Q4 2019 has been the best quarter (IBB up 22.5% XBI up 26.7%) for biotech investors since Q1 2015, which was the top of 2014-2015 rally. This 20+% rally is largely attributed to Fed's overall easing stance, increased mergers & acquisitions, positive regulatory backdrop, solid trial results and better-than-expected corporate earnings. 2019 deal activity has increased significantly, and large Biopharma companies are actively conducting mergers and acquisitions in order to deliver higher long-term return for their investors.

Based on data from Chimera Research Group (Biotech M&A - 2019 Deals), there were 28 biotech M/A deals in 2019, comparing to only 16 last year. The accumulative deal value is $203.7B, which includes two mega deals: BMY buying Celgene for $74B and ABBV buying Allergan for $63B. In 2018, total deal value was only $48.2B. Going into 2020, I am optimistic about the high volume of biotech deal activity will continue.

According to SVB Leerink Research, large Biopharma acquirers currently have $225B dry powder available for M&A deals. While I don't expect we have another year with over $200B total deal value, a year with $100-150B is very likely.

Based the EY M&A Firepower report, a couple of large Biopharma companies such as GILD, PFE, SNY, PFE, NVS, still haven't made any significant M&A deals in 2019. Based on the chart above, these five companies have about $15B to $25B of dry powder. Companies like GILD, MRK, AMGN, or NVS, might do a mega deal, acquiring a large-cap biotech company in a transaction valued more than $15B. While mega deals are hard to predict, I will focus on deals valued at less than $10B so that this would not use up all the dry powder of those large Biopharma companies mentioned at the start of the section.

Therefore, I am picking 5 best Mid-cap biotech acquisition targets in this post with deal value less than $10B each.

(Source: EY 2019 M&A Firepower Report)

With a market cap of $4.9B, Global Blood Therapeutics is engaged in the innovation and commercialization of drugs to serve the needs of sickle cell disease (NYSE:SCD). SCD is an inherited blood disorder caused by a genetic mutation in the beta-chain of hemoglobin, leading to the formation of abnormal hemoglobin known as sickle hemoglobin. GBT went up 60% over 3 weeks since the company confirmed FDA approval of Oxbryta (voxelotor), company's main drug to treat sickle cell disease in adults and children 12 years of age and older.

Oxbryta, an oral therapy taken once daily, is the first approved treatment that directly inhibits sickle hemoglobin polymerization, the root cause of SCD.

FDA Approves Oxbryta (Voxelotor), the First Medicine Specifically Targeting the Root Cause of Sickle Cell Disease

Following suit, the European Medicines Agency (NYSEMKT:EMA) has also included voxelotor in its Priority Medicines (PRIME) program, while the European Commission (NYSE:EC) has designated voxelotor as an orphan medicinal product for the treatment of patients with SCD. Based on GBT's EHA corporate update in June, Oxbryta is addressing the needs of over 100,000 SCD patients in U.S. and 60,000 patients in Europe. The annual cost of SCD care is $200,000 per patient. An approved drug means R&D risks are largely absent and GBT is attractive to large Biopharma companies which seek to expand their drug pipelines without development risks.

Source

Additionally, GBT started HOPE-KIDS2 which is to confirm there is a decreased risk of stroke for children 2 to 15 years old with Oxbryta. GBT also announced a collaboration with Syros Pharmaceuticals (SYRS) to discover, develop and commercialize novel therapies for sickle cell disease and beta thalassemia. On Dec 18, GBT secured $150M non-dilutive term loan to enhance its cash position for further development and commercialization, which clears any near-term dilution risks and places company in a great spot to negotiate a good deal with potential acquirers.

uniQure (QURE) is developing a set of gene therapy treatments for various diseases, and its lead product candidate AMT-061 is in Phase 3 trials targeting hemophilia B. In July, uniQure reports updated AMT-061 and AMT-060 data in patients with hemophilia B. Topline data from HOPE-B pivotal study will come out in 2020. Positive clinical outcomes will provide the basis for QURE to potentially be the first biotech to have a one-off treatment for patients with Hemophilia B. The Hemophilia B market could reach $8 billion by 2026, making for a potential blockbuster status.

