4 Possible Biotech M&A Targets

As I speculated a couple of weeks back, mergers and acquisitions have started to pick up in the biotech sector. It looks like a bidding war has started for mid-cap Medivation (MDVN), which already seen its stock price double and could eventually fetch more than $10 billion from the victorious suitor. Last week AbbVie (ABBV) acquired a privately held stem-cell therapy concern for just under $6 billion. Elsewhere in health care, Abbott (ABT) is buying St. Jude Medical (STJ) for a cool $25 billion. Allergan (AGN) has made several smallish deals since its merger with Pfizer (PFE) was derailed by the Treasury Department, and I am sure both it and Pfizer are planning further moves to shore up their pipelines. After its recent disappointing quarterly results that showed a deceleration of growth from its core hepatitis C franchise, I am sure Gilead Sciences (GILD) will be in this mix as well. It recently did a potential $1.2 billion deal for Nimbus Apollo to further is presence in the treatment of non-alcoholic steatohepatitis (NASH), and with $15 billion in annual free cash flow, it could certainly be a major player in M&A should it choose to do so. So which companies could be attractive buyout targets? I like concerns that have or are soon on their way to having FDA approval for their first commercialized products in addressable markets. This de-risks the pipeline for any potential acquirer and negates the need for the acquired to build its own salesforce from scratch -- a daunting task. It can be a win-win for both parties even if the acquirer has to pay a significant premium. ACADIA Pharmaceuticals (ACAD) received FDA approval for its primary lead compound, Nuplazid, after the bell on Friday. This is the first approved treatment for psychosis in Parkinson's disease patients, which affects some 40% of the approximate one million people affected by that condition in the U.S. It should produce some $1 billion in sales five years out, and the company is in development to treat Alzheimer's patients and those with schizophrenia. Success in those areas could push peak sales to $3 billion and beyond. ACADIA is also one of the few mid-caps in the biotech sector with just over $3.5 billion market capitalization. I would keep an eye on this one. I still have Relypsa (RLYP) as a likely buyout target; however, I do not think this will be done until a competing drug for the hyperkalemia market, ZS-9, has its Prescription Drug User Fee Act (PDUFA) date late in May. Both parties in any potential deal are waiting for this event to determine what exact leverage they have in any negotiations. I expect ZS-9 to be approved, but with a black-box label for patients with hypertension and/or periphery edema, a good portion of the hyperkalemia population. I believe ZS-9 and Veltassa from Relypsa will eventually split most of the approximate $2 billion market; ZS-9 due to its faster action will probably dominate the smaller acute market while Veltassa should be the pick for the chronic market. With a market capitalization of just $750 million, a suitor with an established sales force could make an attractive offer and still have the acquisition be accretive. A couple of small-caps like those I mentioned before, Merrimack Pharmaceuticals (MACK) and Dynavax Technologies (DVAX), also make sense as targets, especially the latter as the FDA has pushed out its PDUFA date for its hepatitis B vaccine inexplicably by three months, making it more likely the company would entertain offers. If M&A is indeed picking up in the biotech space, I could see one or more of the companies mentioned above being part of a larger entity by year's end.

4 Possible Biotech M&A Targets

These concerns are well on their way to FDA approval for their first commercialized products in addressable markets.

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