Mad Hedge Biotech and Healthcare Letter
April 25, 2023
Fiat Lux
Featured Trade:
(SMALL BIOTECHS, BIG OPPORTUNITIES)
(PFE), (SGEN), (MRK), (RXDX), (BMY), (BIIB), (ETNB), (KRTX), (MORF), (IDYA)
Mad Hedge Biotech and Healthcare Letter
April 25, 2023
Fiat Lux
Featured Trade:
(SMALL BIOTECHS, BIG OPPORTUNITIES)
(PFE), (SGEN), (MRK), (RXDX), (BMY), (BIIB), (ETNB), (KRTX), (MORF), (IDYA)
The biopharma sector has seen a flurry of merger and acquisition activity recently, and the trend seems to continue. This is good news for smaller biotech stocks looking to capitalize on the trend.
In the first quarter of 2023, the total healthcare and life sciences M&A in the United States reached roughly $71 billion, more than double the $28 billion seen in the same quarter in 2022. Notably, this figure includes Pfizer's (PFE) acquisition of Seagen (SGEN) for $43 billion.
Still, the situation isn't as dire as it may seem especially considering that in 2022, the total M&A spending in the U.S. dropped to about $300 million year over year from the $400 billion recorded in 2021.
The main culprit behind this trend appears to be higher interest rates, which have made financing a deal less appealing for buyers, particularly when there is the potential for a less optimistic profit outlook due to a slowing economy.
Even with these concerns, pharmaceutical deals have been far from stagnant since the end of the first quarter.
Merck (MRK), a biopharmaceutical company with a market capitalization of $288 billion, announced that it would purchase Prometheus Biosciences (RXDX) for roughly $11 billion, representing a premium of about 75% over the pre-announcement price. The announcement had a considerable impact on Prometheus stock, which saw a surge in value.
Shareholders of Prometheus enjoyed significant gains as Merck seeks to replace its revenue stream from cancer treatment Keytruda, which generates just over $20 billion annually.
Keytruda's patent is set to expire in 2028, leaving room for competitors to gain market share and making Merck's acquisition of Prometheus a critical move. For context, Prometheus's ulcerative colitis product alone has a total available market worth roughly $30 billion.
This deal could be just the beginning of a wave of new mergers and acquisitions in the biotechnology and healthcare industry. Experts note that we are entering a "smart optimism" period in the sector.
It makes sense for larger pharma companies to explore mergers and acquisitions in the current market for several reasons.
For one, many larger companies are seeking to revamp their drug pipelines. Take Bristol Myers Squibb (BMY), for example, which has a market capitalization of $146 billion. Sales of its myeloma treatment, Revlimid, likely peaked at just over $12 billion in 2021. As the patent for Revlimid expires, the company is expected to lose market share, causing sales to plummet to the low hundreds of millions.
While the company has several new drugs in development, it may still seek to acquire smaller firms to safeguard its future. However, given that Bristol has just over $9 billion in cash, any significant acquisitions it pursues could require taking on debt. Such a move would not be unprecedented, as Pfizer financed roughly 70% of its Seagen purchase with long-term debt.
Another big name that could be on the lookout for an attractive deal is Biogen (BIIB), a company with a market capitalization of $42 billion. Biogen is reportedly interested in the neuropsychiatric and inflammatory sectors and could strike a deal as early as the latter half of 2023.
Looking at things from a seller's point of view, many of these companies are now much less valuable than they once were on the public market and, therefore are easier targets for acquisition.
The SPDR S&P Biotech ETF (XBI) has taken a 50% hit from its all-time high set in February 2021. This is mainly due to higher interest rates, which have diminished the perceived value of future profits. Since many small biotechs are valued based on their projected earnings well into the future, this has significantly affected their stock prices.
Some biotech companies have been eyed as potential takeover targets due to their reduced market value.
One is 89bio (ETNB), with a market cap of $1.2 billion and a stock price falling by more than 50% from its all-time high, could be a potential target.
Similarly, Karuna Therapeutics (KRTX), which has a market cap of $7.4 billion and has seen a decline of almost 30% from its all-time high, is also considered an acquisition candidate.
