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An Attractive M&A Play In The Busy Biotech Space

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For much of the early part of this year biotechnology stocks have been hot and high-flying but, predictably, the upward speed has decelerated in recent weeks for a variety of reasons. But investors shouldn’t make the mistake of turning away from the admittedly volatile sector.The fundamental underpinnings of the industry remains positive and in spite of the biotech’s fast and frenzied gains, many if not most of the stocks are far from overvalued.

 “The vast majority of biotech companies are very healthy in every aspect – sales/earnings, clinical trials, R&D programs, and cash positions,” says John McCamant, a close watcher of the biotech space and editor of the Medical Technology Stock Letter.

 The FDA is still “extremely accommodative,” he notes, and multiple catalysts occur daily which add to the sector’s volatility. But one important factor that has been powering up the biotechs is “M&A, which is very much alive,” McCamant points out.

 Specifically, he notes the “numerous breakthroughs” occurring to treat various potentially fatal conditions, increasing survival and quality of life, have continued at a historic pace.

So McCamant strongly advises investors to “take advantage when fear is being reflected in stock prices.” Pullbacks are especially precious opportunities in the biotech space.

In the mergers and acquisition scene, Teva Pharmaceutical Industries (TEVA) has been busy, offering in April to buy Mylan (MYL) for $40.1 billion, which has rejected the bid. In 2014, Teva acquired for $3.5 billion Auspex, whose products include one that’s currently in clinical trials targeting Huntington’s disease.

Among less known biotechs, OPKO Health (OPK), a biopharmaceutical company focused on the discovery and development of therapeutics primarily for oncology, acquired on May 5 privately held EirGen Phama, which designs and produces highly potent chemical actives used in oncology products.

But a name that’s been bandied about as an appropriate acquisition for at least a couple of Big Pharma companies is Incyte (INCY), whose stock has been extra-hot partly because of its promising pipeline of new drugs-in-the-making – but also because it’s profile fits and blends so much with several likely acquirors.

A biopharmaceutical company focused on discovering and producing proprietary therapeutics primarily for oncology, one of its products is an oral “janus associated kinase (JAk),” called JAKAFI, for the treatment of high-risk myelofibrosis.

And its new products pipeline includes “ruxolitnib,” currently in phase 3 clinical trial for pancreatic cancer, as well as another drug in phase 2 tests for the treatment of breast cancer, non-small cell lung cancer, and colorectal cancer. Also in the pipeline is another product in phase 1/2 clinical tests for the treatment of solid tumors. And a drug in phase 2 trials is for the treatment of metastatic melanoma. Other drugs in clinical trials include those targeting B-lymphoid malignancies and hermatology/oncology.

McCamant says he believes Incyte (INCY), with all its products with potential high value, is a “possible takeover target.” The company is a strategic acquisition, he argues, that could “propel a cancer laggard, such as Eli Lilly (LLY) or Pfizer (PFE), to the top of the class.”

He points out that the four top major drug makers have already signed non-disclosure agreements with Incyte. McCamant says that “for all intents and purposes, Incyte will own all the data from the Big Four who will end up in a bidding war” for Incyte.

If Pfizer ends up buying Incyte, “it could stick it to AztraZeneca (AZN), who rejected its offer last year, by either charging a huge price to partner with or to partner with the competition,” theorizes McCamant.

Incyte’s wide array of products, from JAKAFI in solid tumors to recently announced new drug candidates that target different cancer pathways would be a boon to any of the Big Four drug makers, argues McCamant.

Incyte’s pipeline alone, he says, would be “transformative for any Big Pharma/Big Biotech.” For those and other reasons, McCamant believes Incyte is “the most attractive cancer company in our universe.”

No wonder Incyte has become a wonder stock, rocketing from a 52-week low of $43.86 a share, to a high of $111.93. The stock closed at $104 on May 13, 2015.

So McCamant has raised his 12-month price target from $100 to $120 a share. Watching the current turbulent and fenzied  scene on Wall Street these days, M&A activity will only flourish and gain more momentum. So investors take advantage when fear grips your favored takeover stock.