ARGNF - 5 Biotech Acquisition Targets To Accumulate In 2024

2023-12-21 13:05:16 ET

Summary

• Valuations in the biotech market have fallen, making it a good time for acquisitions in the industry.
• Investors should focus on commercial-stage biotech companies that generate revenue, as they provide a safety net in uncertain economic conditions.
• I also summarize historical acquisitions that may support estimates of purchase premiums that may occur through 2024.
• Whether acquired or not, the five companies I discuss are set to provide lower risk than other biotech peers.

Introduction

The biotech market took a back seat from 2021 to 2023 as valuations remained high and M&A interest faded. Now, valuations in the industry have fallen to more reasonable levels and we are starting to see more major acquisitions occurring once again. However, there remains uncertainty about economic conditions and the inability of clinical-stage companies to earn enough funding to survive the high interest rate environment. With that, I believe that investors are best suited to bet on commercial-stage biotech companies, rather than pre-clinical ones. If you were a large-scale pharmaceutical, why take a risk on preclinical assets now when either prices fall or the financial market conditions improve?

There are other benefits as well. As I prefer to expect the worst when making an investment, it is important to look for a safety net. If economic conditions remain poor for biotech companies, those without revenue-generating assets may face weakness throughout the year as their internal cash deposits run out. Some investors may see excessive dilution, while others will find themselves holding a company with excessive high-interest debt. Therefore, I believe the following five companies are the best options as they are revenue generating.

In terms of being acquisition targets, the odds are always hard to determine. However, these deals can be lucrative for investors. I would like to use four major acquisitions over the past half a decade as a case in point. When a biopharma company is acquired and is profitable, we see quite large premiums being earned. We also see that the buyer party is also usually a large, well-financed pharmaceutical that most investors are happy owning shares of. This now creates three major catalysts for the following five biotech acquisition targets of 2024:

• Poor financial conditions are unfavorable for preclinical investments, unlike these names. Investors either face losses with smaller holdings or the probability of an acquisition is lower due to a lack of fundraising.

• The companies can provide a safety net through the generation of revenues to support operations, either through reduced cash burn or profitable growth. If the target is not acquired, there is still an opportunity to provide ample returns.

• Commercial-stage companies have a more transparent outlook, so purchasers have more optimistic views and this provides large premiums. Preclinical companies have less concrete details that would suggest an acquisition is likely, so no need to add more layers to what is already a gamble.

Recent Acquisitions

There have been four major acquisitions over the past few years that highlight the opportunity for commercial-stage companies in 2024. While financial conditions are weaker now than in years prior, the valuations of these purchases still remain viable for use. What is most important to look at is profitability, total revenues from x amount of approvals (i.e. blockbuster status of $1 billion in yearly revenues per approval), and whether the company has a specialty (i.e., rare disease, therapy technology, etc). I summarize the four acquisitions below.

Horizon Therapeutics Public Limited Company ( HZNP )

This acquisition was completed in October 2023 for $27.8 billion by Amgen Inc. ( AMGN ). Horizon was one of my major holdings for the long-term opportunity on the back of three approved therapies in the latter half of the 2010s. One of the main advantages of Amgen's purchase is that they gained access to fast-growing rare disease therapies that will have many years before generics or biosimilars inhibit revenue growth.

Considering the three approvals generated $3.6 billion in revenues in 2022, it is clear that these were quite valuable assets. Not to mention profit generating in a rapid amount of time. This is why Horizon saw a favorable valuation at purchase: they were valued at ~30x and 7.7x FY22 EBITDA and sales, respectively.

Seagen Inc. ( SGEN )

One of the most highly publicized deals of the past decade, this deal was completed in December 2023 for $43 billion by Pfizer Inc. ( PFE ). With this purchase, Pfizer gained four approved therapies and now has the world leader in antibody-drug conjugate technologies within their ecosystem. However, the cutting-edge technology comes at a cost as the four therapies, while recently approved, only generated $2.0 billion in revenues in 2022. Also, Seagen is still investing heavily in their pipeline and operations so profits were not being generated. As of the final purchase price, Seagen still earned a valuation that was over 20x 2022 sales.

