Biotech stocks make for an interesting study. They represent a high-risk industry, characterized by the well-known high overheads and long lead times to develop new products. However, they also have the potential for high rewards as new drugs open up markets with potential sales targets that sometimes reach billions of dollars. It’s not just future sales potential that fuels rewards opportunities; a successful small-cap biotech company, with a newly approved drug, will regularly attract M&A interests from bigger names in the industry.
That’s the subject of a recent statistical study of biotech mergers conducted by Needham analyst Joseph Stringer. Stringer examined mergers and acquisitions in the biotech sector from 2018 through 2Q23 and identified data points that should capture investor attention. First, M&A activity increased in the second quarter of this year and is above the historical average. In addition, of the 104 public company acquisitions that have taken place since 2018, 73% were companies that had reached at least Stage 3 of development. Within this category, 46% of acquisitions involved companies with a drug already on the market, while 6% involved companies with a drug under regulatory review. In addition, 21% of acquisitions related to companies whose main program was in Phase 3 development.
For investors, this provides a “target profile” to look for in biotech stocks. Biotech companies with an approved drug on the market or an advanced clinical program – or better yet, both – are the go-to places for investors looking to capitalize on an acquisition.
Fortunately, Stringer didn’t just analyze M&A activity; he also points out stocks that fit this profile. Using the TipRanks platform, we’ve gathered the latest details on two of his picks, which have over 60% upside potential. Let’s take a closer look at that.
Rhythm Pharmaceuticals (RYTM)
The first name that could be a strong takeover candidate is Rhythm Pharmaceutical, a biotech company working on treatments for rare genetic disorders, particularly hyperphagia and severe obesity caused by diseases of the melanocortin-4 receptor (MC4R) pathway. This is a brain pathway that regulates both hunger and weight, and is a root cause of several obesity disorders with genetic components.
Rhythm’s product line and research program are both based on the drug setmelanotide, an MC4R agonist designed to reduce hunger and obesity in pediatric and adult patients suffering from POMC, PCSK1 or LEPR deficiency or the Bardet-Biedl syndrome (BBS). The drug is the subject of several ongoing and planned Phase 2 and 3 clinical trials and is FDA-approved for the treatment of BBS. The approval, announced last June, was based on positive Phase 3 trial results and the company has since worked to both commercialize the drug, branded as Imcivree, and expand its indications through its clinical trial program.
In its 1Q23 financial and business update, Rhythm announced solid progress in the commercialization of Imcivree. The company notes that more than 175 doctors in the US have prescribed the drug since its approval, and more than 300 prescriptions have been written. More than 100 of those came in the first quarter alone. As of the end of 1Q23, the company has 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 in April in that country. This was followed by the May 8 announcement that Health Canada has also approved the drug. Health Canada approval was for Imcivree as an injection, used to treat Bardet-Biedl syndrome (BBS) or genetically confirmed biallelic pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1), or leptin receptor (LEPR). ) shortage.
Also in June of this year, Rhythm announced positive clinical results from the long-term extension of Imcivree’s Phase 2 trial in the treatment of hypothalamic obesity. The results were released at ENDO 2023, the Endocrine Society Annual Meeting & Expo in Chicago.
Due to Rhythm’s progress in commercialization, as well as its continued success in clinical trials and regulatory approvals, RYTM is emerging as a potential candidate for acquisition, according to Needham’s Stringer.
“We think the early launch metrics are solid, and the +100 TRx increase in 1Q23 was the highest quarterly increase to date. While some bears may point to relatively weak q/q revenue growth, we think it’s important to focus on the underlying launch metrics, which we believe remain solid (steady q/q TRx increases, rising insured refund rate , low stopping medication). We believe the 2023 launch will gain momentum,” said Stringer.
On the clinical side, Stringer went on to say, “Imcivree continues to show good durability of effect in the OLE… We believe that the data presented at ENDO is generally in good agreement with the previous Ph2 HO data and suggest us that Imcivree is demonstrating progressive and sustained improvement in BMI (Ph3 logging endpoint) and other key measures related to obesity.”
According to Stringer, this warrants a buy rating for the stock, and his $32 price target implies robust upside potential of 101% over a year. (To view Stringer’s track record, click here)
Overall, the 7 recent analyst ratings on record for this stock include 6 Buys against a single Hold, for a Strong Buy consensus rating. The shares are trading for $15.92 and their average price target of $37.33 suggests a 134% gain, even more optimistic than Stringer’s view, for the next 12 months. (To see RYTM stock forecast)
Phathom Pharmaceuticals (FAT)
The next acquisition candidate is Phathom, a commercial and clinical stage biopharmaceutical company working on new treatments for patients with acid-related gastrointestinal diseases. Phathom has the exclusive rights to vonoprazan, a potassium competitive acid blocker (PCAB) that has shown promise in the treatment of several gastrointestinal disorders. Phathom’s license includes development and commercialization rights in the US, Europe and Canada.
The company’s clinical program is focused on the treatment of H. pylori infection, a viral disease associated with gastric and duodenal ulcers, as well as erosive gastrointestinal reflux disease (GERD) and non-erosive GERD. Phathom is currently conducting Phase 3 clinical trials in non-erosive GERD.
The FDA approved vonoprazan, branded as Voquenza, in May last year for use in the treatment of H. pylori in adults. The drug was approved in two treatment regimens, the triple pack, containing vonoprazan, amoxicillin and clarithromycin, and the double pack, containing only vonopra
zan and amoxicillin. The two approved modes were supposed to launch commercially in the US in the third quarter of 2022, but an FDA CRL requesting additional stability data delayed that.
However, in June of this year, the FDA accepted the company’s resubmission of the New Drug Application (NDA), and the PDUFA date is set for November of this year. Assuming a positive regulatory outcome, the company is now aiming to launch the drug in Q4 2023, targeting both the erosive GERD and H. pylori indications.
Checking back in with Stringer, we note that the analyst is optimistic about Pathom, writing: “With the positive regulatory update at the end of May 2023 and the announcement of acceptance of the NDA resubmission, we are confident that the stability data will continue to track closely, and think the 6-month data outlook is very favorable. We have a high degree of conviction in vonoprazan EE FDA approval by the November 2023 PDUFA date… We believe vonoprazan has the potential to be a best-in-class acid blocker and peak sales of ~$675 million in erosive esophagitis.
Stringer then rates PHAT as a Buy, with a price target of $23, indicating room for a 64% increase over the course of the next year. (Click here to view Stringer’s track record)
Overall, Pathom gets a Strong Buy consensus score based on 4 recent Buys and 1 Hold from Wall Street analysts. The shares are priced at $14.56 and the $19.67 average price target suggests they will gain ~40% over the one-year horizon. (To see PHAT stock forecast)
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disclaimer: The opinions expressed in this article are solely those of the named analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.