2018 just might be the best time to be a small biotech -- and own shares of small biotech stocks -- than ever before. Despite a couple of noteworthy deals, last year was relatively quiet on the mergers and acquisitions front in the biopharmaceutical industry. But now, large companies can bring more cash back into the U.S. at lower tax rates thanks to corporate tax reform. And many of them are itching to spend some of that money.

We've already seen several significant acquisitions in just the first few weeks of 2018. I expect more will be on the way. But which small biotechs rank among the most likely to become buyout targets? Here's why I think bluebird bio (BLUE -6.51%), Madrigal Pharmaceuticals (MDGL 0.68%), and Sage Therapeutics (SAGE -3.30%) could be small biotechs that big drugmakers are drooling over.

A hand draws a big fish about to gobble up smaller fish with question marks around some of the small fish

Image source: Getty Images.


Bluebird is one of an elite group of small biotechs with a promising cell therapy program that hasn't been scooped up or is in the process of being scooped up by a larger company. It also has the distinction of being an important partner to one of those larger companies that have already done some scooping over the past few weeks -- Celgene (CELG).

Celgene views Bluebird's bb2121 as one of its highest pipeline priorities. The big biotech first partnered with Bluebird in 2013 to develop CAR-T cell therapies. This collaboration currently includes two CAR-T candidates targeting B-cell maturation antigen -- bb2121 and bb21217. Both drugs are being evaluated in early stage studies for treating multiple myeloma.

There has been considerable speculation that Celgene will make Bluebird its third acquisition of 2018, following its buyout deals with Impact Biosciences and Juno Therapeutics (JUNO). If Celgene doesn't pull the trigger, Bluebird could find itself courted by other big drugmakers looking for an edge in cell therapy.

Madrigal Pharmaceuticals

Madrigal Pharmaceuticals ranked as the No. 3 best-performing healthcare stock of 2017, with its share price soaring 516%. All this excitement for Madrigal stemmed from its lead candidate, MGL-3196. The biggest news for MGL-3196 came in December, when the biotech reported the drug met its primary endpoint of reducing liver fat in a phase 2 study for treating non-alcoholic steatohepatitis (NASH).

It was only 30 years ago that NASH was so rare that the disease didn't even have a medical name. Now, between 3% and 12% of adult Americans have NASH. It's projected to edge out hepatitis C as the leading cause of liver transplants by 2020. And there are currently no approved treatments for the disease.

With a significant market and unmet need, big and small biopharmaceutical companies alike have raced to develop drugs to treat NASH. There has already been some acquisition activity over the past few years, including Gilead Sciences' purchase of Nimbus Therapeutics in 2016. I wouldn't be surprised at all more activity this year, with Madrigal in the crosshairs.

Sage Therapeutics

Sage Therapeutics' stock price more than tripled in value last year. Nearly all of that huge gain came in November and December, after the biotech reported positive results from clinical studies of two pipeline candidates.

In November, Sage announced that brexanolone met the primary endpoints in two late-stage clinical studies targeting treatment of postpartum depression. The next month, the company reported experimental drug SAGE-217 met its primary endpoints in a phase 2 study for treatment of major depressive disorder. Sage stated that the drug "provided rapid, profound, and durable effects" through an initial two-week treatment period and during a four-week follow-up period. 

The company now plans to file for FDA approval for brexanolone this year and advance SAGE-217 to a pivotal late-stage study. Small biotechs with late-stage assets that have significant market potential should find themselves in demand in 2018. I expect Sage Therapeutics will be one of them. 

Should investors drool, too?

Buying a stock only because the company might be acquired isn't the smartest investing strategy. One key word in that statement is "might." Bluebird, Madrigal, and Sage might be acquired -- but they might not. The other key word in the statement, though, is "only." The potential for an acquisition certainly should be factored into the decision to buy a stock, but there should be other, more solid, reasons to buy the stock also.

Because of the big run-up in its stock price after Celgene announced its buyout of Juno, Bluebird's market cap now stands at nearly $10 billion. That's close to the total price Celgene paid for for Juno. I'm not convinced that Bluebird is worth a lot more than the current price.

Sage Therapeutics, on the other hand, could have room to run, in my view. The biotech's market cap is around $7.5 billion currently. Tremendous potential for brexanolone and SAGE-217 could make the company worth a good bit more if all goes well with both drugs.

That leaves Madrigal. I think the NASH space is so competitive that Madrigal will be bought at a significant premium to its current market cap of $1.7 billion. I could be wrong, of course. But I like the chances for MGL-3196, and I view Madrigal as a small biotech stock that both big drugmakers and investors can drool over.