4 Drug/Biotech Stocks That Could Be Buyout Targets In 2018

Last week, we issued an article where we mentioned that mergers and acquisitions, which were quite lean in 2017, may pick up significantly in 2018 if the proposed tax reforms are finally approved.

The reforms aim to cut the corporate tax rate from 35% to 20%, which can boost profits of large drug/biotech companies. The change in tax code will also allow companies to bring back huge cash held overseas at a one-time tax rate of 10%.

These changes will definitely leave more cash in the hands of drug/biotech companies. Also, with focus on drug pricing taking a backseat and large drug/biotech companies struggling with organic growth, there is a lot of chatter about a possible increase in large M&As in 2018.

Given that it takes several years and millions of dollars to develop new therapeutics from scratch, large pharmaceutical companies sitting on huge piles of cash may prefer to buy innovative small/mid cap biotech companies to build out their pipelines.

In this article, we discuss some mid- and large-cap names that may be logical acquisition targets next year for companies like Pfizer (NYSE:PFE) , Merck (NYSE:MRK) , Johnson & Johnson (NYSE:JNJ) and others. What matters for buying a drug/biotech stock is the current sales performance of its drugs/products, prospects of future sales growth, and the quality of the pipeline.

The four companies we discuss have most of these factors going in their favor. Acquisitions of small-cap drug/biotech companies are very difficult to predict and quite frequent. Hence, these have been excluded from the discussion.

BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)

Companies whose product/pipeline portfolio includes rare disease drugs are in great demand as it is a less competitive space and the expensive treatments can bring in huge profits. BioMarin is one such drug developer. Its market cap is around $14 billion.

BioMarin’s key orphan disease drugs – Vimizim and Kuvan – continue to do well, backed by strong underlying patient demand trends. BioMarin expects sustained growth in both the drugs. Brineura’s earlier-than-expected approval this year for the treatment of children with CLN2 disease, a form of Batten disease, was also a huge boost for BioMarin.

Its impressive rare disease pipeline is also progressing well with approval for pegvaliase for the treatment of phenylketonuria expected in 2018. On the pipeline, we believe both late-stage candidates – vosoritide - for achondroplasia, the most common form of dwarfism, and BMN27 – for hemophilia A - have blockbuster potential.

BioMarin has already been the target of takeover speculation. Companies like Gilead (GILD), Amgen (NASDAQ:AMGN) and Roche may be interested in buying BioMarin.

Vertex Pharmaceuticals, Inc. (NASDAQ:VRTX)

For Vertex, 2017 so far has been a tremendous year with positive data read-outs and regulatory approvals leading to an increase in eligible patient population for its two approved cystic fibrosis (CF) - Kalydeco & Orkambi. CF is Vertex’s main area of focus. With a consistent expansion in patient population, Vertex’s CF product revenues have increased quarter to quarter throughout 2017.

The company is optimistic that the positive trend of CF sales will continue in 2018 as it gains additional reimbursement approvals for Orkambi in ex-U.S. markets and gets approval to launch tezacaftor(VX-661)/ivacaftor combination medicine.

Meanwhile, the company has also made decent clinical progress across multiple CF studies this year and has meaningful pipeline catalysts. The market cap of Vertex is around $36 billion.

Incyte Corporation (NASDAQ:INCY)

Incyte’s strong oncology portfolio makes it a lucrative target for companies like Gilead, Amgen and Bristol Myers. The market cap of Incyte is more than $20 billion.

The primary reason why Incyte is ripe for buyout is its two products on the market, Jakafi and Iclusig.

Jakafi, a JAK inhibitor, is the first and the only product to be approved by the polycythemia vera (PV) and myelofibrosis (“MF”) – two rare blood cancers. Jakafi is seeing strong sales performance driven by strong patient demand for both indications. In order to expand the patient population and increase the commercial potential of the drug, the company is working on expanding its label further. Iclusig is approved for chronic myeloid leukemia and acute lymphoblastic leukemia.

Meanwhile, Incyte’s pipeline boasts candidates like immune therapy epacadostat — being studied in combination with anti-PD-L1 agents of Merck, Bristol Myers and others — and Olumiant for rheumatoid arthritis – approved in Europe and regulatory application to be filed in the United States in January 2018.

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)

Like BioMarin, Alexion is also focused on the development and commercialization of life-transforming drugs for the treatment of patients with ultra-rare disorders. Its key drug is Soliris, approved for two severe and ultra-rare disorders — paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS) — have been consistently doing well. Meanwhile, Alexion is working on expanding the drug’s label to include additional indications, which if approved, can boost further sales growth. It has two other drugs for rare diseases called Strensiq and Kanuma, which are emerging as growth drivers. Alexion also has a robust pipeline of several candidates under development including Soliris follow-up candidate, ALXN1210.

Roche, Pfizer, or Novartis may be interested in buying Alexion. The market cap of Alexion is more than $25 billion.

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