A big part of investing in biotech is owning takeover names. The quick gains offset a lot of mistakes. Having a biotech stock get bought out simplifies the \u201csell\u201d decision, too.\u00a0<\/p>\n
Lately, though, biotech investors have been far less enthusiastic about takeover prospects. The Federal Trade Commission (FTC) has cast a shadow over the space with an aggressive attempt to challenge a big biotech buyout. If successful, it would set a whole new precedent that could dim takeover prospects for years.\u00a0<\/p>\n
I think the government will likely fail. Then it will be \u201cgame on\u201d again for the mergers and acquisitions trade and biotech in general. <\/p>\n
Biotech has a lot of ground to make up. The iShares Biotechnology exchange traded fund The FTC cloud might be removed as soon as August or September, in court proceedings. I believe three stocks will then emerge as strong potential takeover targets again. They also have other positive qualities in case the M&A speculation does not work out. These stocks are Alnylam Pharmaceuticals At issue here is an FTC lawsuit to block Amgen\u2019s Let\u2019s take a look at the odds of success based on analysis by Jefferies biotech analysts Michael Yee and Akash Tewari, and their legal experts. I\u2019ll also explain why the pressures on big pharma to buy biotech companies are so big, and more about the three names I single out.\u00a0<\/p>\n 1. The FTC challenge may fail:<\/strong> It is always tough to predict court outcomes. That said, brokerage calls with antitrust legal experts suggest the FTC complaint may be a stretch, and the odds are high that the FTC will lose.\u00a0<\/p>\n Jefferies, for example, has hosted calls with several legal experts, including a former FTC attorney with 38 years\u2019 experience at the agency, sometimes on pharma issues. The key takeaway: The Jefferies legal experts offer 60%-80% odds that the FTC will fail. The legal experts say FTC complaint is more of a test case to expand M&A law to include the concept of bargaining leverage \u2014 and not necessarily a slam-dunk win based on traditional issues like product overlap. \u201cWe believe the FTC\u2019s arguments are relatively weak and our base is that the deal will close,\u201d concludes Jefferies biotech analyst Akash Tewari.<\/p>\n 2. Big pharma companies face big patent cliffs:<\/strong> Patent expirations will cost big pharma companies a lot of revenue they will need to replace. They will turn to buyouts to do this. For example, over the next several years AbbVie Collectively, these losses will leave a revenue hole of more than $60 billion. To show the extent of the impact, consider that Humira recently generated over 40% of AbbVie\u2019s revenue and Keytruda accounted for about 30% of Merck\u2019s sales.<\/p>\n 3. The Inflation Reduction Act (IRA) impact:<\/strong> This U.S. law contains provisions that will cut prescription drug costs over time, by allowing Medicare to haggle over drug prices and link price hikes to inflation. It will hit big pharma hard. A Congressional Budget Office (CBO) report concludes the IRA will to save the federal government $164 billion over 10 years. The law allows Medicare to negotiate prices on 10 medicines in 2026, and 60 by 2029.\u00a0<\/p>\n The patent cliff and IRA both help explain why big pharma and biotech CEOs \u201ccontinue to emphasize more deals regardless of FTC headlines,\u201d says Yee, at Jefferies. \u201cWe sense strength and confidence to transact, and our M&A thesis remains intact.\u201d\u00a0<\/p>\n Yee cites commentary from big pharma companies including Biogen For my short list of potential biotech takeover candidates, I looked for names that clear three hurdles. First, they had to be on a list of 15 biotech stocks Yee thinks are M&A candidates because these companies have big product launches over the next several years. This makes them attractive candidates to big pharma looking to fill revenue holes.\u00a0<\/p>\n Next, because takeover speculation can be hard to get right, I want to suggest names that have other things going for them. From Yee\u2019s list of 15, I chose names he\u2019s identified as having significant near-term catalysts. I stuck with names that Yee rates \u201cbuy.\u201d To me, this tilts the odds in a company\u2019s favor that the near-term catalysts will be positive.<\/p>\n 1.<\/strong> Alnylam Pharmaceuticals\u00a0<\/strong><\/p>\n This company develops therapies based on ribonucleic acid interference (RNAi). RNAi is a pathway in cells that regulates gene expression. The company\u2019s RNAi therapeutics tweak messenger RNA to block disease-causing proteins. It brought in $276 million in first quarter sales, up from $187 million the year before.\u00a0<\/p>\n The potential catalysts<\/strong>: Alnylam says in \u201cmid-2023\u201d it will report Phase II data on a potential hypertension therapy called zilebesiran. The company has also said it will report more data from a Phase I trial of a possible Alzheimer\u2019s therapy code named \u201cALN-APP.\u201d\u00a0<\/p>\n 2. Argenx\u00a0<\/strong><\/p>\n This company develops therapies for autoimmune diseases. It reported $218 million in sales in the first quarter, up from $21 million the year before.\u00a0<\/p>\n
\n IBB,
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\n has traded down slightly so far this year compared to a 12% gain for the S&P 500
\n SPX,
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\n and a 27% gain for the Nasdaq Composite
\n COMP,
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\n ALNY,
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\n Argenx
\n ARGX,
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\n and BioMarin Pharmaceutical
\n BMRN,
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\n \u00a0<\/p>\n
\n AMGN,
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\n proposed acquisition of Horizon Therapeutics
\n HZNP,
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\n Amgen wants Horizon for therapies for thyroid eye disease and gout. The FTC is concerned that Amgen will use these important therapies as leverage to sway pharmacy benefit managers to give Amgen favorable treatment over its competitors.\u00a0<\/p>\n
\n ABBV,
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\n will lose exclusivity on its autoimmune drug Humira; Merck
\n MRK,
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\n will lose exclusivity on its cancer therapy Keytruda; Bristol Myers Squibb
\n BMY,
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\n will lose exclusivity on its cancer therapy Revlimid and anti-stroke medication Eliquis; and Regeneron Pharmaceuticals
\n REGN,
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\n for its Eylea which treats eye diseases.\u00a0<\/p>\n
\n BIIB,
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\n AbbVie, Pfizer, Novartis
\n NVS,
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\n GSK
\n GSK,
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\n Johnson & Johnson
\n JNJ,
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\n Merck, Amgen, Gilead
\n GILD,
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\n Bristol Myers Squibb and others. Yee predicts $200 billion worth of M&A will happen this year. Pharma companies announced $70 billion worth of proposed deals in the first quarter.\u00a0<\/p>\n3 potential buyouts<\/strong><\/h2>\n