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Biotech ripe for ‘cascade of dealmaking’ - Here are the top companies to watch

Published 06/04/2024, 12:54 am
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Investing.com — Few corners of the market have been as prone to dealmaking over the last couple of years as the life sciences industry.

Fueled by strong demand for innovation, the cyclical nature of patent cliffs, and substantial cash reserves among major players, the sector has consistently presented attractive opportunities for investors who can identify and capitalize on the right trends.

Not by coincidence, healthcare merger activity remained resilient throughout 2022 and 2023, when tight financial conditions led to an overall drop of 37% and 25% in global M&A volumes, respectively.

Now, as US and global dealmaking stage a substantial rebound, and as the Fed prepares to cut rates, the industry may be on the verge of a ‘cascade of takeovers,’ says an industry source consulted by Investing.com.

“Over the last two years, the valuations of biotech companies have come down due to higher rates. That has resulted in a better price point for acquirers and fewer financing options for smaller biotech companies,” Li Watsek, a biotech analyst at Cantor Fitzgerald, told Investing.com exclusively.

Li’s comments follow Cantor Fitzgerald’s most recent biopharma report, where the research company said it expects merger activity within the industry to grow significantly this year, buoyed by the burgeoning oncology sector. “We are bullish on the [M&A] outlook for 2024, driven by biopharma’s significant firepower in 2023 (second-highest in a decade), unparalleled global market growth in oncology (+$142B by 2028E vs. 2022), and ample supply of innovation from biotech,” says the report.

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Consulted exclusively by Investing.com, Pharma giant AstraZeneca (NASDAQ:AZN) hinted it is, indeed, scanning the market for opportunities. “We are always scanning the horizon to look for new technologies that complement our portfolio, and we’re making strategic investments in new technologies and platforms that we believe have the potential to transform the future of medicine through the end of the decade and beyond” said a spokesperson for the company.

Healthcare Consolidations on the Rise - Oncology Leads the Way

The positive outlook has already resulted in several mergers this year. According to Needham Research, the biotech sector experienced a total of 13 M&A deals in Q1, of which seven were among publicly-traded companies and six private transactions. These figures are substantially higher than the quarterly average of 8.2 observed since 2018.

Among the most prominent is AstraZeneca’s recent acquisition of Fusion Pharmaceuticals (NASDAQ:FUSN) for $2.4 billion, a 97% premium to Fusion’s closing price before the deal. “[The acquisition] marks a major step forward in us delivering on our ambition to transform cancer treatment and outcomes for patients by replacing traditional regimens like chemotherapy and radiotherapy with more targeted treatments,” AstraZeneca told Investing.com.

This follows Johnson & Johnson's (NYSE:JNJ) takeover of cancer drug developer Ambrx Biopharma for $2 billion in January and Merck's (NYSE:MRK) $680 million buyout of Harpoon Therapeutics (NASDAQ:HARP), strengthening the group’s pipeline of cancer treatments.

The recent flurry of mergers shows that companies are strategically targeting the oncology market, which is anticipated to soar to $323 billion by 2028, boosted by a new generation of drug discovery and development. “Oncology is AstraZeneca’s largest therapy area, representing 40% of our total revenue in 2023, a 21% increase year-over-year,” explained AZN.

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“Radiopharmaceuticals hold the potential to gain traction following the recent AstraZeneca M&A of $2B for Fusion Pharmaceuticals. Given its oncology sales of $17.15 billion in 2023, this move aligns with AZN’s strategy to innovate beyond traditional therapies,” explains Aaron Rafferty, co-founder and CEO of technology incubation hub Standard.

Another key factor for increasing activity is the number of impending patent cliffs within the industry. According to Cantor Fitzgerald, big Pharma currently has approximately $182 billion of revenue at risk through 2028 due to potentially expiring licenses, 42% of which comes from oncology. These include highly profitable drugs such as Yervoy ($3B), Cabometyx ($1B), Pomalyst ($2.5B), Perjeta ($5.5B), Imbruvica ($12B), Ibrance ($9B), Keytruda ($30B), and Opdivo ($13B).

“As patent expiries draw closer, M&A is becoming a vital tool for pharma companies looking to bulk up near-term revenue and strengthen drug pipelines,” explains Bryan Luchs, Partner at White & Case.

Success in Obesity Drugs Another Tailwind

The recent boom in obesity drugs, such as Eli Lilly's (NYSE:LLY) Zepbound and Novo Nordisk's (NYSE:NVO) Ozempic, is another tailwind for acquisitions within the industry as companies hoard more cash into their already hefty balance sheets.

In fact, according to Cantor Fitzerald, big Pharma had close to $1.37 trillion in cash in 2023, the second-highest in a decade after the 2021 Covid-vaccines-induced boom. Now, however, estimates are that these companies’ cash piles have grown even higher, further bolstering the industry’s firepower.

“The cash Eli Lilly accumulates from mega-blockbuster drugs like Zepbound could mean it has more firepower to acquire oncology assets among other therapeutic areas. A recent example is its acquisition of Point, a radiopharmaceutical company,” explains Fitzgerald’s Watsek.

