The healthcare sector has been a serious disappointment for investors in 2021. After a banner year in 2020 thanks to the advent of several highly lucrative COVID-19 vaccines and therapies, the closely watched SPDR S&P Biotech ETF (XBI -1.38%) has now fallen by a staggering 11.5% so far this year. The SPDR S&P Biotech ETF, by contrast, gained a whopping 48% in 2020. Even more impressively, this diverse biotech ETF was on a nearly decade-long bull run, where it rose by an eye-popping 570%, before this year's double-digit pullback.
A multitude of reasons underlie this significant downward trend in healthcare stocks this year. The U.S. Food and Drug Administration (FDA) has issued more than a few complete response letters (i.e., a rejection) in 2021, some of which were surprising to say the least. A healthy cadre of headline-grabbing new technologies from biotech pioneers such as Allogene Therapeutics, Bluebird Bio, CRISPR Therapeutics (CRSP 1.08%), Sarepta Therapeutics, among many others, have failed to live up to expectations and/or exhibited worrying safety signals. Some newly approved drugs, such as Biogen's (BIIB -0.85%) Alzheimer's disease medication Aduhelm, have vastly underperformed Wall Street's sales expectations thus far. And last but not least, a fair number of high-value investors are probably locking in profits following the industry's enormous upswing in 2020.
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Buyouts have kept healthcare investors engaged in 2021
The healthcare sector's saving grace in recent months has been big pharma and blue-chip biotech's penchant for mergers and acquisitions to drive growth. Although 2021 has been somewhat of a down year on the M&A side of the equation, there have still been a number of high-profile business development deals in the sector. Pfizer (PFE -0.12%), flush with cash from its COVID-19 vaccine, took out cancer specialist Trillium Therapeutics (TRIL). French pharma titan Sanofi (SNY) has been super busy on the M&A front this year, with deals for both Translate Bio's mRNA pipeline and Kadmon Holdings' newly approved chronic graft-versus-host disease medication Rezurock. And Merck, for its part, recently bought Acceleron Pharma for its blood cancer and possible pulmonary arterial hypertension franchises.
Although business development deals in healthcare are nearly impossible to predict, they can be tremendous wealth generators for shareholders. After all, there have been quite a few buyout agreements across the industry over the past decade that have come at premiums in excess of 100%. While valuable drugs or an entrenched competitive position won't necessarily bring a suitor to the table, these key features are typically the main reason deals get done in healthcare. Armed with this insight, here are two healthcare companies that could appeal to one or more suitors soon.
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Adaptimmune: A solid-tumor cell therapy play
Adaptimmune is a strange bird, to say the least. Despite strong clinical trial results for its of genetically modified T-cell therapies for solid tumors, the biotech sports a market cap of $831 million. What's more, Adaptimmune is possibly only a few months away from filing its first regulatory application for afamitresgene autoleucel, or afami-cel for short, as a game-changing treatment for a form of soft tissue cancer known as synovial sarcoma.
To top it off, the biotech has clinical collaboration and licensing agreements in place with pharma heavyweights such as Astellas Pharma, GlaxoSmithKline, and most recently Roche. Lastly, Adaptimmune has started work on the holy grail of T-cell therapies known as off-the-shelf therapies, which can be manufactured in a far easier manner than the current generation of anti-cancer cell therapies.
Why is the biotech so unloved on Wall Street? Two reasons. First and foremost, biotech as an industry has lost a bit of its shine as an investing vehicle this year. Money that was pouring into the industry now seems to be going toward other high-growth areas such as cryptocurrency. Second, industry experts apparently aren't convinced that T-cell therapies will work in the solid-tumor setting -- despite Adaptimmune's initial clinical trial data suggesting otherwise.
Where is this story headed? Adaptimmune's shares are likely to slowly creep higher heading into afami-cel's top-line readout next year. If the data warrants a regulatory filing, there's a good chance one of the big pharmas will make a tender offer. Adaptimmune's platform is unique, full of high-value clinical candidates, and it can probably be had for less than $3 billion.
Which pharma company might be perfect suitor? My hunch is that Pfizer will be the buyer. Roche might step in, of course, especially after signing a deal to develop off-the-shelf therapies with the company. But Pfizer both has the financial firepower to do a deal and a glaring need to bolster its presence in the anti-cancer cell therapy space.
CRISPR Therapeutics: All about the price tag
CRISPR Therapeutics probably would have been bought out a while back if its share price hadn't gone parabolic earlier this year. CRISPR is working with biotech giant Vertex Pharmaceuticals (VRTX 0.10%) on a therapy called CTX001 for the treatment of transfusion-dependent beta thalassemia and sickle cell disease. Vertex also holds an equity stake in the gene-editing company. If CTX001 bears fruit in the clinical, this single rare-disease therapy could easily post blockbuster sales figures.
But that's not what's impressive about CRISPR. The company also has clinical candidates for various forms of cancer, regenerative medicine, and a host of rare diseases such as the muscle-wasting disorder Duchenne muscular dystrophy. Now, the company did post underwhelming initial results for its first blood cancer candidate blood cancer candidate CTX110 earlier this week. But CRISPR's management believes that additional doses of the therapy should improve its durability, and hence its appeal as a truly needle-moving therapy for large B-cell lymphoma. A pivotal trial for this therapy could get under way as soon as next year.
Who is the potential suitor? Like Adaptimmune, CRISPR is likely to have multiple companies knocking at its door in 2022. Vertex is the obvious choice, via its rare blood disease collaboration. But Gilead Sciences (GILD -1.15%) has shown a keen interest in oncology over the past half-decade, and it has the cash to pull off the deal. Moderna (MRNA -1.39%) could also be in play. Moderna has a penchant for cutting-edge technology, it's flush with cash, and it desperately needs another revenue stream outside its COVID-19 vaccine to justify its valuation.
What's the big picture? A deal for CRISPR probably all comes down to the price tag. Even though the company's market cap is under $8 billion, management may want a figure in the $20 billion to perhaps $30 billion range. CRISPR is a novel drug development platform that can be applied in myriad ways to a variety of genetically based diseases. As such, it would be financially irresponsible to sell the biotech for anything less than a monstrous premium. In fact, this possible buyout may be the largest deal in the entire industry next year.
