. This rare genetic disease threatens the lives of about 40 boys born in the U.S. each year, and it is treatable -- but only with extremely dangerous donor stem-cell transplants.
Bluebird's approach also involves stem-cell transplants, but with the patient's own cells. They're extracted and then "infected" with an effective copy of the necessary gene. By using the patient's own cells, this approach appears to eliminate lethal graft-vs.-host side effects common among donor transplants.
So far, results are outstanding in terms of safety, but the market interpreted efficacy results on par with donor transplants as a bad sign. It missed the fact that none of the patients treated with Bluebird's Lenti-D are showing signs of graft failure, or graft-vs.-host side effects.
Bluebird is also developing similar treatment that replaces a defective hemoglobin gene, called LentiGlobin, for treatment of two much larger indications. Beta-thalassemia affects about 288,000 people worldwide, and a staggering 25 million are thought to have sickle-cell disease. Unlike CCALD, these two conditions are often treatable with more conventional drugs, but long-term outcomes are generally poor.
Only the most severely affected patients with beta thalassemia and sickle-cell receive dangerous stem-cell transplants, but Bluebird's LentiGlobin has a chance to change the treatment paradigm, given its relative safety. With an enterprise value -- a theoretical acquisition price for a company that considers cash and debt -- of just $1.21 billion, Big Pharmas ought to be lining up to present buyout offers.
All that Jazz
Cheryl Swanson: Jazz Pharmaceuticals (NASDAQ:JAZZ) is no stranger to acquisition rumors, and I expect the stock to become a hot takeover target once M&A activity resumes in the biotech sector. The company is a very appetizing morsel for a Big Pharma shark, since the $8.6 billion market-cap guppy owns some unique formulations for rare diseases.
Jazz's lead drug is Xyrem, which has been found to be highly effective in treating major sleep disorders. However, the potential for misuse -- gamma hydroxybutyrate is more infamously known as the "date-rape drug" -- has created some strong barriers to competitor entry, with stringent requirements for medication distribution.
Jazz's pipeline is also starting to prove fruitful. Catalysts expected soon include the U.S. release of Defitelio for a rare liver disease, a filing for Vyxeos (a drug acquired from Celator Pharmaceuticals, Inc.), and phase 3 data for JZP-110 for excessive daytime sleepiness. All three events should occur before the end of the year.
Regardless of whether a suitor comes calling or not, Jazz should do very well in the next 12 months. A takeover attempt could lead to a nice bump for shareholders, but when you look at the fact that Jazz expects to grow earnings at a nearly 25% annualized rate over the next half-decade, it's hard not to see this stock as a highly intriguing buy.
Brian Feroldi has no position in any stocks mentioned. Cheryl Swanson owns shares of Allergan. Cory Renauer has no position in any stocks mentioned. The Motley Fool recommends Bluebird Bio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.