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Another important factor is that two major players that have garnished significant success this year, namely Novo Nordisk (NYSE:NVO) and Biogen (NASDAQ:BIIB), do not yet have an oncology footprint.

“Novo Nordisk and Biogen would find this a tailwind into the space. Their pursuit of diversification could trigger a cascade of oncology-focused M&As,” says Aaron Rafferty, co-founder and CEO of Standard.

The increasing competition for innovation within the sector may also lead to the payment of high premiums for smaller target companies, which could result in hefty gains for investors positioned in such stocks.

“Historically, we know big Pharma can be quite price insensitive when it comes to assets that they want. We could be looking at just as many, if not more, deals, but maybe at a higher premium or valuation than the past two years,” explains Fitzgerald's Watsek.

M&A Framework: Who’s Ripe For the Next Takeover?

Despite the focus on oncology-related deals since the start of the year, other areas of the life sciences industry also appear prone to increased merger activity.

Consulted by Investing.com, AstraZeneca named the other key areas on which it intends to focus its expansion plans. “AstraZeneca is focused on five core disease areas: Oncology, vaccines & immune therapies, respiratory & immunology, cardiovascular, renal & metabolism, and rare diseases,” the company named. “We want to lead in each of the disease areas we operate in, and we are making strategic investments in a number of areas that we believe will shape the longer-term future of medicine,” it added.

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Cantor Fitzgerald’s Watsek also adds other target areas that investors should keep an eye on: “Obesity or NASH/MASH has received a lot of interest. I&I (inflammation and immunology), including CAR-T for autoimmune diseases or select rare diseases, can also be interesting. Neuro made a comeback in the M&A theme last year with some high-profile acquisitions (Karuna, Cerevel), and this trend may continue.”

“Big pharma is looking for transformative assets – advanced-stage therapeutics with proven efficacy, like Inspirna’s Ompenaclid, or innovative modalities such as Umoja’s in-situ CAR-T candidates,” adds Aaron Rafferty.

The current combination of factors has prompted Cantor Fitzgerald to boost its base case scenario to ten oncology M&As this year, three of which have already played out.

Which Biotech Companies to Bet on

Against the highly positive backdrop, savvy investors may want to consider keeping an eye on smaller players that would fit the current M&A framework.

This would include companies with low valuations, increased debt levels due to higher rates, and recent positive developments in the innovation space.

In terms of offerings, Cantor Fitzgerald goes deeper: “We expect ADCs, radiopharmaceuticals, and T-cell engagers to continue to receive attention, deal-wise. Synthetic lethality and TCR therapies are emerging areas in oncology that could get some strategic traction,” the company’s latest report states.

Given the historic potential for high-premium deals and the industry’s leveraged balance sheets, investors positioned in the right companies may be looking at triple- or even quadruple-digit gains in case of a takeover.

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To help you spot the correct opportunities, Investing.com consulted specialists on names that would fit the necessary framework.

Cantor Fitzgerald named its top 24 prime targets at the moment. The list follows:

  1. Alx Oncology Holdings (NASDAQ:ALXO)
  2. Arvinas Inc (NASDAQ:ARVN)
  3. Bicycle Therapeutics Ltd (NASDAQ:BCYC)
  4. Immunocore Holdings Ltd (NASDAQ:IMCR)
  5. Immatics NV (NASDAQ:IMTX)
  6. Oric Pharmaceuticals Inc (NASDAQ:ORIC)
  7. Day One Biopharmaceuticals Inc (NASDAQ:DAWN)
  8. Deciphera Pharmaceuticals LLC (NASDAQ:DCPH)
  9. Erasca Inc (NASDAQ:ERAS)
  10. Exelixis Inc (NASDAQ:EXEL)
  11. Geron Corporation (NASDAQ:GERN)
  12. Ideaya Biosciences Inc (NASDAQ:IDYA)
  13. Karyopharm Therapeutics Inc (NASDAQ:KPTI)
  14. Janux Therapeutics Inc (NASDAQ:JANX)
  15. Merus NV (NASDAQ:MRUS)
  16. Nuvalent Inc (NASDAQ:NUVL)
  17. Olema Pharmaceuticals Inc (NASDAQ:OLMA)
  18. Pmv Pharmaceuticals Inc (NASDAQ:PMVP)
  19. Relay Therapeutics Inc (NASDAQ:RLAY)
  20. Revolution Medicines Inc (NASDAQ:RVMD)
  21. Syndax Pharmaceuticals Inc (NASDAQ:SNDX)
  22. SpringWorks Therapeutics Inc (NASDAQ:SWTX)
  23. UroGen Pharma Ltd (NASDAQ:URGN)
  24. Zentalis Pharmaceuticals Llc (NASDAQ:ZNTL)

Aaron Rafferty makes a strong case for Allorion. “Companies like Allorion, with early-stage disruptors, are prime targets,” he says. “Allorion’s CDK2 blocker was acquired by Avenzo for a $40 million upfront payment and the potential for over $1 billion in milestones,” he adds.

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