A Prime Takeover Target For The Biotech Market
There has been no better hunting ground for predators lately than the biopharma sector.
It makes sense. Many small research outfits have uncovered novel treatments, but lack the financial resources and/or distribution capabilities needed to commercialize them on a global scale. Meanwhile, many larger drug makers are facing patent expiration on their aging products and need growth catalysts. They are long on cash, but short on promising new ideas.
Bringing in a smaller partner helps replenish the development pipeline quickly and cost-effectively.
According to Dealogic, there were 365 M&A deals in the U.S. biopharma sector in 2018 – exactly one for every day of the year on average. And the wheeling and dealing have only heated up since then. Deal volume surged by 33% last year to 484. Those transactions were worth $342 billion — the most in a quarter-century.
Some of the parties involved in this shopping binge include Abbvie, Amgen, Biogen, Eli Lilly, and Merck. And trust me, we haven’t seen the last tie-up. Many industry observers (myself included) think that the pharma sector will continue producing big deals like this in the years to come.
One Of The Best Drug Pipelines On The Market
I’ve got my eye on a few potential takeover candidates in the biopharma space. But one in particular that could get scooped up sooner than later is Incyte (Nasdaq: INCY).
This company can trace its roots back to 2002 when a team of chemists, biologists, and other scientists was assembled to develop new and better medicines. The company has a deep research bench of 600 professionals whose efforts are brought to bear in two main areas: oncology and immunology.
The firm’s flagship drug is called Jakafi, which is used to treat bone marrow disorders polycythemia and myelofibrosis. It has recently been approved for a third use to combat a rare disease that afflicts organ transplant recipients. This particular disease is difficult to treat and has proven to be a death sentence for most, with a 1-year mortality rate of 70%. Thanks to Jakafi, many have hope for the first time.
This breakthrough drug brought in $1.7 billion in revenue last year, a healthy increase of 21%. Management expects sales to jump to nearly $2 billion in 2020. The company is also drawing royalty revenue from other products such as leukemia drug Iclusig and rheumatoid arthritis treatment Olumiant.
As you might expect, a good chunk of those sales (roughly half) is sent right back to the R&D lab. Research is the lifeblood of this industry. But unlike many of its peers, Incyte has achieved profitability – with net income quadrupling last year to $447 million, or $2.05 per share.
Potential acquirers will also admire the clean balance sheet, which has barely a trace of debt against $2.1 billion in cash and securities.
But the crown jewel is the firm’s enviable product pipeline. Incyte has developed nearly 20 promising candidates, half of which have advanced to late-stage clinical trials and are nearing FDA approval. And one just reached the finish line. In April, the company was given the green light to market Pemazyre, which helps fight cholangiocarcinoma (bile duct cancer).
There are other candidates on the horizon aimed at various cancers and inflammatory diseases. Incyte has already teamed up with larger (and better funded) joint venture partners such as Eli Lilly and Novartis to commercialize certain compounds in foreign markets (while retaining exclusive rights here in the U.S.). These joint venture arrangements often pave the way for takeovers – much like dating can lead to marriage.
Action to Take
Whether it’s encouraging clinical data or recent progress on a Covid-19 related treatment to ease the respiratory symptoms of patients on ventilators, INCY has been on fire lately. The stock has surged from $67 in mid-March to a recent price of $97. But if a buyer comes knocking (or any of its candidates progress up the clinical ladder), it could move well into triple-digit territory.
Growth-minded investors would be wise to put this one on their watchlist. It’s a rare find in this market, which is full of bloated valuations. In fact, my colleague Jim Pearce is worried about the rise of indebted companies that are being kept alive by the Federal Reserve’s aggressive monetary policies.
He thinks these vulnerable companies are ripe for a tumble. And investors would be wise to listen to Jim, because he’s successfully identified companies like this throughout his entire career, and was able to make huge gains in 2000 and 2008.
For the first time ever, Jim is ready to reveal his personal secrets for turning these “zombie companies” into your most profitable trades ever. To learn the details, sign up for Jim’s online presentation by clicking here.