Source

In June 2019, Bloomberg reported that QURE is exploring options including a potential sale or partnerships.

"QURE is drawing interest from pharmaceutical companies looking to expand in gene therapy, according to the report, and a deal would bring access to a pipeline of experimental treatments for hemophilia, Huntington's disease and other disorders."

UniQure considering potential sale - Bloomberg

Source

Gene therapy is one of biotech's hottest area in recent years.

"After the Federal Trade Commission cleared the way last week for it to acquire Spark Therapeutics and its portfolio of treatments for genetically driven diseases, Roche followed up on Dec 23 with a massive $1.2 billion collaboration with Sarepta Therapeutics for the biotech's experimental Duchenne muscular dystrophy gene therapy."

Roche hands $1B to Sarepta in major return to gene therapy deals

"Japanese drugmaker Astellas on Monday became the latest large pharmaceutical company to buy its way into a burgeoning gene therapy field, announcing a $3 billion deal to buy the San Francisco-based biotech Audentes Therapeutics."

Astellas joins gene therapy race with $3B Audentes buy

With management's intention for a sale, QURE will likely be acquired in 2020. In 2019 Q3 earnings release (Source), management stated that, "Strong Balance Sheet with September 30, 2019 Cash and Cash Equivalents of $403 Million Expected to Fund Operations into Mid-2022." Currently QURE is valued at a market cap of $3.3B. A possible deal with premium of 75-100% like Roche's offer for Spark Therapeutics could get approved by QURE's management and shareholders.

On Dec 13, Intercept Pharmaceuticals has filed a marketing application in Europe seeking approval of obeticholic acid (OCA) for the treatment of fibrosis due to nonalcoholic steatohepatitis (NYSEARCA:NASH). An AdCom meeting has been tentatively scheduled for April 22, 2020 related to its U.S. application, necessitating an extension of the agency's current action date of March 26, 2020. New interim data confirmed excellent efficacy and its main drug OCA 25 mg showed robust improvement in liver fibrosis (by 1 stage) with no worsening of NASH at 18 months in the Phase 3 REGENERATE studies. It also cleared doubts about OCA's side effects.

Source

NASH, or nonalcoholic steatohepatitis, is defined as fatty, inflamed liver that is not due to alcohol abuse. In western countries, NASH tends to be associated with obesity, often with Type 2 diabetes. The NIH estimates that 3-12% of American adults have NASH. If the accurate number is 6%, that implies more than 10 million patients in the US. As one of the most promising players in NASH, ICPT is the best acquisition target for Gilead (GILD) to expand its dominance in the $60B NASH market or other large Biopharma companies to have a piece of the NASH pie.

Currently, ICPT is trading at a market cap of $4B with annualized sales of $250M which is growing at 32% year-over-year. As of 9/30/2019, ICPT has $714M cash on hand, which eliminated any near-term equity dilution risks. If you want more information, there are many great articles written on ICPT by other SA contributors where they listed ICPT's strengths in NASH in details.

bluebird bio is a clinical-stage biotech company which builds integrated product platforms that encompass gene therapy, cancer immunotherapy and gene editing for the treatment of cancer and rare diseases. Recently, BLUE announced a positive, long-term follow-up of 5 years for beta-thalassemia patients who have been transfusion-free for an extended period of time. Two weeks ago, BLUE and BMY announced positive topline results from a Phase 2 clinical trial, KarMMa, evaluating CAR T therapy idecabtagene vicleucel (ide-cel) (bb2121) in treatment-resistant multiple myeloma patients. In early 2020, the first commercial patient will be dosed with ZYNTEGLO for transfusion-dependent beta thalassemia in the European Union.

(Source)

Similar to QURE, BLUE is another promising mid-cap biotech company focused on gene therapy and gene editing. With previous buyouts of Kite Pharma, AveXis, Sparkand Audentes, large pharma companies have shown their interests in gene therapy and are optimistic about the future of gene editing. In Nov, BLUE was upgraded to Outperform with a target price of $119 by SVB Leerink.