Morphic Holding (MORF), with a market cap of $1.8 billion and a drop of more than 35% from its all-time high, and Ideaya Biosciences (IDYA), which has a market cap of $706 million and has lost almost half its value from its all-time high, could also be targeted for acquisition.
Overall, this is a promising period for the sector. So, take a moment to consider some of the smaller biotech firms in the market. Suppose these companies have a hard time finding interested buyers. In that case, there is still hope for shareholders as there's a chance that a larger corporation may step in and make an acquisition, leading to a substantial payout.
Mad Hedge Biotech & Healthcare Letter
November 26, 2019
Fiat Lux
Featured Trade:
(WHY KARUNA THERAPEUTICS IS THE BIG ONE THAT GOT AWAY),
(KRTX)
In many respects, buying the shares of small biotech companies is a lot like purchasing lottery tickets. Look no further than Karuna Therapeutics (KRTX), which has just soared sevenfold on the back of wildly successful phase II trials for its schizophrenia drug KarXT.
While it is too late to buy (KRTX), it is illustrative of what is going on in the space with ever-increasing frequency. And the great news for you and me is that biotech is only months into a meteoric move that could last for decades.
KarXT is the next “gamechanger” in the field of schizophrenia. Why is this important? In the United States alone, schizophrenia already affects roughly 2.7 million people or almost 1% of the population. Needless to say, this condition makes handling relationships and maintaining jobs virtually impossible.
With its tendency to become a recurring condition as one of its key defining features, schizophrenics need recurring treatment as well. To make matters worse, the conditions are distinct from one patient to another. Hence, it no longer comes as a surprise that over a third of people afflicted by this condition do not respond to the antipsychotic treatments available in the market today.
As for the treatments that do take effect, the side effects associated with the drugs also hinder the day-to-day activities of the patients causing them to discontinue taking it altogether. Currently, one of the most popular antipsychotic drugs used to treat schizophrenics is Johnson and Johnson’s (JNJ) Invega Sustenna. Based on its 2019 revenues so far, the drug is projected to be on pace to hit the projected sales of $3.3 billion by the fourth quarter.
In comparison, Karuna’s KarXT functions on muscarinic receptors that respond to acetylcholine, which is basically an organic chemical found in the brain. Meanwhile, JNJ’s drugs focus on dopamine and serotonin receptors. This primary difference between the two drugs puts Karuna’s drug on the lead. However, Karuna is not the first in looking into muscarinic receptors. In 2016, Allergan (AGN) paid Heptares Therapeutics $3.3 billion in an effort to license drugs similar to KarXT.
What really inspired excitement though is the tolerability of KarXT. Since the majority of antipsychotic drugs on the market today are notorious for their adverse effects, Karuna’s drug achieved a discontinuation rate of only 20% -- an impressive result considering that the placebo group had a 21% discontinuation rate. More impressively, KarXT users did not experience any of the commonly feared side effects like weight gain or drowsiness.
Aside from schizophrenia, Karuna is also looking into ways to use KarXT as a treatment option for other CNS disorders that can offer none of the debilitating side effects of current antipsychotic drugs. This could cover treatments for Alzheimer’s disease and even for pain management.
Following this exciting revelation, Karuna announced its intention to conduct a public offering of 2.6 million shares in an effort to raise additional capital. All things considered, the small biotech company has been moving at a notable pace. Just last June, this PureTech-backed company opened with a $75 million IPO -- a humongous jump from its initial price point of $42 million.
So far, the companies competing in the same space as Karuna are Novus Biologicals, Anavex, and TheraVida.
The next important step for Karuna is its meeting with the FDA in the second quarter of 2020, which is anticipated to push KarXT to Phase 3 of its clinical trial. If all goes well, this phase will be launched in the latter part of 2020.
Volatility is always to be expected particularly when investing in biotech companies. Karuna’s amazing news demonstrates why volatility can sometimes be a good thing. Although there are more trials and testing to be performed, the results of KarXT’s study should put Karuna on the hot list of biotech investors.
While this one got away, the Mad Hedge Biotechnology and Healthcare letter has a long list of letters coming promising similar potential.
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