This highlights that preclinical-like optimism is still at play, even for commercial-stage biotechs. Investors also should take note that despite the high price tag, total returns are not stunning. For example, HZNP rose around 500% in the five years prior to final approval, while SGEN only rose around 275%. This will be an important consideration for some biotechs I will discuss. It is also important for the buying companies to make the most of their purchases by leveraging global scale to advance new technologies.

Celgene

While far above the scale of the companies I will be discussing, the acquisition of Celgene is an interesting case study for the bears of the group. Completed in November 2019 for $78 billion by Bristol Myers Squibb Company ( BMY ). Celegene was already an established biopharma that was facing the troubles of aging assets. Revenues were falling, new assets were not getting approval, and the share price had fallen by 50% before BMY swooped in. However, Celgene was still generating $15 billion in revenues and $1.1 billion GAAP net income in FY2018, one of the more profitable biotechs at the time.

This led to a purchase value of over 30x operating income and 5x revenues. So, despite the lack of growth opportunities, profitability can still be highly valued. Unfortunately for BMY, Celgene's issues have continued as revenues peaked in 2021/22, although EBITDA margins have improved. As with all purchases, time will tell about the true value of the acquisitions.

Alexion

The last deal I would like to discuss is a middle-of-the-ground case. The purchase of Alexion, completed in July 2021 for $39 billion by AstraZeneca PLC ( AZN ), highlights how despite profitability and blockbuster status, acquisition values don't always lead to a huge premium. This is because despite generating $6.1 billion in revenues and over $3 billion in EBITDA from only two blockbusters approved at the time of the deal (FY20), Alexion was only valued at around 6x sales and 12x EBITDA.

However, AstraZeneca seems like the clear winner here with their financials now improving, seemingly, above lows seen in the latter half of the 2010s. So, for biotech investors, the opportunity may live longer if the buyer is boosted, rather than burdened by an overvalued acquisition. But, you can always sell after gaining a nice premium in the purchase of course.

Acquisition Targets for 2024

argenx SE ( ARGX )

Argenx is a company focused on their approved Efgartigimod platform. This unique platform is a modulator of autoimmune disease-causing antibodies in the body, and a wide potentially treatable disease set. The platform therapy already earns over $1 billion in revenues for myasthenia gravis, and many analysts believe in the blockbuster potential of the Efgartigimod platform. However, this comes at a price as Argenx is already worth over $25 billion, so the premium must be earned with more approvals in my eyes.

**Update 12/20/23** Unfortunately, Argenx shares have fallen over 20% as Phase 3 data in a new disease segment has failed. The company will now cease seeking approval for this disease segment, and the platform viability has been reduced. Therefore, the company will need to focus on profitability with the approvals they already have to remain viable. Any acquisition premium will also be lowered.

• Market Cap: $25 billion **Updated** ~$19 billion.

• Approvals: 2 (Vyvgart IV and SC indication for gMG).

• Net Cash: $1.99 billion.

• Operational Runway (Years): over 16 at $100 million loss per quarter.

• Sales Premium at Purchase: 10-15x December 24 FY Estimated Sales, or $25-37.5 billion. **Updated** Estimates are likely to fall now and long-term opportunity is reduced, so perhaps 10x sales of $2.4 billion, or $24 billion. This is a ~26% upside from the new valuation. Higher if the acquisition is based on FY25 estimates, although the downgrades in estimates will be coming. Watch profitability over the coming quarters to offset.

Blueprint Medicines Corporation ( BPMC )

A creator of specialized kinase inhibitors for cancer and rare diseases. Rely on deep knowledge of genetic issues and computational research to target these enzymes. One unique operational quality of Blueprint is that they have sold millions of dollars worth of royalty shares of their approved and pipeline therapies in order to build cash for their R&D. While cash flows will grow far slower with the sales being diverted to the royalty holders, the large upfront payments allow for a better short-term outlook. Other partners include Chinese sales and commercialization with Zai Labs and a research pact with Roche for a few therapies. My prior article , while over a year old, still remains a valid introduction of the opportunity.

