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2 Top Biotech Buyout Candidates

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After a strong resurgence in the back half of 2023 and continued momentum into the first quarter of 2024, biotech stocks are back in vogue. “Hawkish” Federal Reserve Policy, a brutal bear market in 2022, and investor preference for big tech stocks have meant underperformance for biotech stocks. However, over the past six months, the SPDR S&P Biotech ETF ((XBI - Free Report) ), the best proxy for the industry, rose 30%, regained the critical 200-day moving average, and has garnered renewed investor attention.

ETFs like XBI and the iShares Biotech ETF ((IBB - Free Report) ) are the best instruments for risk-averse investors to take advantage of renewed interest in the sector while avoiding risky binary events like FDA decisions. Nevertheless, some investors who are more adventurous, have a high-risk tolerance, and are home run hitters, may opt for individual stocks instead. Investors in this group may want to hone in on stocks that have the potential to be bought out. Below are three top buyout candidates:

Viking Therapeutics ((VKTX - Free Report) )

In February, Viking flashed onto most investor radars when it announced positive top-line results from its Phase 2 clinical trial of VK2735, an injectable drug to fight obesity. In a 13-week trial, the placebo-adjusted mean weight loss reached an impressive 14.7%, sparking a single-day rally of 127% in VKTX shares. The news immediately meant that VKTX joined the juggernauts in the space, biotech behemoths Novo Nordisk ((NVO - Free Report) ) and Eli Lilly ((LLY - Free Report) ).

VKTX has Arguably the Best Oral Drug

Earlier this week, VKTX maintained the positive news momentum. Shares again spiked after Phase 1 results for VKTX’s oral obesity drug were released. Like the injectable drug, the efficacy was impressive (rivaling NVO & LLY’s offerings), and more importantly, was safe (VKTX plans to up the dosage in future trials).

Obesity TAM, Market Cap, & Size of Competitors

According to Goldman Sachs (GS) Research, “Earlier this year, the global market for anti-obesity medications (AOMs) reached $6 billion on an annualized basis. By 2030, it could grow by more than 16 times to $100 billion.”

Because the total addressable market (TAM) for obesity is so vast, companies will seek to consolidate as much of the market as possible. LLY and NVO each have massive market caps north of $500 billion. With a market cap of just $9 billion, VKTX makes a perfect buyout candidate and would allow LLY or NVO to capture a more significant segment of this massive market. In addition, VKTX would be able to ramp up production much faster with the proper resources behind it. Remember Yahoo! was once larger than Alphabet (GOOGL), and Blockbuster was once larger than Netflix (NFLX). LLY and NVO may want to avoid a similar fate in the obesity space.

Madrigal Pharmaceuticals ((MDGL - Free Report) )

Liver disease is an area of the biotech market that many well-known biotech companies have tried to enter but have not succeeded. Earlier this month, the Food and Drug Administration approved Rezdiffra, the pioneering treatment for a widespread and nasty liver disease that adversely affects millions.

Smart Money is Buying

Baker Bros. Advisors is a New York-based hedge fund founded by two brothers, Julian and Felix. The hedge fund is unusual in that it has two doctors as hedge fund managers. This innate industry knowledge has transformed the fund into one of the top-performing biotech funds on Wall Street, as its assets under management (AUM) have swelled to ~$9 billion.

In other words, when the Baker Bros. buy a stock, it’s worth keeping on your watchlist. MDGL is the fund’s second-largest position as of the last 13F disclosure. Earlier this week, the fund layered on another $275 million. The uniqueness of MDGL’s drug coupled with smart money buying makes the stock a prime buyout candidate.

Bottom Line

The resurgence of biotech stocks in recent months marks a promising trend for investors, fueled by a favorable market conditions. VKTX and MDGL have innovative drug pipelines and offer investors the potential to cash in on lucrative buyout opportunities.

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