Biotech is in the doldrums. The SPDR S&P Biotech ETF declined 18% in the past six months, and money continues to flow out of the sector. While several biotechs managed to IPO in September and October, it's not all roses. ADC Therapeutics pulled its plans to list citing market conditions. German unicorn BioNTech raised 40% less than initially planned and priced it at the low end of the range. Biotech management teams, whether already public or in the IPO queue, face similar challenges, forcing the exploration of alternatives including putting the company up for sale.

Cash and stethoscope

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The biotech industry splashed into 2019 with news that Bristol-Myers Squibb was acquiring Celgene in a behemoth $78 billion transaction. Days later, Eli Lilly pulled the trigger on its acquisition of targeted cancer drug developer Loxo Oncology for $8 billion. Following a five-month lull, AbbVie broke news in June of its proposed $63 billion acquisition of Allergan.

Are recent biotech acquisitions a sign of more to come? 

Merger & acquisition activity perked up in September. First, Japanese pharma Dainippon Sumitomo announced a $3 billion deal to acquire a 10% stake in privately held Roivant Sciences and assume Roivant's ownership stakes in certain subsidiaries, including a 75.4% stake in urological disease company Urovant Sciences and a 45.5% stake in Myovant Sciences, a company developing treatments for women's health and prostate cancer. Then, 10 days later, Danish pharma Lundbeck announced its acquisition of migraine drug developer Alder BioPharmaceuticals for nearly $2 billion.

On Oct. 10, Ra Pharmaceuticals agreed to sell itself to Belgium's UCB Pharma for approximately $2.1 billion. The offer, which is more than double the price of the shares on the day prior to the announcement, should please investors. Next, we'll explore eight companies that may be ripe for a hungry pharma or big biotech to acquire.

Rare disease-focused biotechs remain attractive

Alexion (NASDAQ:ALXN) always seems to make the list of biotech acquisition targets. This profitable company made $4.5 billion in revenue over the last 12 months, with 80% coming from its drug Soliris. However, the stock declined 30% this past year. Alexion holds the unique distinction of being both an acquisition target and a potential acquirer. Its $21 billion market cap and healthy balance sheet can readily digest a transaction. Perhaps the reoccurring rumor of an Amgen (NASDAQ:AMGN) deal for Alexion will finally materialize.

Sarepta Pharmaceuticals (NASDAQ:SRPT), a controversial name that attracts long-term investors and day traders alike, has successfully brought to market Exondys 51, a treatment for Duchenne muscular dystrophy (DMD) patients with a confirmed exon 51 mutation. Sarepta sold $94.7 million in the second quarter and $181.7 million for the first half of 2019. In August, Sarepta received a Complete Response Letter from the U.S. Federal Drug Administration (FDA) for its DMD product targeting a different mutation than Exondys 51. The issue is related to infections at the site of I.V. and kidney toxicity seen in the pre-clinical animal data. Once squared away, a potential acquirer may emerge for this rare disease-focused biotech.

Pharma excels at commercializing drugs for large patient populations

Amarin (NASDAQ:AMRN) may just be the next big takeout. Amidst a backdrop of an ever-increasing volume of prescriptions for its approved drug Vascepa, the company's stock has faced recent headwinds. An FDA Advisory Committee Meeting in November will discuss and recommend for or against a proposed expansion of Vascepa's approval. The FDA called for the meeting quite late in the process, creating investor anxiety that the expanded approval is far from certain. The outcome of that meeting will adjust the risk and valuation of Amarin, setting the stage for a buyout. Just how big is Vascepa's potential? Up to 50 million people in the U.S. could benefit from the drug. 

2019 has been a bumpy ride for investors in Portola Pharmaceuticals (NASDAQ:PTLA). The stock ran from $17 to $37 in the first few months of the year only to retreat to the mid-$20s. Portola markets the drugs Andexxa and Ondexxya. Both are newcomers to the market with Andexxa yielding an average of 34% quarter-over-quarter growth in the five quarters since launch. The upcoming third-quarter results will give the first meaningful look at Ondexxya, which launched at the end of the second quarter. Together they should generate in excess of $100 million in sales this year. Portola states the addressable U.S. and European patient population for the drugs is nearly 500,000 people. Delivering drugs to vast numbers of patients, historically, has been the bread and butter for large pharma companies. Don't be surprised if one jumps on Portola soon.

Oncology leads pharma and biotech deal activity

Like Eli Lilly's deal for Loxo earlier this year, Exelixis (NASDAQ:EXEL) provides a nice tuck-in oncology acquisition. Cabometyx, Exelixis' drug for treating advanced liver and kidney cancers, is on pace to exceed $1 billion in sales. The profitable company has more than $1 billion in cash on the balance sheet, yet it currently trades at a $4.9 billion valuation. Exelixis has begun to rebuild its pipeline through partnerships. Now is the time for a buyer to step in before the spending on early stage programs, which are not drivers of the current share price, increases.

Clovis Oncology (NASDAQ:CLVS) must do something and do it quickly. Rubraca, its drug approved for two ovarian cancer indications, is on pace to deliver between $137 million to $147 million in sales. However, Rubraca competes with three other drugs in the same class marketed by formidable competition: GlaxoSmithKline, AstraZeneca, and AbbVie. Debt that it incurred to fund Rubraca's commercial launch remains the noose around Clovis' neck. It refinanced its debt in August taking on $263 million due in 2024. The stock trades just over $3 per share, down from nearly $90 a few years ago. Goldman Sachs issued a sell rating and $3 price target this week while Bank of America issued a neutral rating with a $7 target. It's time to put investors out of their misery, sell the company, and move on.

Growing sales should yield buyout interest

Perennial takeout target Intercept Pharmaceuticals (NASDAQ:ICPT) focuses on non-viral liver diseases. Its lead drug Ocaliva is approved for the treatment of primary biliary cholangitis, a condition where the body's immune system attacks bile ducts in the liver leading to a toxic accumulation of bile. On Sept. 27, Intercept submitted a New Drug Application to the FDA for the treatment of fibrosis due to non-alcoholic steatohepatitis based on a successful 2,400 patient Phase 3 trial. The FDA granted Breakthrough Therapy designation which shortens the review time. With a roughly $1.9 billion valuation, $218 million in revenues over the last 12 months, and an FDA approval on the near-term horizon, this seems like a company that will not remain independent through the end of next year.

Neurocrine Biosciences (NASDAQ:NBIX) a drug developer focused on neurology and endocrinology, markets Ingrezza, a treatment for tardive dyskinesia. Ingrezza generated $836 million in sales since it launched two years ago. In the first half of 2019, doctors wrote nearly 56,000 prescriptions worth $317 million in sales. And it continues to grow. Neurocrine's partner AbbVie gained approval at the end of 2018 and began commercialization of Orlissa as a treatment for uterine fibroids. Neurocrine will receive royalties and potential commercial milestone payments going forward. While AbbVie is the logical acquirer, the dust first must settle on its $63 billion mega-deal with Allergan.

With the exception of Alexion and Clovis, the companies listed above share similar characteristics. Each falls into a market cap range of $1.5 billion to $10 billion. Each company markets a drug that gained approval in the last two years and relies heavily or solely on that drug for revenue. However, this is not meant to be a comprehensive list of every biotech that fits those parameters. Deals for these companies would be meaningful in size but not unmanageable for a big pharma to integrate. The acquirer gains a revenue-producing program with a built-in sales force and usually some R&D that can be pruned if necessary.

Editor's note: This article has been corrected. Ingrezza is not the only approved treatment for tardive dyskinesia.