TAK - Analyzing The Acquisition Potential Of ImmunoGen

2023-10-31 15:25:10 ET

Summary

• ImmunoGen, Inc.'s marketing authorization application for ELAHERE, a cancer therapy, has been accepted by the EMA.
• Rumors suggest that large European pharma companies, including GSK, Sanofi, or Merck, may be interested in ImmunoGen.
• ImmunoGen has an approved drug, a modest pipeline with a catalyst upcoming, and a market cap of around $3.6 billion, making it an attractive target for acquisition.

ImmunoGen, Inc. ( IMGN ) may, as reported by Seeking Alpha, be a takeover target . Often I check out a company like that. In this case, I thought it was interesting enough to write it up. ImmunoGen is a clinical-stage biotech that's developing antibody-drug conjugates that could be useful in cancer therapy. Just yesterday , the EMA accepted its marketing authorization application for ELAHERE. A treatment that's supported by a successful stage 3 trial and was granted accelerated approval in the U.S. Takeda Pharmaceutical Company ( TAK ) already has signed a partnership to commercialize it in Japan.

Most rumors I end up fading because I don't think the odds are on my side. For one thing, I believe a rumor leaking helps dissuade the event from coming to fruition.

Many large pharma companies are eager to build out oncology suites, and many could be interested. Betaville, where the rumor was initiated, believes European Pharmas are interested. That could be GSK plc ( GSK ), Sanofi ( SNY ) or Merck ( MRK ). It bought another novel oncology drug in Keytruda a while ago. But there are other possibilities.

The FDA approval, the licensing, and the quick application in Europe all point towards this therapy being quite interesting and in demand. ImmunoGen trades at a market cap of around $3.6 billion.

There have been no insider trades since 15/10, which is a positive given we want to see a deal. Immunogen has a few other pipeline drugs, like Mirvetuximab (for ovarian cancer). It also has a trial ongoing for mirvetuximab in combination with bevacizumab (Avastin). The latter is a drug that's used to treat colon cancer, lung cancer, glioblastoma, and renal-cell carcinoma.

In the most recent earnings call the company said it would share overall response rates by the end of this year:

Let me now turn to the broader mirvetuximab development program, which has the potential to meaningfully expand the Elahere label by moving into platinum-sensitive disease and positioning mirv as the combination agent of choice in ovarian cancer. Specifically, we are progressing three studies. The first is PICCOLO, a single arm Phase II trial evaluating mirv monotherapy in folate receptor alpha-high platinum sensitive ovarian cancer. Enrolment was completed in January and we anticipate sharing ORR data by the end of this year with duration of response data expected in 2024.

Given the rumor, I'd suppose a big pharma that wanted the approved therapy may want to move in before that data is shared and potentially drives up the purchase price further (although it also makes it a safer buy).

I also noticed ImmunoGen’s Chief Medical Officer is leaving the company to:

take a well-deserved professional hiatus prior to pursuing new opportunities. I would like to take a moment to personally acknowledge and thank her for the essential role she has played in the transformation of this company.

Maybe it means nothing. However, in this role, you coordinate the trials with clinics and hospitals, etc. It's probably a coincidence she's leaving now. That's by far the most likely explanation. But it is also possible she's seeing an acquisition coming and started looking for other roles.

I've also noticed a recent increase in M&A activity after a quiet summer and what is actually a quiet year.

Biotech is very out of favor with investors, which means prices to acquire future revenue are more favorable for big pharma.

The low prices also mean pharma can afford to shell out large premiums. In 2022, the average premium in biotech was around 85%. For 2023, I don't have the exact number but there were many deals around that level and a few outliers at very modest premiums (unlikely to be the case here), as well as 200%+ bangers. A big premium (if a deal happens) is also a bit more likely because this company has enough cash. It isn't against the ropes and forced to take a bid. There must be a chance of a big premium to make up for all the times I buy a few calls here, and they zero out.

Finally, and importantly, Immunogen has tapped capital markets relatively recently. It has over $500 million in cash . Along with an approved drug in the U.S., this should carry it for years. If there's another positive result announced Q4 2023, it seems unlikely to me that the company would immediately tap the market.

Knowing it will most likely go to zero, it seems interesting to me to buy a call spread for December 15 or, alternatively, for January. Given the prices, I thought selling the $55 was interesting, although this limits the upside to 57%. If you are unsure about a bid coming, capping the upside there isn't very wise. But I'm not that sure. Buying the 35 for $2.10 and selling the $55 for $0.30 lowers the breakeven to a share price of $36.80. This way I only need a 13 bounce in IMVT to start making money. The XBI could bounce or the data readout could come in positively, and the stock might get there without a bid. Most likely, the structure expires worthless, but the max upside is around 911% (which is only reasonably achievable if a bid materializes), and it seems reasonable to me that's enough to offset the times I'll lose here.

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