Develop a drug; get bought by a big pharma. It's the biotech way.
Only a few biotechs have survived long enough to develop multiple drugs. And as Genzyme showed, even those hardy veterans aren't immune to being taken out.
While any biotech, at any point, can technically be called a takeover target, the potential really starts heating up when it has a drug that's close to bringing in revenue. As patent cliffs for its current stable of blockbuster drugs approach, pharmaceuticals' lust for new late-stage assets has increased dramatically. Here are five potential takeover targets among biotech contenders.
Big potential, waiting for data
Bloomberg reported last week that Exelixis
XL184 is in a phase 3 trial for medullary thyroid cancer, but its phase 2 data in ovarian and prostate cancer makes the drug a potential blockbuster. Medullary thyroid cancer may get XL184 on the market, but those larger markets could truly propel it to blockbuster status.
The biggest knock against Exelixis as a takeover target is that it has numerous partners -- GlaxoSmithKline, Bristol-Myers Squibb
Clinical trial success, waiting for approval
In the less-risky category, we have Amarin
Amarin is developing AMR101to treat patients with high triglyceride levels. The company owns worldwide rights to AMR101 and has no other drugs in its pipeline, so it's about as clean a purchase as you can get. It would be a good fit at Pfizer to replace Lipitor sales, but I could also see AstraZeneca or Merck coming in to market it alongside Crestor or Vytorin, respectively.
Vertex has already licensed its hepatitis C drug telaprevir to Johnson & Johnson, but that represents a clean division of labor between countries, with Vertex retaining the rights to North America. Thus, I don't consider that partnership a major obstacle for any company keen to buy Vertex.
The bigger issue for a potential Vertex buyer is price. With a market cap of $10 billion, there's a heck of a lot of sales already baked into its shares. I suspect potential buyers will probably wait to confirm that Vertex gets telaprevir approved, then bump it down into the next category while they confirm that the peak sales everyone expects are actually possible.
FDA approval, waiting for sales
Human Genome Sciences'
Human Genome's lupus drug Benlysta was approved last month, so we're still months away from knowing how well the launch is going.
The company also shares the drug with marketing partner Glaxo, which makes it a little less attractive to any potential acquirer not named "Glaxo." Keep in mind, though, that Eli Lilly bought ImClone Systems knowing that it would have to deal with Bristol-Myers to market Erbitux, so this reservation's still not a dealbreaker.
Dendreon is farther along in its sales of prostate cancer treatment Provenge, but the ramp has been slow, because Dendreon needed to increase manufacturing capabilities. Because of the complex nature of the immunotherapy, I suspect big pharma wants to wait until it's sure about the potential for the peak sales of Provenge before jumping onboard.
Waiting, waiting, waiting
There's always something that big pharma can wait for -- clinical trial results, regulatory approval, more sales -- that might deter it from buying a biotech right now. Investing in the hopes of gaining a quick buyout is often a recipe for disappointment.
If on the other hand, you're convinced that the next value-building milestone will fall in the company's favor, go ahead and buy. If you're right, you'll profit whether the company gets taken out or not.
Looking for more stock ideas? Here are six stocks that David and Tom Gardner think you should be watching.
Johnson & Johnson and Pfizer are Motley Fool Inside Value picks. Exelixis and Vertex Pharmaceuticals are Motley Fool Rule Breakers selections. GlaxoSmithKline is a Motley Fool Global Gains recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Exelixis, GlaxoSmithKline, and Johnson & Johnson. Alpha Newsletter Account, LLC owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.