The Best Play in Biotechs: M&A

These 4 biotech stocks should see a good 2015 as Big Pharma firms look to shore up their pipelines

Biotech initial public offerings have really come into their own in the past few years, but increasingly, Big Pharma is eating several of them up as fast as Wall Street can churn new ones out.

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That that trend has put the spotlight on promising companies such as Juno Therapeutics Inc (NASDAQ:JUNO), Exelixis Inc (NASDAQ:EXEL), Acceleron Pharma Inc (NASDAQ:XLRN) and Oncomed Pharmaceuticals Inc (NASDAQ:OMED).

There were just 11 biotech IPOs in 2012. In 2013, that number more than tripled. Last year, there were 79 biotech IPOs. That’s parabolic growth.

But what’s more interesting is what happens after these companies come public — namely, Big Pharma is swooping in and buying up ones with exciting drugs in development.

Just a handful of pharmaceutical companies account for almost half the revenue in the sector, and they rely on blockbuster drugs. For example, Pfizer Inc. (PFE) launched heart medication Lipitor in 1998. By 2005, it was bringing in more than $100 billion per year, accounting for 40% of the company’s profits that year. That’s the little pill that could, to say the least.

However, companies like Pfizer now face a pair of problems:

  • First there’s the ‘patent cliff’ that is approaching Big Pharma. More than $50 billion in annual drug revenue came off patent last year, and big companies are feeling the bite of generic manufacturers stealing more and more sales. This trend is going nowhere.
  • Second, insurers and governments are getting more cost conscious about how they spend on medications. For example, the U.S. government saved $238 billion switching from name brand to generic drugs in 2013. And this trend is growing, not diminishing.

So, is this the end of Big Pharma? Not quite.

Given these ineluctable trends, Big Pharma has relied on one of its strengths — gigantic piles of cash — and stepped up its mergers and acquisition strategies for unique drugs in strategic sectors, like cancer and rare diseases.

Last year, more than $220 billion was spent on drug company acquisition — a new record.

Staying Big by Getting Bigger

This strategy makes perfect sense for big firms since it’s often much cheaper to buy a company with a potential blockbuster than to spend on R&D. And if you know what specific disease you want to focus on, you simply look for a company that is in an acceptable stage of development, monitor its results, then step in and buy it at a premium.

And if you’re looking for high-margin products, you’re best off looking into spaces like rare diseases and cancer, where patients (and insurance companies) have to pay for the handful of drugs that are available for treatment…or die.

At this point, cancer drugs and delivery systems seem to be getting a fair amount of attention, especially with some of the smaller, more specialized biotech firms. These four biotechs are working on cancer solutions — they have promising technologies, but also could be credible takeover targets. All are buys … but with speculative money only.

Juno Therapeutics: JUNO went public late last year and it’s up about 35% since its IPO. It develops novel cellular immunotherapies based on two complementary platforms — Chimeric Antigen Receptors (CARs) and T Cell Receptors (TCRs) technologies. The goal is to re-engage the body’s immune system to treat cancer. Juno genetically engineers a patient’s own T cells to recognize and kill cancer cells, which helps avoid many of side effects of current cancer treatments.

Exelixis: EXEL is a biopharmaceutical company focused on developing and commercializing small molecule therapies with the potential to improve the treatment of metastasized cancers. Its first commercial product, Cometriq (cabozantinib), received its initial regulatory approval in late 2012. Cometriq is used to treat metastatic thyroid cancer. EXEL also is in Phase III trials with a drug to treat metastatic melanoma.

Acceleron Pharma: XLRN specializes in developing medicines that regulate the transforming growth factor beta (TGF-β) superfamily of proteins, which play fundamental roles in the growth and repair of cells and tissues such as red blood cells, bone, and blood vessels. XLRN has built a robust pipeline of protein therapeutics targeted to key mechanisms underlying blood diseases and cancer. It works with partners like Alkermes plc (NASDAQ:ALKS) and Celgene Corporation (NASDAQ:CELG).

Oncomed Pharmaceuticals: OMED develops monoclonal antibodies and other agents that target the biologic pathways critical to tumor initiating cells, also known as “cancer stem cells.” OMED leverages its understanding of these tumor initiating cells to discover and develop novel therapeutics that could provide important alternatives for the treatment of cancer. It currently has six drugs in Phase I to Phase II testing.

As of this writing, Gregg Early did not hold a position in any of the aforementioned securities.

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