Some deals this year include Pfizer‘s acquisition of Biohaven Pharmaceuticals for $11.6 billion, Johnson & Johnson‘s agreement to acquire the heart-device maker Abiomed for $16.6 billion and Bristol Myers Squibb‘s purchase of Turning Point Therapeutics for $4.1 billion. In all, global pharmaceutical deals totaled $65.8 billion so far in 2022, according to the data company Refinitiv.
Biotech investors are well aware that executives are on the prowl and that there is a limited pool of companies that could move the needle financially this decade. A basket of 13 companies seen as takeout targets in a survey conducted by Jefferies healthcare strategist Will Sevush is up 62% on average in the past six months. That compares with a 17% gain for a leading biotech exchange-traded fund, the SPDR S&P Biotech ETF.
The latest to entertain offers from big pharma is Horizon Therapeutics. The company late last month said it was fielding takeover interest from Amgen Inc., Sanofi SA and Johnson & Johnson’s drug arm. (J&J has since pulled out of the talks.) The stock is up over 20% since The Wall Street Journal first broke the story, lifting its market capitalization to about $22 billion. Analysts at Jefferies see a takeout deal valuing it at somewhere between $25 billion and $30 billion.
Mr. Sevush’s list of companies, which includes Horizon as well as other possible takeover targets such as Alnylam Pharmaceuticals, Sarepta Therapeutics, Mirati Therapeutics and Akero Therapeutics, generally consists of two buckets, he explains. In the pricier bucket are the more mature biotechs with valuable pipelines on top of approved medications that could scale to multibillion-dollar products during the second half of the decade. Companies such as Horizon or Seagen Inc., which earlier this year held talks with Merck & Co., would fit into that group.
The other bucket contains smaller companies with late-stage pipeline products that could help big pharma compete with rivals in highly profitable medical areas. These companies typically have no sales, but impressive late-stage data means their pipelines are relatively less risky. That doesn’t mean investors shouldn’t expect a bumpy ride. Mirati’s stock had been soaring as of late because of reports of a potential takeover. Yet, while the company might very well receive U.S. Food and Drug Administration approval for its treatment as a stand-alone for patients with a form of lung cancer who have already received one therapy, data presented on its drug in combination with Merck’s Keytruda disappointed investors and the stock plunged.
Not all of these companies are going to be sold, or at least not immediately. Investors who bid up Seagen during the summer as talks with Merck seemed serious got burned when the discussions broke down. The stock has lost about a third of its value since topping out in early July.
But the hunger for replenished pipelines and maturing products means many of the companies on big pharma’s shopping list could continue to outperform. Betting on a basket of probable targets as deal making heats up still makes a lot of sense.