Biotech stocks are notoriously volatile, making them best suited for only the most risk-tolerant investors. But for those willing to take the risk, biotech companies can often make a big splash; particularly when a bigger fish gobbles them up. However, picking the next biotech takeover candidate isn't easy. Any number of things can derail even the most promising drugs during clinical trials, so to help we've asked three Motley Fool healthcare analysts to chime in with the companies they think might be tasty enough to attract a suitor. Read on to learn which companies they chose.
Brian Orelli: It can be hard to pick companies that might be bought out because you have to find management that is willing to sell and a pharma willing to buy.
For Puma Biotechnology (NASDAQ:PBYI), at least we can check off the first one. Alan Auerbach, CEO, president, chairman, and the company's largest shareholder, has already done it once. He sold Cougar Biotechnology, which developed prostate cancer drug Zytiga, to Johnson & Johnson (NYSE:JNJ) in 2009. It seems likely Auerbach will try to sell Puma, so he can start Lion Biotechnology, Bobcat Biotechnology, or whatever cat he decides to name his next company after.
Whether Auerbach can find a buyer is a completely different matter. The company recently announced positive phase 3 trial results for its breast cancer drug neratinib. The drug produced a 33% improvement in disease-free survival compared to the placebo in patients who received surgery, followed by Roche's Herceptin and then neratinib or the placebo.
The results caused shares to skyrocket. Puma Biotechnology has an enterprise value of more than $7 billion. I wouldn't call that overpriced, but it's at the high end of what seems reasonable even considering neratinib's blockbuster potential and high likelihood of FDA approval. But a buyer will likely have to offer at least a 15% premium on the price, potentially lowering the return on investment below the threshold pharmas are willing to accept.
Fortunately for investors, if Puma Biotechnology can't find a buyer, it will still own neratinib and can launch the drug on its own or, better yet, license it to a large pharma, which might eventually purchase the company to avoid making royalty payments if neratinib lives up to its potential.
Todd Campbell: To pick up on Brian's point, you can probably find a lot of biotech companies that would love to be bought, but locating a buyer is the challenge. Sellers need to find deep-pocketed drugmakers with a product focus that includes the indication for the prospective acquisition's most promising pipeline candidates. And those candidates must be better than anything the buyer can come up with in-house.
In my eyes, that criterion makes Portola Pharmaceuticals (NASDAQ:PTLA) an intriguing takeover play. The company's andexanet alfa is so compelling that Johnson & Johnson, Bristol-Myers Squibb (NYSE:BMY), and Daiichi Sankyo (OTC:DSKYF) are helping fund its trials. In phase 3, andexanent alfa showed it can reverse the effects of Bristol-Myers and Pfizer's (NYSE:PFE) factor Xa anticoagulant Eliquis. If Portola's results are also effective against Johnson & Johnson and Daichi's factor Xa drugs, Portola could be sitting on a must-have medicine that could significantly boost the patient population for factor Xa therapies. But it isn't just andexanet alfa that could intrigue a buyer. Portola is also developing a competing factor Xa therapy that might challenge these same companies. So buying Portola could give one of these company's two things: an antidote and one less competitor. Even better, with a market cap of just $1 billion, the purchase wouldn't break the bank.
George Budwell: As my Foolish colleagues noted, buyouts in the biotech industry are far from straightforward, resulting in most deals seemingly coming out of left field. Even so, one theme that has been constant of late is Big Pharma's hunger for smaller companies working on technologies that target lucrative and underserved markets.
With that in mind, I think the relatively unknown biopharma Prothena (NASDAQ:PRTA) is a potential takeover target for three reasons. First off, the company is based in tax-friendly Ireland (enough said). Next up, Prothena has an outstanding balance sheet for a clinical-stage company, in part, because it was a spinoff from the now-defunct Elan. That means a suitor wouldn't have to take on any problematic financing deals.
But perhaps most important, Prothena is a leader in the development of monoclonal antibodies. Roche in particular has become deeply interested in this technology, and has actually signed a research agreement with Prothena to develop PRX002 for Parkinson's disease.
What could trigger a buyout? I think all eyes will be on Prothena's experimental candidate for AL amyloidosis called NEOD001. If this compound continues to show promise, Prothena's pipeline, along with other value enhancers, might be too tempting for Big Pharma to pass up.