Leerink sees "the transition to a commercial gene therapy company in early 2020 offering a balance between launch execution as a risk vs. high probability of success trial readouts and regulatory decisions in 2020 as potentially appealing catalysts for BLUE over the next 12 months," Foroohar writes.

bluebird bio upgraded at SVB Leerink on valuation

BLUE has a diverse pipeline which includes multiple Phase 2 and Phase 3 data readouts targeting sever genetic diseases in the next 2 years. On top of that, the Company has also started some clinic trials on Oncology. Comparing to other biotech companies focusing solely on gene therapy, BLUE is a more attractive acquisition target due to its diverse pipeline and huge potential.

(Source)

2019 has been a great year for BLUE regarding its multiple clinical successes. However, the share price is still down 8.7% YTD even with the Q4 biotech rally. A market cap of $4.9B is significantly underestimating the upside potential of company's pipeline and talents. As of 9/30/2019, the Company still has $1.41B cash on hand which is sufficient to last till mid-2021 with a quarterly net loss of $200M. I can easily see a big biopharma company to acquire BLUE for $10-12B for its various drugs in the pipeline targeting both severe genetic diseases and oncology and this purchase would generate massive returns for the next decade.

Amicus Therapeutics is a biopharmaceutical company that develops orally-administered, small molecule drugs to treat human genetic diseases. The drugs, called pharmacological chaperones, are being developed to treat Fabray, Gaucher, and Pompe disease. In its October analyst day presentation, FOLD has guided for peak sales of $1.0 billion for its only commercialized Fabry disease therapy, Galafold. Galafold is expected to reach an annual revenue potential of more than $500 million in 2023. This will imply a five-year CAGR of more than 40%.

(Source)

In 2019 Q3 earnings call, the CEO John Crowley stated,

Galafold continues to be one of the most successful launches for a rare disease medicine ever and remains the cornerstone of our success, with $48.8 million in third quarter revenue. We're also now treating more than 1,000 patients at a 90% plus compliance and adherence rate, and we have upwardly revised full-year 2019 guidance of now $170 million to $180 million. All of the global launch metrics that we track are on target or exceeding targets, including new patient starts compliance and adherence to therapy, reimbursement and access, new country approvals and a broadening prescriber base, among others.

Positive data from Phase 1/2 trial evaluating investigational therapy, AT-GAA, seems to establish Amicus' position in the Pompe disease treatment landscape. In February 2019, AT-GAA secured Breakthrough Therapy Designation from FDA for treatment of late-onset Pompe disease. FOLD is expected to complete enrolling patients in the Phase 3 PROPEL study going into 2020. Data from this trial is anticipated in the first half of 2021. If the trial meets its primary endpoints and drug is approved, FOLD is estimating an annual peak sales opportunity of $1.0 billion - $2.0 billion with AT-GAA. FOLD was also able to achieve positive interim results from a phase 1/2 study using AAV-CLN6 gene therapy to treat patients with Batten disease.

(Source)

Currently, FOLD is trading at a market cap of $2.55B. As of 9/30/2019, FOLD has $514M cash on hand. With exceptional growth in Galafold sales going forward, the company has enough cash going into 1H2022. Considering FY23 Galafold's sales of $500M, the stock is trading at 4x P/S excluding cash. FOLD is an attractive acquisition target for any large biopharma companies which are interested in treating rare disease.

Investing in mid-cap biotech companies is highly risky. This article only is only my personal speculation about which mid-cap biotech companies might get acquired in 2020 with a big fat premium. Speculation for M&A is not a solid basis for long-term investing. If readers are okay with the downside of investing in midcap biotech companies mentioned above, I would recommend buy some common stock at dips.

For company-specific risks, please see disclosures in 10-K and other regulatory filings for a fuller understanding of the risks associated with investing in the particular company.

Disclosure: I am/we are long GBT, QURE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are also long ICPT.

See more here:
5 Best Mid-Cap Biotech Acquisition Targets - Seeking Alpha

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