This year is shaping up to be "explosive" for biotech acquisitions after Celgene ( CELG ) and Sanofi ( SNY ), in a matter of days, announced plans to spend north of $25 billion to take over three companies, analysts say.
[ibd-display-video id=3135068 width=50 float=left autostart=true] Celgene and Sanofi, in particular, are facing challenges in areas where insurance companies are pushing back on payments in rheumatology and diabetes. That also leaves the likes of Novo Novartis ( NVO ) and Eli Lilly ( LLY ) in trouble, said Brad Loncar, who manages an immunotherapy-based fund.
"These companies have to buy growth ," Loncar told Investor's Business Daily. "They've been growing their revenue doing artificial things whether that's drug price increases, tax inversions or some kind of other type of financial engineering. Those things are going away."
In all of 2017, there was $50 billion spent in biotech deals , Mizuho analyst Salim Syed told IBD. This year, so far Celgene has said it would spend $9 billion to buy the remainder of Juno Therapeutics ( JUNO ) it doesn't already own. Sanofi is spending $11.6 billion and $4.8 billion to acquire Bioverativ (BIVV) and Ablynx (ABLX).
"For companies who haven't bought anything, it's just a matter of opportunity," Syed said.
The buying spree kicked off in August when Gilead Sciences (GILD) announced its plan to acquire cancer play Kite Pharma for $11.9 billion. Gilead has been suffering from a major slowdown in hepatitis C drug sales amid high cure rates and saturation in the U.S. and Europe.
Celgene and Sanofi announced their plans to acquire Juno and Bioverativ on the same day in January. Days later, Sanofi said it would buy rare disease drugmaker Ablynx.
For Celgene, the acquisition followed a disappointing third quarter in which sales of psoriatic arthritis and plaque psoriasis drug Otezla widely missed expectations . The biotech also cut its 2020 guidance on Otezla's shortfall and after terminating several trials in Crohn's disease.
Loncar described Celgene's long-term growth prospects at the time as a "bleak picture." It's also facing a patent cliff in the mid-2020s for its cancer drug Revlimid.
IBD'S TAKE:It's challenging holding onto a stock amid a market correction as it declines. But that could help shares form a new potential base. Is it still possible to capture a big gain? Head to the Investor's Corner for four tips on how to make gains during a correction.
"So they really couldn't afford to wait," he said.
Sanofi, on the other hand, was skunked twice in 2016 and 2017 as it tried to acquire Medivation and Actelion Pharma. Dow component Pfizer (PFE) beat out Sanofi for Medivation and Dow's Johnson & Johnson (JNJ) was able to acquire Actelion out from under Sanofi.
Roy Behren, a fund manager for Westchester Capital Management, says Sanofi committed a faux pas in both acquisitions - it made a hostile bid for Medivation and went back on an initially higher bid for Actelion , filings show.
"Hostile approaches are generally unsuccessful in this space because of the fact the scientists are such an important part of the value equation," he told IBD. "In the case of Sanofi and Medivation, they couldn't arrive at a price unless it was friendly. It was very difficult to complete the acquisition."
Are Franchises In Trouble?
Among the high profile acquisitions in late 2017 and early 2018, the acquirers have suffered from pressure on sales of key moneymakers. That, along with tax reform allowing companies to pay less in corporate taxes and repatriate cash at a lower rate, could prime the pump for acquisitions.
"I'm a strong believer this is going to be a huge year for acquisitions," Loncar said. "No. 1, for larger companies, their growth is slowing, and No. 2, this tax reform deal adds fuel to that fire. It makes it easier for them to do these deals."
Novo Nordisk lost out on Ablynx to Sanofi. Now, Loncar expects Novo Nordisk to go after other assets to contend with its deep exposure to the diabetes market . Lilly, too, is seeing challenges in diabetes. Meanwhile, Amgen 's (AMGN) older drugs are facing new competition .
"All big companies really need to do this," he said.
But there are outliers, Mizuho analyst Syed said. Biogen (BIIB), for instance, guided to flat 2018 sales for its multiple sclerosis unit including the impact of a royalty it will get on revenue from Roche 's (RHHBY) new drug Ocrevus.
"There's this perception that the franchises are dwindling ," he said. "That's the argument that investors make for a lot of these guys like Biogen, like Amgen - that their base business is going away. That's not necessarily the case. Biogen is stable for 2018."
Still, flat sales won't be enough to pique investor interest. Biogen's aducanumab , a potential treatment for Alzheimer's disease, is a "carrot" for investors until clinical trial data is available toward the end of 2019 or early 2020.
"But as long as that carrot is out there, it becomes really difficult for the hedge fund community to short the stock," he said. "Aducanumab can produce returns - if it works - that large-cap biotechs typically don't see."
Cancer, Rare Disease Assets
Westchester's Behren notes biotechs seem to be fairly interested in immunotherapies and oncology. That includes Gilead's acquisition of Kite and Celgene's plan to acquire Juno. Both are working on drugs known as CAR-T therapies, which teach the immune system to identify and fight cancer.
"There has been a lot of activity in the oncology space in terms of immunotherapies," he said. "The larger companies are trying to gobble up any promising technology they can while it's still affordable. We are also seeing quite a few testing companies being acquired."
Celgene's acquisition of Juno followed a common storyline, Behren said. Celgene invested in Juno in 2015 to create immunotherapies in cancer and autoimmune diseases. The duo is furthest along with JCAR017, a potential treatment for non-Hodgkin lymphoma.
When Celgene pulled the trigger on Juno on Jan. 22, it made sense that it was at a 28% premium to Juno's closing price on the prior trading day.
"Biotechs - even more than high tech - tend to come at significant premiums to trading prices," he said. "That's because they're somewhat risky, but could be a huge payoff in the event they're successful."
Nektar's Dance With Bristol
Nektar Therapeutics (NKTR) and Bristol-Myers Squibb (BMY) could be amid a similar plot. In September 2016, the duo paired up to test Nektar's drug called NKTR-214 with Bristol's Opdivo in patients with melanoma, kidney cancer and lung cancer. In November, Nektar presented strong early data from the combos.
Loncar pegged Nektar as a potential takeover target in 2018, calling NKTR-214 "revolutionary." Days later, Bristol announced it would pay Nektar $1.85 billion upfront - comprised of $1 billion in cash and the purchase of 2.28 million shares - to test NKTR-214 with Opdivo and Opdivo plus Yervoy.
The deal allows Bristol to remain the leader in immuno-oncology/immuno-oncology combinations without risking a $16 billion bid on Nektar, Evercore analyst Umer Raffat said in a Feb. 14 note to clients.
"I have no doubt (Nektar's) phone has been ringing off the hook since (November) because their data was so interesting," Loncar said. "If someone is bold enough to buy them, it could put the acquirer into a class of their own in immuno-oncology."
Drugs called PARP inhibitors also look interesting, Loncar said. Clovis Oncology (CLVS) and Tesaro (TSRO) both have drugs approved in this class and are small enough to acquire. AstraZeneca (AZN) also works in that space.
Sarepta Therapeutics (SRPT), Neurocrine Biosciences (NBIX) and BioMarin Pharmaceutical (BMRN) have also had successful launches recently.
"If a company wants revenue growth, buy a rare-disease drug ," he said. "They have the best sales ramps. I think those types of companies are really interesting right now. I wouldn't be surprised if some of them get bought out."
Biotech Investors Flee In Droves As Market Correction Rocks The Group
These Biotechs Could Spring Back After Market Correction: Analyst
Why These 3 Biotech Stocks Could Outperform Their Peers In 2018