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Why do these 8 companies have a greater probability of future M&A activity?
Looking at the biotech sector’s year to date (YTD) performance, and one might be inclined to look the other way, particularly with the estimated 35 percent decline in the small to mid-cap stocks. Still, despite the depressed sentiment in the sector, CitiGroup analyst Yigal Nochomovitz, points at a bright light at the end of the tunnel.
“Pharma/LC Biotech is cash rich and has signaled repeatedly over last 6-12 months they are looking for new assets,” the analyst wrote in a note to clients. But the important question, and undoubtedly one that investors will want answered is when?
Nochomovitz highlighted that the set up for the next merger and acquisition cycle is ready, however, what is missing from the equation is the willingness of biotech management teams to do deals. In his view, “we may need another 1-3 qtrs before reset valuations are better absorbed as the new reality and a meeting of the minds between target/acquirer can happen.”
With that in mind, the analyst listed his top picks –of the companies CitiGroup follows – for the most likely companies in the sector to be involved in merger and acquisition activities in the next 12 to 18 months.
Ardelyx Inc (NASDAQ:ARDX)
Ardelyx is a clinical stage biopharmaceutical company with a focus on innovative, minimally-systemic, small molecule therapeutics that work exclusively in the gastrointestinal tract to treat gastrointestinal and cardio-renal diseases. In December, the company started its second of two planned Phase 3 clinical trials for evaluating Tenapanor to treat constipation-predominant irritable bowel syndrome (IBS-C).
Nochomovitz’s reasoning behind why Ardelyx is a likely candidate for future M&A is “IBS-C Phase 3 should work. Tenapanor will require large primary care sales force in IBS-C better suited to Pharma biz model.”
Medivation (NASDAQ:MDVN)
Medivation is focused on medically innovative therapies to treat serious diseases for which there are limited treatment options. Nochomovitz sees the company’s Xtandi as a “commercial asset with significant growth expected in prostate cancer”, furthermore with a peak of $7-8 billion in worldwide sales, the analyst sees Medivation as one of the few small-mid cap biotech companies with less than $10 billion valuation and a positive earnings per share.
Ophthotech (NASDAQ:OPHT)
Developing the next generation of science-driven age-related macular degeneration (AMD) therapies, Ophthotech specializes in novel therapeutics to treat diseases of the back of the eye. The company is currently in the Phase 3 clinical trials for its Fovista, which Nochomovitz believes should work, making it the first new mechanism in wet AMD (wAMD) in more than 10 years. The analyst models roughly $3 billion in sales worldwide, which should attract pharma players in the wAMD market.
Puma Biotechnology (NASDAQ:PBYI)
For Puma Biotechnology, Nochomovitz explained that management “has always proffered an exit strategy by sale of company” and even though the company’s neratinib risk/reward remains controversial, the analyst expects FDA approval, and subsequently “interest in the asset.”
Portola Pharmaceuticals (NASDAQ:PTLA)
Portola is working on developing product candidates that could significantly advance the fields of thrombosis and other hematologic diseases. The company currently has three programs using a novel biomarker and genetic approach that could increase the probability of clinical, regulatory and commercial success of its potentially life-saving therapies.
Nochomovitz sees the company as a likely take over candidate as he believes that “Antidote (andexanet alfa) would be well-suited to inclusion in Pharma’s portfolio alongside Factor Xa inhibitors (e.g. Xarelto, Eliquis). With APEX/betrixaban out of the stock, Pharma likely more interested in a bid.”
Ultragenyx Pharmaceuticals (NASDAQ:RARE)
Committed to bringing to market novel products for the treatment of rare and ultra-rare disease, Ultragenyx is particularly focused on debilitating genetic diseases where there is an high instance of unmet medical needs. This clinical-stage company has been trading below CitiGroup’s net present value for its lead asset KRN23. Because of this, the analyst sees “acquisition premium for diversified orphan portfolio is now erased.”
Relypsa (NASDAQ:RLYP)
Working on developing medicines that can change treatment paradigms. The company’s polymer-based medicines act within the gastrointestinal tract and do not get absorbed into the bloodstream or other parts of the body. Nochomovitz sees the company as having a “commercial stage asset with precedent for deal in hyperkalemia space given AZN’s purchase of ZSPH for $2.7B last year.”
Versartis (NASDAQ:VSAR)
Versartis is an endocrine-focused company developing novel long-acting recombinant human growth hormone for treatment of human growth hormone dificiency. Nochomovitz noted that the company’s fast-acting pediatric growth hormone is likely to reach the market in the coming year.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.