The pharmaceutical merger and acquisition (M&A) scene is heating up. Speaking to this point, Pfizer recently doled out $5.4 billion to acquire Global Blood Therapeutics for its sickle cell disease assets. Amgen spent $3.7 billion on a deal earlier this month for ChemoCentryx in order to attain the newly approved ANCA-associated vasculitis drug Tavneos. And Merck is rumored to be in advanced talks to buy the cancer specialist Seagen.

Four key factors are driving this notable uptick in pharma M&A.

  1. A wave of patent expirations for top-selling drugs such as Eliquis, Humira, and Opdivo is set to hit the industry over the course of the current decade. 
  2. Most blue-chip biopharmas are flush with cash at the moment.
  3. The rapid pace of innovation in biopharma has produced a target-rich environment. 
  4. Valuations across the industry have fallen drastically over the past 10 months. 

With this background in mind, here is a brief look at three biotech companies that could be acquired soon.

A proven gene-silencing platform 

Alnylam Pharmaceuticals (ALNY -0.43%) is a ribonucleic acid interference, or RNAi, drug development specialist. The core concept behind RNAi is to silence genes associated with human disease. To date, the drugmaker's novel platform has yielded five approved therapies: Onpattro, Givlaari, Oxlumo, Amvuttra, and Leqvio. The biotech also sports five late-stage clinical candidates.

Why is Alnylam a possible takeover target? In brief, Alnylam's RNAi platform ought to generate multiple blockbuster products in the years to come. Moreover, these gene-silencing drugs have an unusually strong competitive moat due to their unique nature and outstanding clinical profiles.

Now, there is a major impediment to a potential buyout in this case. Namely, Alnylam's shares are already trading at close to 16 times 2023 projected sales. A buyer, therefore, would probably have to be willing to pay up to around 20 times 2023 estimated sales (roughly $32.6 billion or about $272 a share) to win over Alnylam's key stakeholders.

That's an enormous premium, to put it mildly. After all, the richest deals in this space have generally come in at around six to eight times peak estimated revenue. A buyer would thus have to be fairly confident that Alnylam's deep value proposition will indeed bear fruit. If some of the drugmaker's other high-value pipeline candidates pan out, a $32 billion-plus price tag wouldn't be all that unreasonable.   

A bet on a new depression drug

Axsome Therapeutics (AXSM -0.26%) is a central-nervous-system disorder specialist. The company currently sports two FDA-approved therapies: Sunosi for excessive daytime sleepiness due to narcolepsy and Auvelity for major depressive disorder. Axsome is also developing a late-stage migraine candidate called AXS-07, along with a fibromyalgia candidate called AXS-14.

Axsome's buyout thesis truly centers around Auvelity, however. As a new option for a hard-to-treat form of depression, Wall Street thinks this drug can haul in over $2 billion in annual sales. The problem is that Axsome probably doesn't have the infrastructure and experience necessary to maximize the drug's commercial potential. As a result, this mid-cap biotech company may simply choose to sell itself ahead of Auvelity's launch later this year. 

Keeping with this theme, it has become all too common for early commercial-stage biotech companies to lose a large chunk of their value during the opening phase of an important new drug launch. The fact of the matter is Wall Street has little to no patience when it comes to potential blockbusters stumbling out of the gate. That's not to say that Axsome can't turn Auvelity into a commercial success, but the path of least resistance is definitely the buyout route.   

A big win in schizophrenia

Karuna Therapeutics (KRTX 0.13%) posted outstanding late-stage trial results earlier this month for its schizophrenia drug candidate KarXT (xanomeline-trospium). Wall Street has the drug's peak sales for this indication pegged at $1.2 billion. If KarXT's other indications, such as Alzheimer's disease psychosis, pan out, the drug is predicted to generate over $5 billion in annual sales at peak, putting it in the running to possibly hit megablockbuster status one day. 

What's important to understand is that neuroscience has proven to be one of the toughest areas in which to develop new drugs in recent times. Most neuromedication candidates either flame out in the clinic or get hit with unsightly safety warnings during the labeling process. KarXT's clinical trial data, thus far, appears to set it apart from the crowd on these two key points. Big pharma, in turn, is almost certainly paying attention to the drug's clinical development -- especially after its recent win in the adult schizophrenia setting.

The bottom line is that Karuna is unlikely to remain independent leading into KarXT's upcoming regulatory filing in mid-2023. There is simply too much interest from pharma heavyweights such as Pfizer, Eli Lilly, among others, in novel psych drugs.