Does This 50% Price Target Hike For Array BioPharma Inc. Make Sense?

By Markets Fool.com

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What: Shares of Array BioPharma , a biopharmaceutical company focused on developing novel small molecule cancer drugs, surged just shy of 10% on Monday following a hefty price target hike from brokerage firm Stifel Nicolaus.

So what: Stifel kept its buy rating on Array BioPharma, but following a better than 40% run higher on Friday upped its target price on the stock by 50%, from $6 to $9.

The impetus for the move was Array's announcement on Friday of an agreement under which it will acquire fromNovartisthe global rights to encorafenib, a BRAF-inhibiting melanoma drug, for a "de minimis payment" and no milestone or royalty payments. Array, in turn, agreed to seek out a global development partner to help with commercialization of the product if approved. Novartis will cover the bulk of the remaining phase 3 trials involving encorafenib.

Now what: Does this upgrade by Stifel make senses? I think so, and not just for the obvious reason that Array's share price had catapulted the company's prior price target and made it look somewhat foolish.

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Source: Array BioPharma.

I believe the business dynamics have completely changed here with Array acquiring an advanced melanoma product for likely pennies on the dollar. In addition, acquiring encorafenib could enable Array to explore the effects of a BRAF/MEK inhibitor by combining it with binimetinib. Really, this cheap acquisition opens anumber of possibilities.

A few notes of caution, though. First, encorafenib is being studied in 11 clinical trials, the results of which probably will not be known until mid-to-late 2016 at the earliest. In other words, even though Array scooped up a late-stage melanoma drug on the cheap, it is unlikely to see real revenue until 2017 or 2018.

Additionally, the market for melanoma treatments is getting awfully crowded. From first-line to last-line therapies, patients now have a myriad of treatments choose from. That is great news for patients, but not so much for the bottom lines of melanoma drug developers.

Don't get me wrong, Stifel's price upgrade ultimately makes sense. But investors should understand that Array still has some very big shoes to grow into.

The article Does This 50% Price Target Hike For Array BioPharma Inc. Make Sense? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.