I'm still waiting for the trees in my yard to sprout leaves, but we've already seen half-a-dozen drugmaker deals worth around $100 billion in total this year. Despite a slew of mergers and acquisitions (M&A) over the past several months, there are still some cash-laden big biotechs and pharmaceutical companies eager to bulk up their development pipelines.
It's never a good idea to buy a stock solely because you hope it will soon be acquired at a premium. That said, many of the attributes that make takeout targets attractive are important features in any M&A climate. A quick look at why these big drugmakers are willing to pay through the nose for their smaller peers could help you spot a winner down the road.
|Takeda (NASDAQOTH: TKPYY)||Shire (NASDAQ: SHPG)||$64 billion (estimate)|
|Novartis (NYSE:NVS)||AveXis (NASDAQ: AVXS)||$8.7 billion|
|Sanofi (NASDAQ:SNY)||Bioverativ||$11.6 billion|
|Celgene (NASDAQ:CELG)||Juno Therapeutics||$9.0 billion|
Time to leave home?
If Shire accepts Takeda's bid for $64 billion, it will probably be the biggest pharma deal of the year. It also will net Shire's shareholders a 60% premium above the stock's closing price ahead of the negotiations.
Why is the 235-year-old Japanese drugmaker so eager to buy a British company? Takeda wants to be a global biopharma heavyweight player, but the company books more product sales in Japan than in the U.S. Shire is headquartered in Ireland, but it records around two-thirds of its sales in the enormous U.S. market for prescription drugs. Shire's ADHD and hemophilia drugs pushed total U.S. sales to $9.5 billion last year, which nearly is enough to double Takeda's presence in the region.
Combining Takeda's international operations with Shire's also would create the leading life-sciences employer in the state of Massachusetts. That means Takeda could quickly become top dog at the world's most productive hub for biotechnology research.
From large to rare
Sanofi's an international pharma giant with a healthy presence in the enormous U.S. market for diabetes treatments. Unfortunately, its long-acting insulin, Lantus, is showing its age. Sales of the 18-year-old drug fell 19%, to $5.6 billion last year. That's around 16% of total revenue, so continued losses will create a stiff headwind to overcome.
Insurers and pharmacy benefits managers are getting better at negotiating drug prices in an increasingly competitive environment for diabetes drugs. Medicines that treat rare diseases generally encounter less pushback, which explains why Sanofi is investing heavily into next-generation hemophilia drugs that coincidentally compete with Shire's portfolio.
In January, the company struck an $11.6 billion deal for Bioverativ, which currently markets two next-generation hemophilia treatments Eloctate and Alprolix. The ink wasn't even dry on the Bioverativ deal before Sanofi agreed to acquire clinical-stage Ablynx for $4.8 billion. The Belgian biotech has several new drug candidates designed to treat rare blood-based disorders and will fold well into the company's new hemophilia unit.
Signs of gene-therapy mania?
Last year, Novartis became the first to earn a Food and Drug Administration (FDA) approval for an exciting new type of cancer treatment that involves training patients' own immune cells to attack cancer. Chimeric antigen receptor T-cell (CAR-T) therapies have produced amazing results for certain blood cancer patients who have exhausted other treatment options -- but there are only so many of these patients to go around.
Last year, Novartis earned the first FDA approval for a CAR-T program, but it was quickly joined by another. Novartis' Kymriah and Yescarta from Gilead Sciences both seek out a target called CD-19. Undeterred by the potential crowding, Celgene shelled out $9 billion for Juno Therapeutics earlier this year. Even though Juno's lead candidate aims for the same target as Yescarta and Kymriah, Celgene offered Juno's shareholders roughly double the company's market value a couple of weeks earlier.
Eager to maintain an edge in the gene-therapy space, Novartis made a stunning $8.7 billion offer for AveXis earlier this year. That made the fledgling start-up one of the best performing biotech stocks of the past few years.
AVXS-101 uses a proprietary virus to deliver a functioning copy of a gene implicated in spinal muscular atrophy. Most infants born with the muscle-wasting disease can't breathe unassisted by their first birthday. In an early stage trial, all 15 babies treated with a single dose of AVXS-101 reached 13.6 months of age without needing a ventilator.
At the end of 2016, the FDA approved the first drug aimed at the rare disorder, and it's already generating blockbuster sales. If approved, AVXS-101 will probably gain a leading share of the limited space, but it's hard to see how the company can charge enough for a once-and-done treatment to see a return on its upfront investment. Clearly, Novartis is hoping the same proprietary delivery method can be used to deliver a variety of new treatments that haven't been discovered yet.
Don't follow the herd
When deep-pocketed drugmakers start throwing heaps of cash around in an M&A frenzy like the one we're seeing now, it can feel like you're losing out by staying cautious. While there's a lot to like about rare-disease drugmakers from an investor's standpoint, chasing after the next hot gene-therapy stock could prove disastrous if these companies can't show us proof that once-and-done treatments can actually succeed in a commercial setting.
It's still early, but commercialization efforts so far are not encouraging. During the first three months of 2018, Novartis recorded just $12 million in Kymriah sales. If we don't see big sales figures from once-and-done treatments in the quarters ahead, things could get ugly.