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Biotech stocks rally as investors bet on the next big tie-up

Pharmaceuticals M&A
Gideon Mendel | Getty Images

Whether consolidation begets consolidation in the drug industry is often debated. What's not debatable, though, is that consolidation begets speculation about more consolidation.

That's driving up shares of several biotech companies Monday, after drug giant Pfizer announced its $14 billion deal for cancer drug developer Medivation. The deal price, of $81.50 per Medivation share in cash, is a 21 percent premium to where Medivation shares closed Friday, and is significantly higher than the $52.50 a share put on the table earlier this year by French competitor Sanofi.

"The process, like most capital markets, was efficient and competitive," Pfizer Chief Executive Officer Ian Read told analysts on a conference call Monday, in response to a question about other bidders for Medivation. In addition to Sanofi, Gilead, Celgene and Merck were all reported to be interested.

As the winner, Pfizer gets Medivation's approved prostate cancer drug, Xtandi, which draws more than $2 billion in annual sales — though proceeds are split with partner Astellas. Medivation also has two experimental cancer drugs in development, talazoparib and pidilizumab, the first in advanced trials for breast cancer, and the second in the hot area of immuno-oncology.

The IBB, the exchange-traded fund that tracks the Nasdaq Biotechnology Index, rose more than 2 percent Monday morning, on pace for its best performance in almost a month. After Medivation, which was trading up about 20 percent, it was led by Regeneron, Incyte, Celgene and BioMarin — themselves all potentially targets of takeover speculation, whether or not they are actually targets for takeovers. (Celgene is also, and more frequently, cited as a potential buyer.)

"It would make sense that the Medivation price tag would boost Incyte (another mid-cap oncology company)," Cowen analyst Eric Schmidt wrote in an email Monday. Incyte's market value is about $15 billion, making it bigger than Medivation but similar in its focus on cancer drugs. "The others ... are very different beasts, so there shouldn't be any read-through."

Yet speculation abounded, particularly around BioMarin, which makes drugs for rare diseases.

"We know that Sanofi had been aggressively pursuing Medivation and whilst some may be relieved to see it not pay for this particular deal, investors will now begin to look for alternative targets for them," Jefferies analyst Jeffrey Holford wrote in a note to clients Monday morning. "Many investors that speak to us believe that this could include BioMarin."

Sanofi said it doesn't comment on market rumors. In a statement about its Medivation bid, the French drugmaker said, "While we recognized the potential strategic benefits of a combination with Medivation, we are first and foremost a disciplined acquirer and remain committed to acting in the best interests of Sanofi shareholders."

BioMarin declined to comment.

Brian Abrahams, also of Jefferies, told clients Pfizer's acquisition may have implications for biotech giant Biogen, which he says was speculated to be another potential target for Pfizer.

"The Medivation acquisition likely takes them out of the running," Abrahams wrote. "However, this may theoretically move Pfizer competitors, such as Sanofi, who had been seeking to buy Medivation, into play. With Sanofi's strong cash position and interest in the multiple sclerosis space, there could be synergies between the two companies, though it is unknown whether Sanofi would be interested in pursuing something as large as Biogen and they have only indicated going up to around 20 billion euros in size."

Biogen, which sells drugs for multiple sclerosis and has an experimental drug for Alzheimer's in the late stages of clinical development, has a market value of about $70 billion (about 61.8 billion euros).

Gilead, AstraZeneca and Celgene are other likely buyers of biotechs, Abrahams said, while targets include Vertex and Incyte, "based on their approved products and pipeline growth opportunities in cystic fibrosis and oncology, respectively, and digestible sizes."

Rounding out Abraham's list of potential targets is Alder Biopharmaceuticals, a smaller biotech firm working on a medicine for migraines.

Finally, two other cancer drug developers saw a boost Monday morning: Tesaro and Clovis. Both are developing medicines in the same class as Medivation's talazoparib. Called PARP inhibitors, they interfere with cells' ability to repair DNA. The entire class got a boost when Tesaro reported positive data from a clinical trial at the end of June.

And in an interesting twist, Clovis' PARP inhibitor was licensed five years ago ... from Pfizer, which has now re-entered the class with its acquisition of Medivation. And to round out the dance, Medivation acquired its PARP inhibitor from BioMarin, now speculated to be the target of Sanofi, which started the Medivation bidding in the first place.

Jefferies' Abrahams suggests "we may be heading into deal-making season" for biotechs. Investors in the space, which has vastly underperformed the broader market for the last year, certainly hope that's the case.