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M&A Heats up in Biotech

09/22/2016 9:00 am EST


John McCamant

Editor, Medical Technology Stock Letter

The combination of extremely low interest rates and thinning pipelines at big drug companies make for an ideal environment for M&A in the biotech sector, observes John McCamant, editor of The Medical Technology Stock Letter.

A scarcity of mid-cap biotechs is creating a supply/demand imbalance in favor of the smaller biotech as acquirers are having to outbid each other. 

Pfizer (PFE) recently scooped Medivation (MDVN) at around $81 per share, well above the previously disclosed $58 bid from Sanofi (SNY).

The multiple that PFE is paying implies 12x EV/sales for 2017E MDVN revenue estimate of $1.2 billon.

Therefore we have a rough gauge of today’s valuation for takeovers of the larger more successful companies with blockbuster sales ($1 billion) at a relatively early stage of their growth curve.

The current M&A shoppers in addition to Sanofi, include Astra Zeneca (AZN), Gilead (GILD), Merck (MRK), Celgene (CELG), and Roche (RHHBY).

Johnson & Johnson (JNJ) is always looking to buy. Amgen (AMGN) and Biogen (BIIB) has announced plans to make acquisitions, too.

Oncology remains the sweet spot for M&A as the market for new cancer drugs has never been better as an aging and wealthy population remains willing to pay a significant premium for life extending, more effective and safer drugs.

While there remains a real controversy regarding the high price of drugs, truly innovative cancer drugs continue to demand premium pricing when they deliver a clear survival benefit.

Sanofi is considered the most aggressive of the M&A shoppers as they just spent months on their failed bid for Medivation.

Regeneron (REGN) is a natural fit given that SNY already owns 22%. BioMarin (BMRN) is another potential fit as their rare disease focus would dovetail nicely with Sanofi's Genzyme division.

Gilead and Incyte (INCY) is an intriguing combination as the INCY small molecule oncology pipeline is an excellent fit as in one fell swoop Gilead would become a player in oncology player overnight.

BMRN and INCY are both holdings in our portfolio. Two other stocks among our recommendation – Alkermes (ALKS) and Nektar Therapeutics (NKTR) – are “sleeper” M&A candidates.

Their growing, royalty-based revenue streams may lead to less dilution/accretive near-term and their wholly-owned pipeline assets representing long-term growth drivers for the acquirer.

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By John McCamant, Editor of The Medical Technology Stock Letter

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