However, more cash supplementation will be needed soon, unless profitability is increased (which is possible with the fast growth of approved therapies). This makes the chance to acquire shares at a lower valuation possible through 2024, and this may increase the premium if an acquisition occurs. Under $5 billion is where I would look to accumulate and I believe that even without an acquisition the long-term outlook remains bright. As they only have two approvals, it is hard to say if their kinase inhibition specialty is a blockbuster platform yet, but the valuation will increase as long as the pipeline is expanded and successful. A better choice for long-term investors.

• Market Cap: $5.2 billion.

• Approvals: 2.

• Net Cash: $493 million.

• Operational Runway (Quarters): 3.8 at $130 million loss per quarter.

• Sales Premium at Purchase: 13-15x FY25 Estimated Sales, or $7.4-$8.5 billion. This is a premium of between 40-60%.

Sarepta Therapeutics, Inc. ( SRPT )

This company is a specialist in genetic medicines, primarily with RNA-targeting therapies. Sarepta is most famous for an exon-skipping RNA therapy for Duchenne muscular dystrophy (DMD), although the recent approval has been narrowed to a small subset of the total patient population. With the continued risk avoidance and niche role of genetic medicines remaining, valuations remain low compared to other technologies. However, the current valuation weakness may play a role in the chance of acquisition, especially as Sarepta now generates positive gross profit. As a smaller bolt-on acquisition, larger firms may be willing to take the gamble on a slow, but steady growth opportunity at a fair price.

With current sales now reaching over $1 billion for the trailing twelve-month period, Sarepta may not offer blockbuster therapies, but they are only in the early stages of developing their genetic medicines. If you begin to accumulate, it is almost imperative that profitability becomes positive now that four therapies are approved. Upon this occurring, the long-term viability increases significantly and an acquisition can be priced similarly to Alexion. If no acquisition occurs, then there is reduced risk from continued headwinds in terms of the risky genetic therapies. As long as the market cap remains less than $10 billion I believe accumulating shares will end up with steady returns in the 1-3 year timeline.

• Market Cap: $8.9 billion.

• Approvals: 4.

• Net Cash: $344 million.

• Operational Runway (Quarters): 6 at less than $50 million in losses per quarter.

• Sales Premium at Purchase: 4-6x FY25 Estimated Sales, or $10.7-$16 billion. This is a premium of 20-80%, depending on the success of increasing profitability and expanding their narrow pipeline.

Incyte Corporation ( INCY )

Incyte is an old, established biotech that has now earned eight approvals, with yearly revenues of over $3 billion. Despite this, the market cap is only $13.5 billion as growth slows and the company remains reliant on a single therapy, Jakafi, for the bulk of revenues. However, with profits being generated each quarter, Incyte is now self-sufficient and this limits downside risk, even if the upside is not tremendous. I expect shares to remain weak in 2024, but if the company earns success for either expanded Jakafi indications or additional successful platforms, a slow increase in value may begin. We already see this underway over the past month as a Phase 2 trial with an unrelated therapy showed positive data, and shares rallied.

Incyte does check the box of profitability thanks to an aging blockbuster therapy, but some work is needed to expand either diversification or the quality of the specialty to garner a higher valuation upon purchase. This is most similar to the former Celgene acquisition, so I would value it accordingly. As you will see below,

• Market Cap: $13.5 billion.

• Approvals: 8.

• Net Cash: $3.5 billion.

• Operational Runway (Quarters): Indefinite (profitable).

• Sales Premium at Purchase: 4-5x FY25 Estimated Revenues, or $18.3-$22.9 billion. This matches with a 30x operating income premium from an estimated $600-$700 million for FY25, or $18-$21 billion (which is a conservative sub-20% increase in operating income). This equates to a premium of 30-70%.

