Biotech companies focused on cancer treatments are some of the hottest acquisition targets in the drug industry, growing in value with novel drugs that have the potential for high price tags.
Other takeover candidates include companies with promising drugs for immunological or neurological disorders
The group already has lofty valuations, partly fueled by takeover speculation. But they could still command premiums as high as 30 to 40 percent from larger drugmakers pressed to find new growth, according to investment bankers and industry sources.
"We have seen some very successful oncology drugs," said Fariba Ghodsian, chief investment officer at hedge fund DAFNA Capital. "Novel drugs with novel targets are in demand."
Current takeover candidates — all of which operate at a loss — include Dendreon, Pharmacyclics, Synta Pharmaceuticals, Threshold Pharmaceuticals , Seattle Genetics and Exelixis, analysts and industry bankers said.
"Over the next year or two, you'd be right on at least half of these names (getting sold)," said one investment banker who declined to be named because he was not authorized to speak to the media.
Past successes in oncology-related deals include Bristol-Myers Squibb's 2009 purchase of Medarex, which has yielded the first successful treatment for melanoma, but the field is riddled with risk when it comes to the actual value of medical breakthroughs and regulatory scrutiny.
Seattle Genetics is a case in point. Shares in the company are up 32 percent this year, on hopes for its experimental drug to treat two rare types of blood cancer, compared with an 11 percent gain for the Amex Biotechnology Index. The medicine, Adcetris, is up for review this week by U.S. health regulators who cautioned on Tuesday it may be suitable for a smaller-than-expected patient group.
"Seattle Genetics I feel is very highly valued," Ghodsian said, adding that because the drug would be the company's first commercial product, potential acquirers are likely to hold off until they see how it does in the marketplace.
Another cancer drug developer with an expensive share price is Dendreon, which last year launched sales of Provenge, a novel vaccine treatment for prostate cancer that costs $93,000 per year. The company's shares have gained 10 percent in 2011.
"They have strong pricing power with Provenge," said Morningstar analyst Damien Conover. "A deal could hit the bottom line (of an acquirer) a lot quicker than some of the other firms out there."
Ghodsian said Dendreon will also likely "have to show that the launch is going really well for a period of time," before any buyers step up.
CANCER DRUG SALES OUTPACE
The allure of new cancer drugs is high — growth in the global oncology market is expected to be twice that of the overall pharmaceutical market, reaching up to $80 billion in sales by 2012, according to IMS Health.
The drug research firm also estimates that $25.4 billion in U.S. drug sales are at risk of generic competition this year as patents expire on iconic drug brands like Pfizer Inc.'s
Lipitor or Bristol and Sanofi's Plavix.
At the same time, large drug makers are cutting research and development, giving them a greater appetite for buying products with significant sales potential.
In addition to cancer, Alzheimer's, rheumatoid arthritis and other "old age ailments" are cornerstone areas that all big pharma need to have more exposure to, bankers said.
Targets range from Biogen Idec, with a price-to-earnings ratio near 25, to smaller companies like InterMune, which trades at around 17 times trailing 12-month earnings. Shares in the S&P 500 trade, on average, at around 16 times earnings.
Conover said Biogen is an attractive buyout candidate given its relatively robust drug development pipeline combined with the profit-boost of existing products like multiple sclerosis drugs Avonex and Tysabri.
"There is at least a 30 percent chance of Biogen being taken out in the next three years," RBC Capital Markets analyst Michael Yee said, citing the company's diversified product lines and capacity for manufacturing biotech drugs.
Full data from a key trial of the company's experimental MS drug, BG-12, will be presented this fall. Positive initial results, announced in April, sent Biogen shares up as much as 24 percent to an all-time high.
Two other biotechs with recently launched drugs — Human Genome Sciences with lupus treatment Benlysta and Vertex Pharmaceuticals with hepatitis drug Incivek — have new drugs that will define their value.
"They have to prove that they can deliver on the blockbuster potential of these franchises," said RBC's Yee.
He named Pharmasset as another potential buyout target involved in development of hepatitis drugs.
Ghodsian cited InterMune, which saw its pulmonary fibrosis drug Esbriet approved by European regulators in March, as a strong takeover candidate, even though the company said in April that it was not considering a sale.
"The feedback from physicians is that it (Esbriet) will be used extensively in Europe," she said. "The valuation is relatively low." InterMune is conducting a separate pivotal trial of the drug for review by U.S. regulators.
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