The year so far has proved to be M&A rich as far as the drug/biotech sector is concerned. There were two mega-merger announcements, Bristol-Myers Squibb-Celgene and AbbVie-Allergan, after relatively dried-up M&A activity in 2018. Smaller biotech research firms investigating new therapies and interesting pipeline candidates garnered attention of bigger players this year. Given that it takes several years and millions of dollars to develop new therapeutics from scratch, large pharmaceutical companies, sitting on huge piles of cash, prefer to buy innovative small/mid cap biotech companies to build out their pipelines. Fast growing and lucrative markets such as oncology and gene therapy have mainly been the focus areas for M&A activities.
Some of these buyouts came at significantly high premiums. Continuing the trend, on Monday, two of the biggest drug giants, Merck (MRK - Free Report) and Sanofi (SNY - Free Report) offered hefty premiums to buy small cancer drugmakers to strengthen their oncology pipelines.
On the one hand, Sanofi announced a definitive deal to buy California-based small cancer biotech, Synthorx for $68 per share in cash, representing an aggregate equity value of approximately $2.5 billion. The offer price of $68 per share represents a premium of almost 172% to Synthorx’s Friday’s closing price of $25.03.
Merck, on the other hand, has offered to pay $20 per share in cash for an approximate total equity value of $2.7 billion to buy Massachusetts-based ArQule, Inc. . The offer price of $20 represents a premium of almost 107% to ArQule’s closing price of $9.66 per share on Friday.
The acquisitions, if successfully closed, will add promising cancer treatments to Sanofi and Merck’s respective portfolios.
Sanofi’s deal will add Synthorx’s lead pipeline asset, THOR-707 to its immuno-oncology (“IO”) portfolio. THOR-707 is being evaluated across multiple solid tumor types alone and in combination with immune checkpoint inhibitors. Once acquired, it can be evaluated in combination with Sanofi’s present oncology medicines as well as immuno-modulatory agents in pipeline. Meanwhile, the acquisition will also boost Sanofi’s pipeline with Synthorx’s pre-clinical candidates for oncology and autoimmune disorders.
Meanwhile, the acquisition of ArQule will strengthen Merck’s oncology pipeline with the addition of some strategic assets including, ARQ 531, its novel, oral Bruton’s tyrosine kinase (BTK) inhibitor. ARQ 531 is currently being evaluated in a phase II dose expansion study for the treatment of B-cell malignancies. In early-stage studies, ARQ 531 has demonstrated early signs of anti-tumor activity for the treatment of patients with relapsed or refractory chronic lymphocytic leukemia (CLL) and Richter’s Transformation. It has also shown a manageable safety profile.
While shares of ArQule were up almost 104% on Monday, Synthorx shot up almost 171%. Shares of Merck and Sanofi have risen a respective 16.1% and 4.3% this year so far compared with the industry's increase of 7.2%.
Both the transactions are expected to be closed in the first quarter of next year.
The hefty premiums paid by Merck/Sanofi clearly highlight the need of these biggies to beef up their pipelines to fight competition and sloppy sales of mature drugs due to pricing pressure and generic/biosimilar competition. Smaller acquisitions like these reduce the reliance of Merck and Sanofi on their main top-line drivers and blockbuster medicines, PD-L1 inhibitor Keytruda for Merck and eczema treatment, Dupixent for Sanofi.
While Merck currently carries a Zacks Rank #2 (Buy), Sanofi has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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