Could These Be the Next 2 Biotech Buyouts?

It's been a year of ups and downs for larger biotech stocks, but the industry's smaller players have seen a lot of damage. The Wells Fargo Biotechnology Small Cap ETF has fallen around 17% in 2018, while the Nasdaq Biotechnology index is right back where it began the year.

Now that smaller biotechs have tumbled to more reasonable prices, industry heavyweights could begin another feeding frenzy. Here's why these two biotechs could be gobbled up next.

Company (Symbol) Year-to-Date Stock Performance Market Cap Key Asset
Agios Pharmaceuticals, Inc. (NASDAQ: AGIO) (5%) $3.1 billion Tibsovo
Clovis Oncology, Inc. (NASDAQ: CLVS) (71%) $1.1 billion Rubraca

Agios Pharmaceuticals, Inc.: Two times a winner

Agios is a midsize cancer drug developer that's already earned Food and Drug Administration (FDA) approvals for two new and novel cancer therapies, and the company still owns one of them outright. In August 2017, the FDA approved Idhifa tablets for the treatment of advanced stage acute myeloid leukemia (AML) patients who also test positive for an IDH2 mutation. Idhifa arose from a long-running collaboration with Celgene (NASDAQ: CELG), which also provided Agios with its current CEO. The oncology heavyweight's former chief operating officer began steering the ship at Agios in September.

Agios was ready for a shift in leadership because this summer, the company launched a wholly-owned treatment similar to Idhifa called Tibsovo. Now that Tibsovo is available for advanced-stage AML patients who test positive for the IDH1 mutation, it might make sense for Celgene to bring both therapies in-house instead of paying Agios a tiered royalty percentage on sales of Idhifa that tops out in the mid-teens.

Agios Pharmaceuticals stock has fallen 46% since reaching a peak in June, and now that its enterprise value has fallen to a relatively modest $2.5 billion, we could see an offer from a company other than Celgene. Agios began two pivotal studies this year with AG-348, a hemoglobin booster for patients with pyruvate kinase deficiency. Results from moderately affected patients who don't rely on regular transfusions are expected in 2020, and a second pivotal study with transfusion-dependent patients should wrap up in 2021.

If approved for both indications, annual AG-348 sales could peak above $800 million, plus peak sales for Idhifa and Tibsovo could both top out above $1 billion if they successfully expand from the relapsed population to newly diagnosed AML patients. At recent prices, an Agios acquisition could be a wisely calculated risk for Celgene or many of its peers.

Clovis Oncology, Inc.: We have one too

GlaxoSmithKline (NYSE: GSK) recently agreed to pay a huge premium to acquire Tesaro in order to get its hands on a PARP-inhibitor called Zejula. Clovis Oncology also has a PARP-inhibitor called Rubraca that's approved for the maintenance treatment of ovarian cancer patients who are responding to initial chemotherapy.

Unlike Zejula, Rubraca tablets also are approved to treat ovarian cancer patients with BRCA mutations that have relapsed after two lines of chemotherapy. PARP-inhibitors work well for people with BRCA mutations, and this genetically defined group also includes a lot of prostate cancer patients in advanced stages. An initial peek into the ongoing Triton2 study showed a surprising 44% response rate among the first 25 evaluable patients. Also, a majority of participants who have taken multiple PSA tests have seen their scores drop by at least half.

Rubraca launched ahead of Zejula in 2016, but sales reached just $65 million during the first nine months of 2018. An expansion to treat prostate cancer, though, could make this drug a blockbuster in the hands of a company with a larger, more experienced sales force.

Bristol-Myers Squibb (NYSE: BMY) is sponsoring a pivotal study with its star immunotherapy Opdivo in combination with Rubraca as a treatment for a difficult-to-treat group of breast cancer patients. A successful trial result could convince Bristol to help promote Rubraca, but investors shouldn't hold their breath waiting for a buyout offer. Clovis originally licensed Rubraca from Pfizer, and the big pharma remains entitled to a tiered royalty percentage of net sales that tops out in the mid-teens.

Glaxo didn't seem to mind cutting a similar deal with Tesaro, but angry investors have already clipped $8.8 billion from the big pharma's market cap since it announced the $5.1 billion acquisition. That sort of punishment won't go unnoticed by the rest of the industry.

Avoid the crowds

Any company that acquires Clovis will have to pay Pfizer royalties and probably end up competing with Pfizer's recently launched PARP-inhibitor Talzenna. An acquirer also would need to compete with AstraZeneca and Merck, which have invested a great deal of resources into advancing Lynparza, the first PARP-inhibitor to earn approval.

There have been a surprising number of new treatments approved for AML recently, but Agios' first-in-class IDH inhibitors are the only ones likely to reach pharmacy shelves for years to come. Altogether, Agios looks like a much safer bet than Clovis and perhaps a stock worth buying right now whether you expect a buyout offer in the near term or not.

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Cory Renauer owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.