One thing I am hoping to see during the second quarter is increased M&A activity in the biotech space. Deal volume was strong in January thanks partly to clarity provided by tax reform and more importantly the need for major drug and pharma giants to replenish their pipelines. However, transactions dried up in February and March after volatility spiked in the market. The VIX or "fear index" is now up some 70% from where it began the year.
A good sign on that front came Monday morning with Novartis (NVS) announcing it will buy AveXis (AVXS) for $8.7 billion after it raised some $13 billion by selling its stake in a consumer healthcare joint venture. This is a huge win for AveXis' shareholders as the buyout price is more than 80% above where the stock closed on Friday.
This has ignited a rally in other gene therapy concerns. One of these is Bluebird Bio (BLUE) , which I would fade. The company has a huge collaboration deal with Celgene (CELG) . This makes it an unlikely purchase unless it is by that biotech stalwart, which is still digesting its recent acquisition of Juno Therapeutics (JUNO) . Gene-editing concerns such as Editas Medicine (EDIT) are more likely acquisitions, in my opinion, and that particular one has been speculatively linked to Gilead Sciences (GILD) in the past. Gilead made its own foray into this space recently with its $12 billion purchase of Kite Pharma (KITE) in August of last year.
I believe that the oncology space will continue to see a good share of new deals at nice premiums. One name I like as a standalone pick as well as a potential buyout target is Clovis Oncology (CLVS) . During the carnage last Friday in the market, the FDA granted its lead drug "Rubraca" a label expansion for second-line or later maintenance treatment in patients with the cancer. Importantly, the extension came with a "clean label." Rubraca will compete in this indication against Lynparza from AstraZeneca (AZN) which has a label warning for pneumonitis as well as Zeluja from Tesaro (TSRO) which warns for blood toxicity and cardiovascular events. This removes an overhang from Rubraca's investment case and should help ramp up sales significantly (the drug did $55 million in sales in 2017, its first year on the market).
Outside of oncology, I think Neos Therapeutics (NEOS) which already has rebuffed one hostile low-ball bid, makes sense as an acquisition target. It has had three drugs to treat ADHD (attention-deficit/hyperactivity disorder) approved over the past 18 months and sales are ramping impressively. The ADHD space is a $10 billion market with several competitors. Even with a solid buyout premium this would be less than a $400 million purchase, which is a "bite-sized" deal. I also think the management team is more than willing to be acquired at the right price.
Those are several names I like if the "animal spirits" in M&A pick up in the months ahead, which I think is likely.
This commentary originally appeared on our sister site Real Money Pro on April 9. Click here to learn about this dynamic market information service for active traders and to receive daily columns from Jensen, Ed Ponsi, Paul Price and others.
