Biotech investors are on the edge of their seats this holiday season thanks to a recent string of juicy buyout offers. Despite a busy year for acquisitions, big pharmaceutical companies with pipelines to fill and money to spend have been jumping over each other to acquire smaller biotechs at steep premiums.
Which of today's smaller biotechs will be the next one that inspires pharmaceutical giants to open their checkbooks wide? Arrowhead Pharmaceuticals (NASDAQ:ARWR), Blueprint Medicines (NASDAQ:BPMC), and Deciphera Pharmaceuticals (NASDAQ:DCPH) are on big pharma's Christmas list. Here's why.
1. Arrowhead Pharmaceuticals
A recent $9.7 billion buyout offer for The Medicines Company from Novartis bodes well for Arrowhead. The only asset The Medicines Company had to offer was inclisiran, a new drug candidate that interferes with RNA (RNAi) to dramatically lower cholesterol.
Arrowhead Pharmaceuticals has a whole pipeline full of RNAi drugs aimed at treating inherited disorders. The furthest along the development timeline, JNJ-3989, could be the first highly effective treatment for chronic hepatitis B infections.
Arrowhead is developing JNJ-3989 in partnership with Johnson & Johnson and is entitled to a royalty percentage of potential sales and significant milestone payments. There are also three wholly owned clinical-stage RNAi drugs in its pipeline that could bring deep-pocketed drugmakers to the deal table.
2. Blueprint Medicines
Many of the most aggressive cancers are driven by known mutations to proteins that play a role in cell growth and proliferation. Blueprint Medicines is developing potential new small-molecule drugs that aim for those mutated proteins, and little else.
Small-molecule drugs that selectively inhibit mutated proteins so they can't promote tumor growth are all the rage lately. Earlier this year, Eli Lilly shelled out $8 billion for Loxo Oncology and Pfizer paid $11.4 billion for Array BioPharma. Both companies were developing highly targeted kinase inhibitors for the treatment of patients with cancer driven by very specific mutations.
An application for Blueprint's lead candidate, avapritinib, is under review for the treatment of people with a common mutation associated with gastrointestinal stromal tumors (GIST). In the first quarter of 2020, the company expects to submit an application for what could be its second new drug, pralsetinib. This potential new treatment is aimed at lung cancer driven by RET-fusion mutations.
3. Deciphera Pharmaceuticals
Blueprint's not the only company that can entice large pharma companies with small-molecule drug candidates. Deciphera Pharmaceuticals is developing a drug similar to pralsetinib called ripretinib for the treatment of patients with advanced GIST who relapsed following three other therapies.
Deciphera already completed a successful pivotal trial with fourth-line GIST patients and expects to have a new drug application ready for the FDA in the first quarter of 2020. Ripretinib lowered the risk of death by 64% compared to a placebo, which is probably enough to earn a stamp of approval.
Who's the prettiest?
Wondering which one of these businesses is the most likely to be acquired at a steep premium? With a $7.1 billion market cap, there are only so many drugmakers capable of paying a premium for Arrowhead.
It's also important to remember that Arrowhead's employing a gene-silencing technique that hasn't yet proven itself in the commercial setting. If sales of recently approved RNAi drugs from Alnylam didn't rise much further in the fourth quarter, Arrowhead could lose its spot on this list.
With a market cap of just $2.9 billion, Deciphera's the least expensive of the three, but it probably doesn't offer as much bang for a potential buyer's buck as Blueprint Medicines. Deciphera's pipeline beyond ripretinib involves candidates with targets that aren't as well understood as the candidate next in line at Blueprint.
Around 2% of lung cancer patients have RET-fusion positive tumors that could make them eligible for treatment with Blueprint's pralsetinib. That might not sound like much, but lung cancer claims more lives than any other malignancy and treating just a sliver of this population could lead to significant sales.
Before the end of 2020, Blueprint could have a second drug in its product lineup with higher sales potential than its first.
Good enough for everyday investors?
These three biotechs have what it takes to attract attention from potential acquirers, but are they good enough for your portfolio? That all depends on how large of a position you intend to take and how soon you'd like to retire.
These stocks are too risky to form a cornerstone of anyone's stock portfolio. If you want to hold smaller positions as part of a diversified portfolio, though, all three could provide market-beating gains over the long run.