Top Biotech Acquisition Candidates

Karen Andersen: I'm Karen Andersen, senior biotech analyst at Morningstar. With me today to discuss the M&A environment is biotech analyst Lauren Migliore. Thanks for joining me, Lauren.

Lauren Migliore: Good to be here, Karen.

Andersen: So, just to recap 2011, it was a relatively light year for biotech M&A.

Migliore: It was.

Andersen: We really only saw one biotech in our coverage acquired, and it was actually not the typical big pharma biotech deal that we've seen. Generics leader Teva has spent just over $6 billion to acquire Cephalon, which really helped to round out its specialty pharma and branded business.

Migliore: But it does look like things are starting to pick up in 2012.

Andersen: They are starting to pick up, and particularly in hepatitis C. We've seen a couple of big deals close just recently. In January Gilead closed an $11 billion acquisition for Pharmasset. And then in February Bristol's $2.5 billion deal for Inhibitex closed.

I think there are a couple of other firms that maybe could be targets, Idenix and Achillion. Both of these firms are outside our coverage, but I think they are within the hep C space, they still look interesting.

Just outside of hep C, we're still seeing some of the same trends we've seen in past years. So far in 2012, Celgene and Biogen Idec have made small acquisitions in cancer and in orphan drug niches, and we really think that those are going to remain interesting areas going forward for big pharma acquirers.

And just to set some context for our listeners, Morningstar annually does do a biotech takeout list. How are these trends kind of playing out in our list for this year?

Migliore: Well, actually Morningstar's annual biotech takeout list does include two cancer-focused drugmakers, as well as two orphan disease drug makers in our top five.

If data for its lead pipeline drug are positive in the first half of this year, we think Swiss biotech Actelion represents the most attractive target, given this orphan disease focus, a broad pipeline, and the fact that it's in Europe, which would allow a potential acquirer to deploy some overseas cash.

Outside of Actelion, in our top five we have Biomarin, whose focus on rare diseases allow it to charge very high prices for its products.

Human Genome Sciences, which launched the first lupus drug in over five decades last year and may be easier to swallow now that its valuation has come down compared to historical levels.

And then finally, Onyx and Seattle Genetics round out our top five due to their focus on the high growth area of oncology.

Andersen: All right. And what about from a valuation perspective--do any of these firms look cheap right now?

Migliore: Actually, three of the top 10 targets for 2012 carry our 4-star rating. So, we've already talked about Actelion, and then we also have Vertex, which is in the process of launching its top-selling drug Incivek, and then we have cancer-focused biotech Exelixis, which would also make an attractive target, and we think is also undervalued on its own.

So, we think that these firms could see share appreciation regardless of whether they are targeted by an acquirer.

Andersen: OK, great. Thanks, Lauren.

Migliore: Thanks, Karen.

Andersen: So for our full biotech takeout list for 2012, as well as our M&A outlook for other industries within health care, please visit healthcare.morningstar.com and download the latest issue of the Healthcare Observer.