These 2 Biotech Stocks Are Most Likely to Be Acquired, Says Needham — and They Have Over 60% Upside Potential
Biotech stocks make for an interesting study. They represent a high-risk sector, characterized by high overheads and a long lead time to develop new products. However, they also have the potential for high rewards when new drugs open up markets with potential sales goals sometimes running into billions of dollars. It’s not just future sales potential that fuels bonus prospects; A successful small-cap biotechnology company, with a newly approved drug, will attract frequent M&A interest from the big names in the sector.
This is the subject of a recent statistical study of biotechnology integration conducted by analyst Joseph Stringer at Needham. Stringer examined M&A activity in the biotech sector from 2018 to 2Q23 and revealed data points that should catch investors’ attention. First, M&A activity increased in the second quarter of this year and is above the historical average. Moreover, of the 104 public company acquisitions that have occurred since 2018, 73% involved companies that have reached at least the third stage of development. Within this category, 46% of acquisitions involved companies with a property already on the market, while 6% involved companies with a property under regulatory review. In addition, 21% of the acquisitions were related to companies whose main program was in the third stage of development.
For investors, this presents the “target profile” to look for in biotech stocks. A biotech that has an approved drug on the market or a late-stage clinical program — or better yet, both — is the sweet spot for an investor looking to capitalize on an acquisition.
Fortunately, Stringer didn’t just analyze M&A activity; He’s also been pointing out stocks that fit that profile. using TipRanks platformWe’ve rounded up the latest details on two of his picks, which are up to 60% more likely. Let’s take a closer look.
Cadence Pharmaceuticals (Rhythm)
The first name that could be a strong candidate for an acquisition is Rhythm Pharmaceutical, a biotechnology company working on treatments for rare genetic conditions, particularly hyperphagia and severe obesity caused by diseases of the melanocortin 4 receptor (MC4R) pathway. This is a brain pathway that regulates hunger and weight, and is a root cause of many obesity cases with genetic components.
Both Rhythm’s product line and research program are based on the drug setmelanotide, an MC4R agonist designed to reduce hunger and obesity in pediatric and adult patients with POMC, PCSK1 or LEPR deficiency, or Bardet-Biedl syndrome (BBS). The drug is undergoing several ongoing and planned Phase II and III clinical trials, and has been approved by the US Food and Drug Administration for the treatment of BBS. The approval, which was announced in June last year, was based on the results of a positive Phase 3 study, and the company has been working since to boost commercialization of the drug, which is branded as Imcivree, and to expand its indications through a clinical trial program.
In its Q1 ’23 financial and business update, Rhythm reported strong progress in the commercialization of Imcivree. The company notes that more than 175 physicians in the United States have prescribed the drug since its approval, and that there are more than 300 prescriptions written. More than 100 of those came in the first quarter alone. As of the end of Q1 2013, the company had received payer approval for more than 160 written prescriptions.
Since the release of its Q1 report, Rhythm has announced that Imcivree has been approved for use in Germany for the treatment of BBS and was launched commercially in that country in April. This was followed by the May 8 announcement that Health Canada had also approved the drug. Health Canada’s approval of Imcivree was as an injection, to be used to treat Bardet-Biedl syndrome (BBS) or biallelic genetically confirmed pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1), or leptin receptor (LEPR) deficiency.
Also in June of this year, Cadence announced positive clinical results from the long-term extension of a phase II study of Imcivree in the treatment of hypothalamic obesity. The results were published at ENDO 2023, the Endocrine Society’s annual meeting and exhibition, held in Chicago.
Given Rhythm’s progress to commercialization, as well as its continued success in clinical trials and regulatory approvals, RYTM is emerging as a potential acquisition candidate, according to Needham’s Stringer.
“We believe early launch metrics are strong, and the +100 TRx addition in 1Q23 was our highest quarterly addition to date. While some bears may point to relatively soft sales growth on a quarterly basis, we think it’s important to focus on the underlying launch metrics. , which we believe remains strong (steady q/q TRx adds, higher guaranteed reimbursement rate, lower drug discontinuations). We believe the launch will gain momentum in 2023,” Stringer said.
Turning to the clinical side, Stringer continued, “Imcivree continues to show good robustness to effect in OLE…we believe that the data presented in ENDO tracks well overall with previous Ph2 HO data and suggests to us that Imcivree displays a gradual and sustained improvement in BMI.” (Ph3 scoring end point) and other important obesity-related measures.”
In Stringer’s view, this warrants a Buy rating on the stock, and its $32 price target suggests a strong one-year upside potential of 101%. (To watch Stringer’s log, click here)
Overall, the last 7 analyst reviews on file for this stock include 6 Buys to 1 Hold, for a Strong Buy consensus rating. Shares are trading for $15.92, average price target of $37.33 implying a gain of 134%, more bullish than Stringer’s position, over the next 12 months. (be seen RYTM stock forecast)
Pharthom Pharmaceuticals (Fat)
The next acquisition candidate is Phathom, a commercial and clinical biopharmaceutical company working on new therapies for patients with acid-related digestive conditions. Phathom holds the exclusive rights to vonoprazan, a potassium acid competitive blocker (PCAB) that has shown promising results in the treatment of several gastrointestinal disorders. Phathom’s license includes development and marketing rights in the United States, Europe, and Canada.
The company’s clinical program focuses on treating Germ stomach infection, a viral disease associated with ulcers of the stomach and intestines, as well as erosive gastro-intestinal reflux disease (GERD) and non-erosive gastroesophageal reflux disease. Phathom is currently conducting Phase III clinical studies in non-erosive GERD.
The US Food and Drug Administration (FDA) granted approval for vonoprazan, called Voquenza, in May last year, for use in treating Germ stomach in adults. The drug is approved in two treatment regimens, the triple package, which includes vonoprazan, amoxicillin, and clarithromycin, and the dual package, which includes only vonoprazan and amoxicillin. The two modes approved for commercial release in the US were planned for the third quarter of 2022, but the FDA’s CRL, which is requesting additional stability data, delayed that.
However, in June this year, the Food and Drug Administration accepted the company’s re-submission of the New Drug Application (NDA), and the PDUFA date was set for November this year. Assuming a positive regulatory outcome, the company now aims to launch the drug in the fourth quarter of 2023, targeting both gastroesophageal reflux and H. pylori indications.
Checking back with Stringer, we find the analyst to be bullish on Phathom, writing, “With the positive regulatory update in late May 2023 and the NDA Resubmission Acceptance Announcement, we have confidence that the stability data will continue to track well, and we believe the 6-Expec data The month is very favorable. We have a high level of conviction with vonoprazan EE FDA approval by November 2023 PDUFA… We believe vonoprazan has the potential to be a best-in-class acid blocker and generate peak sales of up to $675 million in erosive esophagitis.”
Stringer continues to rate PHAT as Buy, with a $23 price target suggesting room for a 64% upside over the next year. (To watch Stringer’s log, click here)
Overall, Phathom has a Strong Buy consensus rating based on 4 Recent Buys and 1 Hold from Wall Street analysts. Shares are priced at $14.56, and the average price target of $19.67 indicates that it will gain about 40% in one year’s horizon. (be seen PHAT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
