We had a rare Merger Monday in Biotech Land to start the new trading week. Merck (MRK) used some of its considerable buying power to plop down $10.8 billion in hard cash to acquire Prometheus Biosciences (RXDX) . The purchase included an approximate 70% buyout premium. Prometheus's main asset is a candidate called PRA023, which is being developed for Ulcerative Colitis (UC), Crohn's Disease (CD) and Systemic Sclerosis-Associated Interstitial Lung Disease (SSc-ILD).
Nothing sparks the animal spirits in the biotech sector like a significant acquisition. Correspondingly, the SPDR S&P Biotech ETF (XBI) rose 4.6% in trading Monday in what was a fairly flat market.
Whether we see a significant uptick in these types of purchases is an open question. Major pharma firms such as Merck, Pfizer (PFE) , Merck and others certainly have the cash and financial wherewithal to be more active in M&A. And with the small biotech sector falling some 50% from its last peak early in 2021, one would think there would be bargains to be had, even with significant premiums.
Here are two names I own on a stand-alone basis, but would be logical buyout candidates as well.
Exelixis (EXEL) is a mid-cap oncology outfit I highlight consistently on these pages. It is relatively easy to make the case Exelixis would be a straightforward buyout candidate. The company has an established blockbuster oncology drug called CABOMETYX, which is already at an over $1 billion annual run rate. This drug is still taking market share in its approved indications and is in evaluation for other oncology targets.
Then there is valuation. Exelixis has a market capitalization of approximately $6.2 billion. A little over $2 billion of that is represented by the net cash on its balance sheet. However, the company did recently announce a $500 million stock buyback authorization as it faces new pressure from an activist investor that has accumulated a better than 7% stake in Exelixis.
Between product sales and milestone payouts, Exelixis should produce around $1.8 billion in revenue this year. The company is nicely profitable as is, but an acquirer would likely be able to slash operational costs dramatically resulting in significantly higher cash flow.
Viridian Therapeutics (VRDN) is a new name to my portfolio. This small-cap name ($1.23 billion market capitalization) is focused on the development of fast-follower therapies that improve upon existing treatment options for rare diseases, leveraging its expertise in antibody discovery and engineering. The company has two candidates -- both IGF-1 antagonist compounds with different delivery systems -- undergoing evaluation in the clinic for thyroid eye disease (TED).
After positive Phase 2 results, Viridian's lead TED candidate, VRDN-001, is enrolling in a pivotal Phase 3 trial whose results should be out in mid-2024. The company is well-funded at the moment and Wells Fargo (WFC) initiated the stock this week with a "Buy" rating and $46 price target. The analyst at Wells believes VRDN-001 has potential advantages over Horizon Therapeutics' (HZNP) Tepezza including "better efficacy, rapid onset and... also... lower adverse events."
Tepezza did nearly $500 million in net sales in the fourth quarter and was one of the key drivers of Amgen's (AMGN) nearly $28 billion takeout of Horizon late last year. It seems logical that if VRDN-001 progresses it might also make Viridian a target for M&A.