This past year proved profitable for investors in Incyte (NASDAQ:INCY) and Seattle Genetics (NASDAQ:SGEN). Handily beating broad market and biotech indexes, these two drug manufacturers hit the $20 billion valuation mark and are poised to continue growing in the coming year -- unless, of course, an acquirer emerges.  

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2019 was a solid year for Incyte, with its stock rising approximately 42%. Sales of its lead drug Jakafi exceeded $1.2 billion in the first nine months of the year. The company expects full-year sales of Jakafi to reach $1.65 billion to $1.68 billion. Royalties and sales of leukemia drug Iclusig in Europe added another $283 million over the first three quarters of the year. 

Incyte's pipeline remains one of the most extensive in biotech. With nine late-stage drug candidates, seven have two or more phase 2 or phase 3 clinical trials under way. Its early stage portfolio sports another dozen drug candidates. 

What does this mean for investors? Expect to see continuous program updates and clinical trial results throughout 2020 and 2021. Also, the breadth of the research and development pipeline coupled with revenues approaching $2 billion in 2020 should be able to absorb any R&D setbacks or failures.

Seattle Genetics hits on all cylinders

Seattle Genetics flourished in 2019 with its stock more than doubling on the heels of positive news. Adcetris, Seattle Genetics' first approved cancer drug, continued to reach record sales levels each quarter, representing growth between 30% and 42% compared to the corresponding periods in 2018. The company expects the total year revenue to range between $625 million to $640 million for Adcetris.

This week the U.S. Food and Drug Administration granted accelerated approval three months ahead of schedule for Seattle Genetics' drug Padcev to treat the most common form of bladder cancer. Earlier this month, the company highlighted promising clinical trials results for a novel breast cancer drug called tucatinib. While Seattle Genetics feverishly readies tucatinib's New Drug Application (NDA) for approval, the FDA designated the drug as a Breakthrough Therapy. 

Seattle Genetics is a stock to own for 2020. Padcev's approval means another revenue stream in addition to Adcetris. Importantly, three products could be marketed by the end of 2020. The company's management announced that it expects to file the NDA for tucatinib in the first quarter. This promising breast cancer drug also showed the ability to combat cancer that spread to the brain. 

Who will buy them?

Incyte and Seattle Genetics are both perennial M&A targets. However, since both companies boast valuations of $20 billion, any acquirer needs to be able to afford that plus the premium to make a buyout attractive. Only big pharmaceutical companies can afford to shell out $20 billion to $40 billion, assuming a 100% acquisition premium at the top end of the range.

Currently, several big pharmaceutical companies are trying to digest recent or on-going acquisitions, taking them off the table as prospective near-term buyers. In January, Takeda Pharmaceutical closed its $62 billion acquisition of Shire. Bristol-Myers Squibb concluded its $74 billion acquisition of Celgene in November. AbbVie remains in the thick of its $63 billion deal with Allergan. And by mid-2020, Pfizer hopes to complete the Viatris transaction, formed through the spinoff and merger of its Upjohn business unit with Mylan

Japanese pharma Astellas (OTC:ALPMF) stands out as the natural buyer for Seattle Genetics. The companies enjoy a long-standing partnership dating back to 2007, which yielded Adcetris and now Padcev. However, Astellas' market cap is just $33 billion. Therefore, it would likely need to be a merger instead of an acquisition. Culturally, the existing partnership may be more productive than forcing a cross-border merger. Astellas traces its roots back to 1894 and may prefer smaller, less dilutive acquisitions, like its recent $3 billion buyout of gene therapy company Audentes Therapeutics.  

Incyte partners Novartis (NYSE:NVS) and Eli Lilly (NYSE:LLY) seem like the most likely buyers. Even for Eli Lilly, the smaller of the two, an acquisition could be manageable. Earlier this month, Eli Lilly appointed Josh Bilenker and two of his key lieutenants to run oncology R&D. Eli Lilly bought their company Loxo Oncology earlier this year for roughly $8 billion. Could this changing of the guard with a deep background in targeted small molecules look to make a statement by acquiring Incyte?

Since we're speculating, here's another food for thought scenario. What if Incyte and Seattle Genetics merged? It's not so least, on paper.

Both companies focus on oncology, while Incyte would bring diversification through its R&D in immunology, rheumatology, and dermatology. The merged company would have five marketed drugs. That could easily reach seven if Seattle Genetics' tucatinib and Incyte's pemigatinib gain approval in 2020.

Jakafi and Adcetris combined should generate more than $2.25 billion in sales in 2019. Incyte also sells the leukemia drug Iclusig in Europe. This commercial infrastructure and capability could be leveraged to market tucatinib, assuming approval. Seattle Genetics owns worldwide rights to the drug.

What about the R&D fit? Historically, Incyte discovered and developed small molecule drugs to inhibit specific enzymes called kinases. Through recent partnerships with Agenus and Merus, Incyte expanded into therapeutic antibodies and bispecific antibodies. This allowed it to get into the ultra-hot immuno-oncology field. 

Seattle Genetics' platform seeks to develop antibody-drug conjugates, a "smart bomb" cancer therapy that tethers highly potent cancer-killing small molecules to an antibody that recognizes a specific molecular target on a cancer cell. Seattle Genetics' 2018 acquisition of Cascadian Therapeutics gave it tucatinib, a kinase inhibitor for breast cancer that could be FDA-approved next year, and an early stage immuno-oncology program. Thus, the R&D efforts of both companies can be viewed at a high level as complementary.

The biggest potential roadblock in a deal like this comes down to management. Who will run the combined company? Arguably, both management teams have done tremendous jobs at creating shareholder value and delivering new therapies to patients, with more to come. 

If the personnel issues can be worked out, and with some additional creative deal-making, I can envision a dynamic entity able to step in to fill the hole left by Celgene. Willing to bet on cutting-edge science, Celgene transformed into one of the most prolific dealmakers sought out by emerging biotech companies as their partner of choice. Can Incyte and Seattle Genetics do the same? If $1 plus $1 can equal $3, will $20 billion plus $20 billion equal $60 billion?

I hope readers fully grasp the speculative nature of my idea. Incyte and Seattle Genetics are great companies in their own right. Creating much-needed therapies for patients remains the backbone of their businesses. The two companies benefit from approved drugs providing attractive cash flow to support the additional promising R&D. Will either or both companies get acquired? Nobody knows for sure. However, the stock prices should be higher this time next year making them each a worthy investment opportunity today.

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.