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Read This Before You Buy Any New Cancer Drug Stocks

By Cory Renauer - Updated Jun 24, 2019 at 4:47PM

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Around $36 billion worth of biopharma acquisitions over the past few years suggests smaller might be better.

If you've been paying attention to merger and acquisition activity in the oncology space, you've probably seen plenty of headlines related to exciting new cell-based cancer therapies and the use of bi-specific antibodies. Unless you've been watching very closely, though, you probably haven't noticed that biopharma companies with money to burn are more interested in simpler, easy-to-swallow solutions. 

Among 2018's top-selling cancer therapies, four of the top 10 were small molecule drugs. Over the past two and a half years, cash-laden biopharma companies have spent a stunning $32 billion to acquire smaller biotechs at steep premiums and hoping their candidates will be the next to reach the top-10 list. 

Company (Symbol) Acquirer Deal Valuation Acquisition Premium Lead Asset Target
Cascadian Therapeutics Seattle Genetics $614 million 151% tucatinib HER2
Ignyta Roche $1.7 billion 70% entrectinib TRK and ROS1
Tesaro GlaxoSmithKline  $5.1 billion 119% Zejula (niraparib) PARP
Ariad Pharmaceuticals Takeda  $5.2 billion 75% Iclusig (ponatinib) BCR-ABL
Loxo Oncology Eli Lilly $8.0 billion 67% Vitrakvi (larotrectinib) TRK
Array Biopharma (ARRY) Pfizer (PFE 0.56%) $11.4 billion 80% Braftovi (encorafenib) BRAF

Data source: company filings.

Let's look at two key reasons bigger companies are paying steep premiums to acquire these drugs, before trying to figure out which one Big Pharma wants to buy next. 

1. They hit the spot

All six of the drugs in the table are designed to shrink tumors by inhibiting specific proteins that are stimulating their growth. That might sound easy, but getting a small molecule to bind to a particular pocket in a folded protein and prevent its activity is like stopping a motorcycle by throwing a wrench at it.

In recent years, the rate of tumor genome sequencing has exploded, which means plenty of potential targets are showing themselves, but it isn't easy to find a pocket for a drug to bind to. With some help from computational models, though, investigators can also aim for pockets that exist for only a brief moment while the target protein is changing and then freeze them into an inactive shape.

Lab technician pipetting reagent into blood samples.

Image source: Getty Images.

2. They're easier to market and manufacture

Cells can begin dividing uncontrollably for all sorts of reasons, but mutated genes producing overactive proteins that stimulate tumor growth are usually to blame. Drugs that target overactive proteins to prevent them from stimulating tumor growth have been gaining ground against indiscriminate chemotherapy for two solid decades. Until recent years, though, targeted cancer treatments have usually been so large that they must be delivered slowly by infusion under the watchful eye of healthcare professionals.

Biopharma giants know that compliance isn't as much of an issue with small-molecule drugs. Chemotherapy's ruthless side effects are often so fierce that many patients would rather let their disease take its own course than suffer through another round of any infused treatment. Patient compliance with capsules and tablets that can be taken in the comfort of their own home are higher. That means more recurring revenue from patients as they remain in remission.

Oncologist looking at a colorful report.

Image source: Getty Images.

Who's next and who isn't?

Exelixis (EXEL 0.00%) owns a small-molecule drug called Cabometyx that treats patients with kidney and liver cancer. The odds Exelixis will receive a juicy buyout offer seem mighty slim, though. Cabometyx has been shown to inhibit 13 different tyrosine kinases, all of which play a role in the life of normal healthy cells.

When it comes to targeted cancer therapies, specifically inhibiting the overactive proteins at fault while leaving the rest unaffected might be the most important factor. If so, Mirati Therapeutics (MRTX 2.20%) could be the next midsize biotech to receive a juicy buyout offer. 

With a recent market cap of just $3.7 billion, Mirati is within range of a midsize buyout, and its lead candidate, MRTX849, has an exceptional pedigree. It was Array Biopharma that discovered half of the drugs in the table, and MRTX849 could be its most exciting accomplishment to date. 

The candidate Mirati commissioned from Array inhibits KRAS, a protein that scientists have known for decades to play a role in a variety of aggressive malignancies. Recently, Mirati stock jumped after a potential competitor from the same class as MRTX849 produced interesting human proof-of-concept results from 10 evaluable patients.

Guy wearing a tie and looking through binoculars.

Image source: Getty Images.

Look before you leap

It's easy to see why Pfizer is acquiring Array for a whopping $11.6 billion. Its drug discovery program has an uncanny knack for developing drugs that hit targets previously considered impossible.

We won't get our first look at results for the KRAS inhibitor that Array designed for Mirati until the end of the year, but after a string of successes, it would be surprising to see MRTX849's first clinical trial produce data that isn't exciting.

While Array's track record might give you confidence in Mirati, you should know that there's a lot to lose if Array didn't hit a bull's-eye again. If MRTX849 doesn't look like it can compete, Mirati will be left with practically zero clinical-stage new drug candidates.

Mirati doesn't have anything to sell, and the only other new drug candidate in its pipeline, sitravatinib, hasn't been on anyone's radar since it delivered disappointing results in a midstage study. Poor results from MRTX849's first trial could lead to swift and heavy losses.

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Stocks Mentioned

Mirati Therapeutics, Inc. Stock Quote
Mirati Therapeutics, Inc.
$69.66 (2.20%) $1.50
Pfizer Inc. Stock Quote
Pfizer Inc.
$51.88 (0.56%) $0.29
Exelixis, Inc. Stock Quote
Exelixis, Inc.
$22.22 (0.00%) $0.00
Array Technologies, Inc. Stock Quote
Array Technologies, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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