|Closer look: Biotech Takeover Targets|
|By David Zanoni|
|Monday, 19 September 2011 21:12|
The biotechnology sector has a common theme:
Small companies develop a drug that achieves FDA approval.
The drug has potential for strong sales.
The company gets bought out.
On average, it takes 12 years and $350 million to get a drug from the laboratory to pharmacies. After a firm develops a drug, it undergoes about 3.5 years of laboratory testing before an FDA application is filed to test the drug in humans. The odds are 1 in 1000 for a drug to make it to the human testing phase. Once the drug has clearance from the FDA for human testing, it will enter a 3 phase process where volunteers are monitored to test the drug’s safety, effectiveness, and adverse reactions. Once the 3 phases are complete, an application is filed with the FDA for the drug’s approval.
After a drug is FDA approved, doctors begin prescribing it, and sales begin. Some small companies with newly approved drugs looks attractive to larger drug companies such as Pfizer (PFE), Merck (MRK), GlaxoSmithKline (GSK), Sanofi (SNY), etc. Today we’re going to highlight biotech firms that have the potential to be taken over by these larger firms.
Human Genome Sciences (NASDAQ:HGSI)
HGSI has Benlysta as their FDA approved drug. Benlysta has been designed for the treatment of autoantibody-positive adult patients with active, systemic lupus erythematosus who are receiving standard therapy. It is the 1st newly approved drug in 50 years for the treatment of lupus. They also have a drug in its late stages of development for the treatment of inhalation anthrax, called raxibacumab. HGSI also has the following drugs in earlier phases of development: Darapladib for cardiovascular disease; Albutide for Type 2 diabetes; Mapatumumab, HGS-1029, and HGS1036 for cancer.
HGSI has GlaxoSmithKline as a marketing partner, who is currently conducting phase 3 tests of Darapladib and Albutide. Glaxo would be one logical buyer of HGSI as they already have a business relationship established.
Vertex Pharmaceuticals (NASDAQ:VRTX)
Vertex has an FDA approved drug called Incivek for the treatment of hepatitis C. They also have four drugs in Phase 2 clinical testing for the treatment of: Cystic fibrosis, hepatitis C, immune-mediated inflammatory disease, and epilepsy. Vertex also has a drug in Phase 3 for cystic fibrosis.
A recent study at the University of North Carolina at Chapel Hill has shown that Incivek can cut the treatment of hepatitis C in half. Traditional treatment of hepatitis C called for two drugs to be taken as part of a 48 week regimen, but when Incivek is added to the regimen in the first 12 weeks, the cure rate after 24 weeks was just as high as the cure rate after 48 weeks. This shows a lot of potential. Vertex has reported sales of $75 million from Incivek.
Lexicon Pharmaceuticals (NASDAQ:LXRX)
Lexicon currently has four drugs in Phase 2 clinical trials and one drug in the preclinical stage. Their Phase 2 drugs are to treat the following conditions: irritable bowel syndrome, carcinoid syndrome, rheumatoid arthritis, and diabetes. They also have a preclinical phase drug that is designed to treat glaucoma.
You will have to give Lexicon a few years to complete the clinical trials and to apply for FDA approval. If these drugs are found safe & effective, they have plenty of potential for healthy sales.
Amarin has a prescription strength Omega-3 fatty acid called AMR101, which is in Phase 3 for the treatment of very high triglycerides and to treat high triglycerides in patients with mixed dyslipidemia. They are also planning to test the same drug for the prevention of cardiovascular events. Amarin is expected to submit an application for FDA approval in the third quarter of 2011. Since they are nearing the end of their Phase 3 trials, an FDA approval decision could take place in less than a year.
Exelixis is focused on the development of Cabozantinib (XL184), which is for the treatment of various cancers. Cabozantinib is in Phase 3 clinical trial for the treatment of medullary thyroid cancer. The same drug is in Phase 2 for the treatment of castration-resistant prostate cancer and for the treatment of advanced malignancies of breast cancer, gastric/GE junctional cancer, hepatocellular carcinoma, melanoma, non-small cell lung cancer, ovarian cancer, pancreatic cancer, and small cell lung cancer.
Exelixis also has license agreements with multiple larger drug companies for developing 11 new drugs for the treatment of cancer and metabolic diseases. The companies involved include: GlaxoSmithKline, Genentech/Roche, Sanofi, Bristol Myers-Squibb, and Daiichi-Sankyo. Any of these companies could be a logical buyer of Exelixis in the future.
Dendreon has achieved FDA approval for Provenge, which is a treatment for prostate cancer. They also have 2 antigen targets known as carbonic anhydrase IX (CA9), and carcinoembryonic antigen (CEA) in pre-clinical development. Product candidates targeted at CA9 are for treatment of kidney, colon, and cervical cancer. Product candidates targeted at CEA are for the treatment of breast, lung, and colon cancer.
Dendreon has an advantage as a potential buyout candidate as they already have an FDA approved drug in Provenge. If sales of Provege continue to be strong, then a takeover of Dendreon is likely.
Acorda Therapeutics (NASDAQ:ACOR)
Acorda also has an FDA approved drug known as Ampyra, which is designed as a treatment to improve walking in patients with MS. More than 400,000 people in the U.S. and nearly 2.5 million people worldwide are living with MS. Ampyra is the first MS therapy for the treatment of walking impairment.
Acorda also has another FDA approved drug called Zanaflex. Zanaflex is a short-acting drug for the treatment of spasticity. Spasticity is a consequence of injuries to the central nervous system such as MS, spinal cord injury, brain trauma, and stroke.
They also have four other compounds in early development stages to treat injuries of the central nervous system and cardiovascular systems.
Acorda may be in the best position compared to the others as a takeover target as they already have two FDA approved drugs on the market. They are a step ahead of the competition with positive earnings per share of 0.40 and a healthy balance sheet indicated by 3.7 current ratio. Acorda has total cash of $228.2 million compared to only $6.28 million in debt. They are expected to grow earnings annually at 33% for the next five years.
The purchase of biotech companies with 2 or less FDA approved drugs as highlighted in this article should be considered speculative. If negative news arises regarding patient safety on any of these drugs, the stocks will take a beating. However, with high risk, comes high reward - so using a little speculative money as a small portion of your portfolio should make investing exciting. I personally like Acorda as a standout among the list since they already have two FDA approved drugs and they’re already profitable. Acorda looks like a great investment regardless of whether in gets taken over or not.
Disclosure: I have no positions in any stocks mentioned
About the Author:
David Zanoni is a graduate of Rutgers University with a B.S. in Management. He is an independent long term investor of quality stocks and uses options for strategy.
You may follow him at Seeking Aplha