One of the nice things about owning biotech companies is the large number of acquisitions in the sector. You can wake up one morning and find your investment up 50% or more because some pharma or large biotech company has come along and snatched up your development-stage biotech company.
Finding those nice surprises is a challenge for sure. While biotech companies occasionally put themselves up for sale, more often than not, they get sold behind closed doors. The first wind of the acquisition is the press release announcing the sale.
The only trick I know of to identify potential takeover targets is to look for biotech companies with large pharma partners. If their potential is great enough and their valuation compelling enough, pharma companies will usually acquire their partners.
Here are three biotech companies with partners that could get acquired.
I'll see you a drug and raise you a pipeline
Regeneron Pharmaceuticals (NASDAQ:REGN) has been on fire lately. Its macular degeneration drug Eylea is selling like hotcakes. It also has a partnership with Sanofi (NASDAQ:SNY) to develop drugs -- the first of which, Zaltrap, is already on the market.
Bayer, Regeneron's ex-U.S. partner for Eylea, could buy the biotech, but I think Sanofi is a more likely suitor. The tight integration of the drug development pact between Regeneron and Sanofi would likely be a turnoff for Bayer. Sanofi, on the other hand, could deal with having Bayer as a partner for Eylea, since the companies are basically doing their own things in separate countries.
Avoiding the fat
An acquisition of Arena Pharmaceuticals (NASDAQ:ARNA) by its marketing partner Eisai isn't likely to happen any time soon; the companies haven't even launched their obesity drug, Belviq, yet. Eisai will probably want to see how sales progress before grabbing the additional rights to the drug.
If Belviq does sell well, though, it's easy to see why the Japanese drugmaker would want to acquire the biotech company. Eisai is on the hook for sales milestones of more than $1 billion when annual sales hit certain levels. The pharma can essentially add that amount to its purchase price, since it won't have to pay the milestone if it buys Arena first.
Half of it, at least
Last week's announcement that Theravance (UNKNOWN:THRX.DL) was splitting the company into two biotech companies makes the royalty holding company part of the split an easy target for an acquisition by GlaxoSmithKline (NYSE:GSK), Thervance's partner on lung drugs Breo and Anoro.
By putting the assets that Glaxo might not want into a separate company, Glaxo is free to buy the royalty holding company to gain full control of Breo and Anoro, avoiding paying out a royalty. Obviously, the price still has to be right, but it's a much cleaner transaction than buying Theravance as a complete package.
It's still just a bonus
Buying biotech companies just because you think they'll get acquired is usually a bad idea. Onyx Pharmaceuticals for instance, has been rumored for years to be an acquisition target of its partner Bayer, but the biotech company has yet to be taken out.
Instead, look for solid biotech companies that you'd like to own forever. If you're right about their potential, a partner will see it, too.
Of the three here, I like Regeneron's prospects the best, although the quality doesn't come cheap.