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Daily Intelligence Briefing

Thursday, December 1, 2022

Identifying Change-Driven Investment Themes


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

Another Blockbuster Biopharma Acquisition on Deck,
May Set the Stage for Breakout M&A Activity in 2023

Summary: Three pharma giants are in the running to purchase Horizon Therapeutics in what will likely be a larger deal than any other thus far in 2022 – potentially worth $20 billion or more. M&A activity has continued to gain momentum in the biopharma space throughout the year and is set to maintain that trajectory into next year. As 2024 inches closer, so too does a spate of patent cliffs that will threaten hundreds of billions of dollars in revenue across major pharmaceutical producers throughout the mid to late 2020s. Bolstering their pipelines with new products to retain revenue growth remains a high priority and many have plenty of cash on hand to make it happen.

Related ETF: VanEck Pharmaceutical ETF (PPH)

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Per Fierce Pharma, rare disease drug maker Horizon Therapeutics said it has drawn buyout interest from three pharma giants: Amgen, Johnson & Johnson’s Janssen, and Sanofi. Horizon has confirmed it’s in “highly preliminary” discussions with all three. Horizon is headquartered in Ireland, where securities laws will require the potential acquirers to announce whether they intend to make an offer by January 10.

Horizon was trading at around $79 per share prior to the announcement, touting a market cap of nearly $18 billion as of market close. Shares have now shot up to over $100 – equivalent to more than $22.7 billion – which should be nearer to the ultimate acquisition price if we imply a large premium above the price when negotiations began. An acquisition anywhere near that size would be the largest this year, by far, surpassing Pfizer’s purchase of migraine specialist Biohaven Pharmaceutical in an $11.6 billion deal in May.

At that time, MRP noted the Pfizer deal may have been “the first signal of a turnaround in M&A activity” in the biopharma space. Heading into the end of 2022, that assessment seems to have been correct.

In August, Amgen announced plans to acquire ChemoCentryx for $3.7 billion in a deal meant to deepen its pool of medicines targeting inflammation and the kidneys. In October, Eli Lilly and Co announced it would acquire genetic medicine developer Akouos Inc for about $487 million in cash, aiming to bolster its portfolio of gene therapies, and inking the deal at $12.50 per share, a significant premium that was nearly 4x the $3.30 Akouos was trading for at the start of September. Gene editing firm Vertex Pharmaceuticals has also signed a definitive agreement for the acquisition of biotechnology company ViaCyte in a deal totaling $320 million in cash. MRP recently highlighted Vertex’s ongoing work with CRISPR therapeutics to treat fatal blood disorders via gene editing as part of a as part of a $900 million agreement.

Those are just a few examples of a broader trend. From the start of January through mid-October, there have been 32 biopharma M&A deals worth $50 million or more, reflecting a total value of $39 billion, according to data compiled by BioPharma Dive. The same period in 2021 saw 25 deals with a cumulative worth of $42 billion. Though the combined value of deals has been lower, in spite of greater volume, that can likely be chalked up to the fact that the vast majority of firms in the biopharma space were valued at significantly higher prices throughout most of 2021 when compared to 2022. Ultimately, smaller valuations are working in the acquiring companies’ favor.

Pfizer followed up its aforementioned Biohaven acquisition by expending another $5.4 billion in cash for sickle cell disease drugmaker Global Blood Therapeutics (GBT). Per Reuters, Pfizer will add sickle cell disease treatment Oxbryta, which was approved in 2019 and is expected to top $260 million in sales this year, to its portfolio. It will also pick up two pipeline assets – GBT601 and inclacumab – targeting the same disease. If all of those products are approved, Pfizer believes GBT’s drugs could eventually generate more than $3 billion in sales annually.

Advanced talks between Merck and Seagen, with the former attempting to acquire the latter, for a deal that could have been almost double the size of a potential Horizen deal at $37 billion – $40 billion were reported earlier this year by the Wall Street Journal. In fact, that would have been the largest acquisition since AstraZeneca bought Alexion Pharmaceuticals for $39 billion in 2020. However, the most recent reporting on the Merck-Seagen deal notes talks stalled back in late August.

That did not stop Merck from pursuing a smaller deal though, paying $36 per share in cash for Imago this month, therefore acquiring several therapies for bone marrow conditions at a total value of about $1.4 billion. The estimated revenue potential of the Imago deal is probably not enough to fill the loss of exclusivity gap that will be left by Keytruda when key patents for the drug held by Merck expire in 2028, BMO Capital Markets analyst Evan Seigerman told Reuters.

A wave of patent cliffs – the point at which a firm’s revenues could “fall off a cliff” when one or more established products go off-patent – have become a rising threat to many big pharma companies as we enter the mid to late 2020s. A recent PwC report notes that the biopharma industry is looking for assets that can start to provide value from 2024 as patent cliffs have put about $180 billion in revenue for the largest companies at risk in the 2023 through 2028 time frame.


MRP added LONG Pharmaceuticals to our list of themes on June 16, 2022 amid huge cash balances among pharma firms and rapidly declining biotech valuations opening up opportunity for the former to bolster pipelines with a trove of new drugs at a major discount.

Throughout the past few months, MRP has highlighted significant cash balances among many biopharmaceutical giants. Hundreds of billions of dollars are set to be deployed by these companies to bolster their drug and therapeutics pipelines as the ongoing sell-off in publicly-traded biotech firms, compounded by massive layoffs and other economic disruptions to business at privately held operations, is making valuations increasingly attractive to possible big pharma buyers.

Jefferies analyst Michael Yee has estimated that the combined market capitalization of all the biotech stocks valued at under $5 billion is around $350 billion. That compares to a combined cash balance among the top 20 biopharma companies worth over $300 billion. “We have reached a point where Big Pharma has so much cash they could basically buy the whole smid-cap universe,” Yee wrote. Per European Pharmaceutical Review and Ernst & Young LLP, big pharma firms accounted for about 77% of M&A spending in the biopharma sector’s second quarter. In the first quarter, the equivalent figure was just 10%.

Since the initiation of this theme, the VanEck Pharmaceutical ETF (PPH) has returned 6%, thus far underperforming the S&P 500’s gain of 11% over that same period.


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