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The Return of M&A Activity Is Lifting These Biotech Stocks Today

By Maxx Chatsko - Nov 25, 2019 at 4:21PM

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A $9.7 billion deal and two failed takeover bids ushered in renewed enthusiasm for acquisitions in the pharmaceutical industry. What makes these stocks buyout candidates?

What happened

After a brief lull in pharma industry merger and acquisition activity in recent months, two announcements today have broken the silence.

Novartis offered to gobble up The Medicines Company ( MDCO ) for $9.7 billion in total consideration. Shares of the acquisition target have exploded 330% since the beginning of 2019.

Additionally, Sorrento Therapeutics ( SRNE -8.89% ) announced that it had turned down all-cash offers from two biopharma companies and is instead forging ahead with licensing and collaboration deals. Shares rose as much as 99.4% on the disclosure.

That has investors giddy with excitement over what announcement might flash across newswires next. And that's all it took to send shares of other buyout candidates trekking higher. Shares of Arrowhead Pharmaceuticals ( ARWR -2.57% ), Dicerna Pharmaceuticals ( DRNA -0.01% ), and Clovis Oncology ( CLVS -9.47% ) are among the pharma stocks making moves fueled by speculation.

A chalk drawing of a big fish trying to eat smaller fish and red question marks.

Image source: Getty Images.

So what

Shares of Arrowhead Pharmaceuticals and Dicerna Pharmaceuticals gained as much as 21.4% and 11.1%, respectively, today. Each company is developing a pipeline of drug candidates based on RNA interference (RNAi), an approach that relies on silencing the expression of disease-driving genes. Meanwhile, shares of Clovis Oncology gained as much as 15.8% today. The company has long been considered a potential buyout candidate despite operational woes. 

What makes each of these companies buyout candidates in the minds of investors? 

Well, both Arrowhead Pharmaceuticals and Dicerna Pharmaceuticals harbor intriguing potential owing to their targeted RNAi platforms, which couple a gene-silencing molecule and a special sugar to ensure delivery of the therapeutic payload to cells in the liver. Last week, Alnylam Pharmaceuticals became the first company to earn marketing approval for a drug based on that approach. 

The simplicity of the delivery method and encouraging (very) early stage results have attracted lucrative collaboration deals. Arrowhead Pharmaceuticals is partnered with Johnson & Johnson and Amgen, while Dicerna Pharmaceuticals has announced deals with Roche and Novo Nordisk -- each since the end of October. The four partnerships could be worth over $5 billion in combined milestone payments for the pair.

If enthusiasm for the future is sending shares of the promising RNAi duo higher, then desperation for a bailout might explain why shares of Clovis Oncology are jumping. The company's lone drug product, Rubraca, has failed to gain market traction in the limited oncology indications for which it is currently approved. While the PARP inhibitor was thought to become a leading contender for the multibillion-dollar opportunity to treat a range of genetically defined cancers earlier in their progression, it hasn't always lived up to those lofty expectations -- or bested results from other drugs in its class -- in clinical trials.

That pessimism catalyzed an epic collapse as shares of Clovis Oncology have fallen from over $80 in mid-2017 to less than $10 today. The thinking has been that the further the company's valuation sinks, then the more attractive it may become to a potential buyer who can swoop in, boost operational efficiency, and make the most of Rubraca. That hasn't resulted in an acquisition to date, but the storyline keeps the business in the conversation each time M&A activity heats up.

Now what

Investors should never become overly confident that a buyout is imminent or invest solely on speculation that a deal might occur. Both Arrowhead Pharmaceuticals and Dicerna Pharmaceuticals are intriguing companies to research further thanks to their targeted RNAi approach and de-risked drug development paths, but robust clinical results are lacking and shares of each company are red hot right now (suggesting now isn't a great time to start a position). 

Meanwhile, shares of Clovis Oncology have more than doubled this month on renewed enthusiasm for Rubraca, but the company is still valued at just $540 million. Whether or not that makes it an attractive takeover target -- and overshadows other red flags -- is a bet investors may not want to make.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Clovis Oncology, Inc. Stock Quote
Clovis Oncology, Inc.
CLVS
$2.82 (-9.47%) $0.29
Arrowhead Pharmaceuticals, Inc. Stock Quote
Arrowhead Pharmaceuticals, Inc.
ARWR
$67.90 (-2.57%) $-1.79
Dicerna Pharmaceuticals, Inc. Stock Quote
Dicerna Pharmaceuticals, Inc.
DRNA
$38.12 (-0.01%) $0.01
The Medicines Company Stock Quote
The Medicines Company
MDCO
Sorrento Therapeutics, Inc. Stock Quote
Sorrento Therapeutics, Inc.
SRNE
$5.02 (-8.89%) $0.49

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

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