Market Overview

3 Stocks In Focus As Biotech M&A Hopes For 2018 Rise


At the beginning of 2017, expectations were pretty high that the pharma and biotech sector would finally see lots of mergers and acquisitions. However, that did not happen. While a few high-value deals were announced, the focus was mostly on small bolt-on acquisitions and licensing deals and agreements.

According to Mergermarket's Global Pharma, Medical & Biotech trend report for 3Q17, M&A in the global pharma, medical and biotechnology sector was in the range of $207.6 billion spanning 1,040 deals so far this year, declining 9.9% from the year-ago period. The dip was mostly attributable to the pharma and medical sectors.

Key deals announced this year include the Gilead GILD-Kite and the Johnson & Johnson JNJ-Actelion acquisitions, which boosted the value of M&A transactions in the biotech sector. Biotech stocks continue to command hefty premiums where M&A is concerned.

The key question now facing the sector is - will M&A activity remain sluggish in 2018 or will there be a surge in M&A deals?  

With tax reform in the works, M&A activity is expected to increase in the upcoming quarters. Tax reform and cash repatriation are expected to lead to a boost in this area with biotech remaining a highly sought-after sector. Companies with innovative technologies and pipelines remain in demand with disease areas like nonalcoholic steatohepatitis ("NASH"), immuno-oncology, gastrointestinal and central nervous system diseases seeing quite a bit of activity. Treatments for orphan diseases and gene editing technology are also in demand.

There are several large drugmakers that are on the lookout for deals – while some of these companies are looking to replace sales of blockbuster products that are facing loss of patent exclusivity, others are looking to build their pipelines both through acquisitions as well as licensing agreements.

Expectations are high that big players like Sanofi SNY, Pfizer, Merck and Amgen AMGN will announce M&A deals in 2018. Companies like J&J and Gilead are also expected to be on the lookout for additional acquisition targets. A major deterrent, however, could be high valuations and bidding wars which could keep some of the key players on the sidelines.   

In this backdrop, here is a look at three biotech stocks that could find themselves on the radar of companies on the lookout for acquisition targets in 2018.

Incyte Corporation INCY: Wilmington, DE-based Incyte is a company that is often considered an attractive acquisition target thanks to its flagship product, Jakafi, and a promising pipeline. Jakafi – a JAK1/JAK2 inhibitor – looks well-positioned for growth. Jakafi revenues are expected in the range of $1,125-$1,135 million in 2017. Incyte is also working on expanding Jakafi's label into additional indications including steroid-refractory acute graft-versus-host disease ("GVHD" – data expected in the first half of 2018) and essential thrombocythemia ("ET"), a rare blood cancer that can lead to life-threatening complications.

The company has several catalysts lined up for 2018 including the potential approval of baricitinib (resubmission of the new drug application for moderate-to-severe rheumatoid arthritis expected by January 2018) as well as the advancement of its immuno-oncology pipeline.

The company's immuno-oncology pipeline includes IDO1 inhibitors (epacadostat), PI3K-delta inhibitors (INCB50465), and JAK inhibitors (itacitinib, INCB52793) among others. Epacadostat, which is in late-stage development for melanoma with data due in the first half of 2018, has immense commercial potential. Epacadostat is being evaluated for several other types of cancer as well.

Juno Therapeutics, Inc. JUNO: Biopharmaceutical company, Juno's shares have been on an upward trend following the Gilead-Kite acquisition announcement earlier this year. With Juno being focused on the development of innovative cellular immunotherapies for the treatment of cancer, the company is considered a potential acquisition target. Juno's cell-based cancer immunotherapies are based on chimeric antigen receptor and high-affinity T cell receptor technologies. The company has several cell-based candidates in its pipeline targeting a variety of B-cell malignancies as well as multiple solid tumors and multiple myeloma.

Although the company suffered a major setback with the development of its erstwhile lead pipeline candidate due to safety issues (including patient deaths), Juno is now focusing on JCAR017, a next-generation CAR-T cell product that targets CD19. JCAR017 is currently in a registrational study for non-Hodgkin's lymphoma ("NHL"). The company expects to file for approval in the second half of 2018.  

Juno's shares are up 211.1% year to date, compared to the 2.7% gain recorded by the industry it belongs to.

bluebird bio, Inc. BLUE: bluebird is another clinical-stage company working on developing gene therapies for serious genetic diseases and T cell-based immunotherapies for cancer. The company's pipeline includes Lenti-D, currently in a phase II/III study, for the treatment of cerebral adrenoleukodystrophy, and LentiGlobin, currently in five studies for the treatment of transfusion-dependent β-thalassemia and severe sickle cell disease. The company's lead oncology programs, bb2121 and bb21217, are anti-BCMA CAR T programs which are being developed in collaboration with Celgene.

While Incyte, Juno and bluebird are all Zacks Rank #3 (Hold) stocks, you can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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