With Mergers Picking Up in the Beaten-Up Biotech Sector, Here's a Target I Like

The last 18 months have been one of the most brutal stretches I can remember in more than 35 years of investing in the biotech sector. Since the beginning of 2021, the SPDR S&P Biotech ETF is down around 60%. Similar carnage can be found in the artificial intelligence, electric vehicles and fintech spaces as well with just about every company that debuted on the market via a special purpose acquisition company (SPAC) in the second half of 2020 through the summer of 2021. In retrospect, the massive amounts of liquidity unleashed by the Federal Reserve led to too much money chasing too few good ideas. It is hardly the first time this type of excess has happened. Once the bubble popped, it has resulted in something akin to the Internet bust for these areas of the market. A lot of babies have been thrown out with the bathwater along with myriad companies that never should have been brought to market in the first place. The good news is that the sector seems clearly in oversold territory as there are hundreds of small biotech stocks that are now selling for as much as or less than the net cash on their balance sheets. It does appear biotech is trying to find a floor at support levels that have held a few times over the past half-decade. I have been accumulating XBI via covered call orders quite heavily in June. In addition, merger-and-acquisition activity seems to be picking up a bit. In mid-May, Pfizer agreed to purchase Biohaven Pharmaceuticals for more than $11.5 billion which represents a premium of better than 70% We also have seen smaller deals, such as TherapeuticsMD Inc. agreeing to be bought by a private equity firm for nearly five times what it was trading at before the announcement in late May. Nothing gets the animal spirits going in this sector than a pickup in M&A activity. There also have been few times in recent history that there are more bargains available after the brutal selloff in this space. Big Pharma is flush with cash, and I can see a variety of small- and mid-cap concerns that would make solid strategic or bolt-on acquisitions. One of these is Acadia Pharmaceuticals , a position I added to Tuesday via covered call orders after the stock tumbled more than 30% following an unfavorable recommendation by a Food and Drug Administration advisory committee related to a marketing application for its flagship product Nuplazid as a treatment for hallucinations and delusions associated with Alzheimer's disease. I am quite surprised at the extent of the pullback as I always put a low probability on approval for this indication. Getting anything approved to help treat the Alzheimer's population has always been a challenge, which has gotten even trickier since the government agency's Aduhelm debacle last year. The indication for which Nuplazid is already approved likely will see $1 billion in peak sales and it will produce more than $500 million in net sales this year. Even without FDA approval, the drug is likely to see some off-label use in that area and the drug is in late-stage development to treat similar symptoms in schizophrenia. Acadia also has another molecule to treat a rare affliction called Rett Syndrome in Phase 3 development that is targeting a 2023 FDA approval. The company ended the first quarter with $380 million of net cash on the balance sheet as well. With a market cap just around $2.1 billion, Acadia is a fairly compelling sum of the parts story. A larger player with an established sales force could easily target Acadia as an accretive acquisition even at a significant buyout premium.

With Mergers Picking Up in the Beaten-Up Biotech Sector, Here's a Target I Like

This particular biotech company just saw its stock whacked but still holds a lot of promise.

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