Get ready for the biotech M&A attack

A surge of buyout activity could produce more frenzied deals.

By InvestorPlace Apr 20, 2012 12:31PM

Image: Prescription medicine expenses © Don Farrall/Photodisc/Getty ImagesBy Gene Marcial

Judging by the recent buyout frenzy in the biotech sector, Big Pharma is once again showing an appetite for deals that could bolster the bottom line.

Indications are that more takeover plays will surface this year as the major pharmaceutical companies discover there are plenty of fish to catch in the biotech industry. And the stark reality that Big Pharma badly needs new products to augment its sagging top and bottom lines only intensifies the determination to find and close great deals -- pronto!

Who are the likely buyout targets among the biotechs?

The latest unsolicited buyout attempt was for Human Genome Sciences (HGSI), whose stock incredibly soared 98% -- yes, 98% -- to $14.17 per share Thursday after U.K. pharmaceutical giant GlaxoSmithKline (GSK) announced it had offered to buy it for $2.6 billion, or $13 per share, an 81% premium to HGSI's closing price the day before.

You would think Human Genome, whose stock had been in a sharp tailspin this year for various reasons, would have jumped at the high-premium offer. It didn't. Genome rejected the bid from long-time partner GlaxoSmithKline as too low, describing it as not reflecting " the value inherent in HGS." It's presumably looking for higher price tag, so HGSI is now "in play," assuming that either GlaxoSmithKline will up the ante or somebody else will come along as a white knight. Judging by the jump in HGSI's price, many believe either one, or both scenarios, could happen.

In a similar case, Illumina (ILMNrejected a buyout offer from Roche (RHHBY) -- even after the latter raised its original offer. These are the unsuccessful (so far) takeover bids, both involving biotechs whose products could become blockbusters.

Some buyout offers that ended in happy marriages were mighty impressive deals. Late last year, Gilead Sciences (GILD) paid $11 billion for Pharmasset, whose treatment for hepatitis C -- a once-daily dosage that's orally administered -- currently is in phase 2 clinical trials. In 2011 biotech giant Amgen (AMGN) acquired two biotechs: It paid $1.6 billion for Micromet and another $1 billion for BioVex. Amgen was attracted to Micromet mainly because of its leukemia drug, which is in phase 2 clinical studies. And BioVex has developed a vaccine for the treatment of melanoma and head and neck cancer, which also is in phase 2 clinical testing.

A couple of biotechs that are expected to be among the next involved in M&A talks: Amylin Pharmaceuticals (AMLN) and a little known Los Angeles-based company, ImmunoCellular Therapeutics (IMUC).

I wrote a column about Amylin earlier this month suggesting that approval of the company's drug, Bydureon, for the treatment of type 2 diabetes, will attract suitors. Before that, I wrote another column with the headline, "Is Amylin a buyout target?" The stock at the time was trading at $14 a share. On March 28 Bloomberg reported that Amylin had rejected a $22-per-share offer from Bristol-Myers Squibb (BMY), which Amylin refused to comment on.

Then on April 4, Bloomberg followed up with a report that activist investor Carl Icahn, who owns 14.4 million Amylin shares, is pressing the company to pursue a sale. Icahn might launch a proxy fight at as management refuses to discuss the Bristol-Myers offer. It disagrees with Icahn's contention that the board is "dysfunctional and is not operating in a manner than enhances shareholder value."

Shares of Amylin currently are trading around $23 per share but had jumped earlier to a 52-week high of $25 on March 25, amid takeover rumors.

"We expect Amylin to be bought this year -- with Roche, AstraZeneca (AZN), GlaxoSmithKline and Takeda Pharmaceuticals (TKPYY) among others, lining up to buy the company," says John McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif.

So sometime soon, Amylin will have to come clean with what's going on and should face the buyout question directly.

ImmunoCellular Therapeutics, the other biotech some pros believe will become takeover bait, is focused on developing dendritic cell-based cancer vaccines, similar to Dendreon's (DNDN) FDA-approved prostate cancer vaccine. But unlike Dendreon, IMUC is pursuing a polyvent strategy that allows its products to target multiple cancer antigens at once. In addition to targeting "regular" tumor cells, IMUC is targeting cancer stem cells, a distinctive cancer-cell type that is widely believed to be the root cause of tumor growth and recurrence.

In a phase 1 clinical study in 16 patients with deadly brain cancer glioblastoma multiforme (GBM), IMUC's lead cancer vaccine candidate, ICT-107, demonstrated a three-year progression-free survival rate of 38.5%. According to IMUC, three patients have now lived four years free of disease, and one, an unheard-of five years. The sample size is small, true, but considering GBM patients have only a 6% chance of surviving three years disease-free with standard care alone, the findings shouldn't be dismissed, according to some investors.

A large phase 2 clinical trial is now under way, with completion expected this quarter and final data anticipated by next year. Carol Werther, a veteran biotech analyst at Summer Street Partners, which focuses on life sciences, considers IMUC a highly undervalued stock, and has a price target of $8 a share. The stock currently is at $2.78.

In the hunt for oncology game changers, IMUC has a chance of proving the uniqueness of its multivalent vaccine strategy. So there is little doubt that Big Pharma might soon "discover" IMUC to usher in, as Werther indicates, the paradigm shift that oncology needs.

 As of this writing, Gene Marcial did not hold a position in any of the aforementioned securities.

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