89bio (ETNB -2.24%), Karuna Therapeutics (KRTX 0.03%), and Morphic Therapeutics (MORF 0.07%) are clinical-stage biotech companies that make attractive buyout targets. Their financial positions may not be great, as they all have little revenue, but they have promising potential blockbuster therapies in their pipelines.
Financing has become more difficult lately for small and mid-sized biotechs. Facing big expenses to fund research and marketing of their drugs, these companies often turn to licensing deals, partnerships, and outright buyouts to see their blockbusters to the finish line.
They are all trading below what they would be if they were profitable companies, but that provides an opportunity for larger pharmaceutical companies and for investors. It allows a chance for a larger company to buy a de-risked asset and investors who think long-term can get in now on a stock that will likely jump if it gets a buyout offer.
89bio's top therapy is getting close to approval
89bio presents strong potential as a buyout candidate. The company's stock is up more than 28% so far this year, thanks to positive news regarding its lead pipeline candidate.
The clinical-stage biotech company specializes in therapies to treat cardio-metabolic and liver diseases. 89bio's potential blockbuster drug is pegozafermin, which did well in a phase 2b trial to treat nonalcoholic steatohepatitis (NASH) patients. The disease is a form of nonalcoholic fatty liver disease that causes inflammation of the liver and liver damage and can lead to fibrosis, or scarring of the liver. It can also lead to cirrhosis, permanent scarring of the liver that can lead to liver cancer. Nearly 35.5% of those who are overweight have NASH, according to a recent meta-analysis published by the National Library of Medicine.
Pegozafermin's next step is two phase 3 trials to treat NASH, which has a relatively large target market. There are no Food and Drug (FDA)-approved therapies yet to treat the disease, which affects 5% of adults in the U.S., according to the American Liver Foundation.
Pegozafermin is also being looked at to treat severe hypertriglyceridemia (SHTG), when a person has high levels of triglycerides, which could lead to atherosclerosis, heart disease and acute pancreatitis. In a phase 2 study, pegozafermin significantly reduced triglycerides. SHTG affects up to 4 million people in the U.S.
89bio has no revenue and lost $102 million last year. It recently raised cash by selling $275 worth of stock, as it had only $188.2 million at the end of 2022.
Karuna is in a race to develop a schizophrenia drug
Karuna Therapeutics focuses on therapies to treat psychiatric and neurological conditions. The clinical-stage biotech is on track for its first marketed therapy and its shares are up more than 62% over the past year, but flat so far this year.
The company said it plans to file a New Drug Application (NDA) with the FDA midway through this year for KarXT, a muscarinic agonist, to treat schizophrenia. The drug is a combination of xanomeline and trospium chloride. The advantage for KarXT is it seems to have fewer side effects than many antipsychotic drugs. The target group for KarXT could be quite large. According to the World Health Organization, 24 million people worldwide, roughly 1 in 300, have the disease. and drugs used for schizophrenia often can migrate into other applications, such as dementia-related psychosis.
In preparation for a potential launch of KarXT, Karuna recently sold $400 million worth of stock. At the end of 2022, it said it had $1.1 billion in cash, enough to fund operations into 2025. Last year, the company had $10.6 million in collaboration revenue but it lost $274.9 million.
One concern for Karuna is that another schizophrenia drug is on the horizon, emraclidine, from Cerevel Therapeutics, which is in phase 2 trials. However, it is at least two years away from approval. It might make sense for a larger company to buy Karuna now before its Kar-XT is approved.
One potential suitor could be Eli Lilly, which sold the rights to xanomeline to Karuna in the first place. Biogen and Jazz Pharmaceuticals, both of which are active in neurological therapies, might also make sense as suitors.
Immunology drug makes Morphic a hot commodity
Morphic focuses on oral integrin drugs to treat chronic diseases, including fibrosis, cancer, and autoimmune, cardiovascular, and metabolic diseases. The company's stock is up more than 77% this year, thanks to positive news regarding its lead ulcerative colitis (UC) therapy, MORF-57.
In a phase 2a trial with UC patients, the drug was responsible for complete remissions in 26% of patients. The twice-daily oral pill has the potential to match the efficacy of Entyvio, regarded as a $5 billion a year UC and Crohn's Disease therapy from Takeda Pharmaceutical. Through nine months this year, Entyvio has posted sales of 547.9 billion yen ($4.1 billion).
Morphic said it has $421 million in cash as of March 31, enough to fund operations into 2026, giving it plenty of time to develop MORF-057.
In the first quarter of 2023, the company had a net loss of $36.1 million, with collaboration revenue of $500,000.
Companies such as Morphic that specialize in immunology disorders have become frequent buyout targets. Merck just spent $10.8 billion for Prometheus Biosciences and in 2022, Pfizer completed a $6.7 billion deal to buy Arena Pharmaceuticals.
