Valuations Step-Up With More Deals 

Prior to the acquisition of Pharmacyclics (PCYC) by Abbvie (ABBV) for $20B, the top price paid for an emerging biotech company was in the $10B range. Two additional companies among the mid-caps  were acquired in prior years: Cubist by Merck in December 2014 and Onyx by Amgen in 2013. M&A has been a major driver of biopharmaceutical stocks and the buyout of Syngeva (GEVA) by Alexion for $8.4B last week showed that there is a lot of value in pipelines that fit with the acquirer. Financial engineering began with “roll-up”companies created by strategic acquisitions such as Activis plc (ACT) and fortified by so-called “inversion deals” whereby a company’s headquarters could be moved to a lower tax domicile such as Ireland (17% vs 35% in U.S.) or Luxembourg.

Another serial acquirer is Valeant Pharmaceuticals (VRX) created by the acquisition of Bausch and Lomb, Medicis and Warner Chillcott but failed in a merger with Activis in 2013. Both Activis (ACT) and Valeant (VRX) have been very profitable to shareholders with 2 year returns of 200% for ACT and  300% for VRX. But ACT and VRX are growth companies that have exploded through financial engineering with synergies in marketing and sales, cuts in corporate expenses and favorable tax advantages.

The success of these deals and others has caused more companies to aggressively look outside for sales growth. But the biotech model is unique in that the deals are for earlier clinical stage products and new relatively unproven technology.

Large cap pharma has always looked to biotech for pipeline and technology and that has recently hit a new level with the  $700M deal for Rare Disease Drugs that Sanofi (SNY) agreed  to pay Alnylam Pharmaceuticals (ALNY) for access to rare disease drugs utilizing RNAi technology.

In previous posts we summarized some of the additional factors driving this dealmaker mentality.

  • Strong demand for new products and R&D pipeline. Competition for deals and technology.
  • Plethora of companies being funded bring more opportunities for “recombination”.
  • Low interest rates and debt market liquidity. Easy money courtesy of the FED.
  • Revenue growth trumps earnings.
  • Pipelines are getting generous valuations with a low risk mentality.

In October of 2013 we compared the valuation models of emerging biopharmaceutical stocks from an M&A perspective and all of these stocks but two, Ariad (ARIA) and Seattle Genetics (SGEN) have beat the market. The following four companies within the mid-cap list have had huge returns and are included among the Rayno Mid Cap Portfolio Picks. Our top ETF pick the First Trust NYSE Arca Biotech FBT up 16% in 2015 is up 16% YTD.

Rayno Mid Cap Picks -2015 Performance

Alkermes (ALKS) Up 0.3% YTD

Celldex (CLDX) Up 41.75% YTD

Seattle Genetics (SGEN) Up 24.9% YTD

Vertex (VRTX) Up 12.7% YTD

Here is a complete list of all Rayno Biopharmaceutical Portfolio Picks. Two companies among our picks that were acquired: Cubist had a 4.9X return and Pharmacyclics had a 6.7X return since added to the portfolio. The challenge now is to find new mid-cap picks.

Below find a list of well-known mid-caps that have strong pipelines and technology in oncology, orphan/genetic diseases and cystic fibrosis. The latest frothy market area is rare diseases so look for more M&A but valuations are now a bit stretched in what is a niche market.

Our next biopharma review will be in the immunotherapy and CAR-T area where companies without Phase II data now have multi-$B valuations.

Company Ticker Price 5/12 Market Cap 2015 Rev P/S BV/Sh Perform
$ $B Est $B %YTD
Alkermes ALKS 58.73 8.85 0.65 13.43 9.59 0.3
Alnylam ALNY 106.5 9.56 0.057 173 12.16 17.33
Biomarin BMRN 121 19.4 0.803 24.18 15.45 33.95
Celldex Ther. CLDX 25.9 2.55 0.037 688 4 41.75
Clovis Oncology CLVS 85.8 2.95 0.013 n/a 9.77 53.3
Incyte INCY 105 18.73 0.581 31.7 -0.24 43.6
Medivation MDVN 124.2 9.69 0.833 11.6 6.02 24.7
PumaBio PBYI 204 6.2 n/a n/a 3.87 7.78
Seattle Genetics SGEN 40.13 4.96  0.329 16.7 1.7 24.9
VertexPharm* VRTX 129.5 30.2 1 26.7 4.08 9.25
*FDA news 5/12
ETF FBT 118.5 3.31 16.15
Cubist Pharm. CBST 101.9 9.5 1 10 6.3 12/14 deal 4.9X return
Onyxx ONXX 123.6 9 0.87 17.5 1.14 10/13 deal
Pharmacyclics PCYC 256.6 19.5 1.12 26.73 10.95 3/15 deal 6.7X return

We have no positions in any of the above stocks.

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