Exelixis, Inc. ( EXEL )

Exelixis is an oncology-focused biotech with one platform therapy now approved, cabozantinib. This therapy has two approved indications, and multiple Phase 3 trials underway to expand patient access. Along with two partner therapies (less than 10% of revenues), trailing twelve-month revenues have reached $1.6 billion. The narrow focus is the biggest weakness, but based on the $7.2 billion market cap, investors see the opportunity. Part of this is based on Exelixis already being profitable despite the narrow focus. We are already seeing a large increase in R&D expenses as management understands the risk of relying on a therapy that may see generics encroach by 2026.

This headwind is in regard to a patent lawsuit against a generics maker. However, analysts believe the risk is not very high and price targets upon positive trial results are estimated to be over 100% of current trading levels. This complicates things, but provides an additional catalyst for EXEL investors. Will potential suitors wait until the trial is over, or will they take the chance to purchase at a discount? I believe that as investors we can take the risk of investing prior to the end of the trial, especially with management already working on damage control in the bear scenario. Exelixis is the riskiest play of this list, but perhaps the one that offers the highest reward.

• Market Cap: $7.4 billion.

• Approvals: 2 (4 including partner programs).

• Net Cash: $912 million.

• Operational Runway (Quarters): Indefinite (profitable).

• Sales Premium on Purchase: 5-6x FY25 Estimated Revenues, or $11.6-$13.9 billion. This equates to a premium of 55-85%, and I believe that is the low range of a potential acquisition value, rather than if the trial is successful (Exelixis already tends to trade at a 5-6x P/S).

Honorable Mentions

Genmab A/S ( GMAB )

This unique biotech company is more of a technology provider than a drug developer. As a major name in monoclonal antibody research with partnerships across the industry, these ties make it unlikely for a larger company to risk breaking these ties by purchasing Genmab. Just to make my point, partners already include Johnson & Johnson ( JNJ ), Seagen, AbbVie Inc. ( ABBV ), BioNTech SE ( BNTX ), Horizon, Novartis AG ( NVS ), Novo Nordisk A/S ( NVO ), and Roche Holding AG ( OTCQX:RHHBY ). Plus, Genmab is already trading over 8x sales or 30x earnings, leaving little room for a large premium. While I recommend the company on its own, I am unsure whether there is much acquisition potential, despite the company checking off many of the traits that would be favorable.

Alnylam Pharmaceuticals, Inc. ( ALNY )

The problem with Alnylam, despite having four approved therapies, is that losses are so high. While the RNAi platform value is now being unlocked, the acquisition would be Seagen-like in terms of scale and risk. As Pfizer is taking a significant and costly gamble, it is unknown whether other giants would take the risk. One suitor is potentially Roche, but they have been investing in pipeline collaborations and royalties, rather than owning Alnylam outright. I believe that Alnylam is a company that prefers to be a household name for their expertise rather than selling themselves. Quick Purchase Premium Analysis: 15x Estimated FY2025 Revenues is $36 billion, or a 50% premium.

Conclusion

Despite a slow year, I believe that the biotech market is at a low point. While an upturn may be slow, I believe the best way to mitigate risk is with commercial-stage biotech companies generating revenues. At the same time, there is the potential for an acquisition to occur as big pharma takes less risk on preclinical investments. A bolt-on strategy is an underappreciated form of growth for an industry that favors gambling on R&D. With potential premiums averaging 40%, the mid-term opportunity is significant, and if no acquisition occurs, downside is limited.

I believe any investor who chooses to accumulate shares through 2024 will see a positive return in 2025. However, I also suggest not leaving all your eggs in one basket, calculating the net present value based on the probability of success for each potential outcome (using your appropriate discount rate), and remaining tolerant of typical biotech risk points. Also, this is just a thought experiment and there are many other options out there.

Thank you for reading. Feel free to share your thoughts in the comments.

For further details see: