Today we’ve got a teaser pitch from Dylan Jovine’s new service, Takeover Targets, which he says is “half price” for charter subscribers (that would be $997/year, and unlike many higher-end newsletters they say they do offer refunds for 30 days)… and, as you might imagine, the service is all about identifying companies that might be taken over at a premium price.
Which means biotech and technology are probably the best areas to sniff around for ideas, and particularly biotech — since little biotech companies are essentially treated as R&D labs by big pharma companies, who tend to restock their own development pipelines by partnering with or buying out promising biotechs whose drugs look appealing. The downside, of course, is that the reason big pharma waits a while before making these takeover offers is that so many of these early stage drugs fail during clinical trials, so if you’re speculating on possible takeovers in the biotech space you’re also taking that “failure” risk with these development-stage drugs.
Speculating on takeovers is a perennial entertainment for financial pundits of all stripes, since takeovers usually come at a nice hefty premium and often drive the target stock up by 30-50% or more in a single day, and we’ve seen several “takeover” focused newsletters pitched over the years… but it’s a tough segment if you’re counting on identifying a brand new takeover idea every single month, and I don’t think most of those letters lasted long.
But this one’s new and full of hope, so what is it they’re teasing? Well, you will be unsurprised to hear that they’re pitching “Our #1 Takeover Target this Month.”
Here’s a bit from the ad:
“Today I’m going to take you behind the scenes and introduce you to a company we think gets taken over in as soon as the next 90 days due to a new medicine they’ve invented…
“A precision-medicine that attacks Alzheimer’s on a genetic level and has already changed how that disease is being treated.
“And not just Alzheimer’s. All told, this genetic breakthrough has the potential to treat other neurodegenerative diseases such as Parkinson’s and ALS.”
OK, so that’s three big-time diseases — certainly a new and more effective drug for those would make someone a lot of money, though Alzheimer’s is the biggie, thanks largely to the fact that the current treatments are so disappointing for patients and families and can’t really stop or reverse the progression of the disease.
So what’s this “1 Super-Pill that Can Stop 3 Different Diseases?” What’s the “number one takeover target” that Jovine is looking at for February? We’ll check out the clues… but first, let’s see what criteria they say they look for when identifying takeover targets…
“Three Key Ingredients to Any Good Deal
“A Large Gap Between the Value of a Company and What the Common Stock is Selling for….”
OK, it’s tough to argue with that — “buy stuff that’s cheap” is pretty much everyone’s favorite strategy, though when it comes to valuing biotech stocks, which are often a decade or more from potentially becoming profitable, there’s a lot more art involved than there is science or math. What else?
“You Need a Board of Directors Open to a Legitimate Offer….
“I have it on good authority that Steve Jobs rejected a couple of takeover offers when he took back control of Apple.
“Entrepreneurs like that are not going to sell a company unless they’re forced to.”
OK, so that gets you into iffier territory — buy companies with a short-term focus who are looking for deals, and avoid those with entrepreneur founders who want to build something big? That might work in the short term, but selling Apple because Steve Jobs didn’t want to sell the company in, say, the late 1990s would have been pretty bad for your portfolio (returns since Steve Jobs returned to Apple in 1996 would have been 38,000%).
So yes, maybe “banker type” boards and CEOs are good for takeover candidates, but if the company doesn’t get taken over (and most don’t, of course, so you shouldn’t buy a lousy company just because it might be a takeover target), they aren’t always the stocks you want to commit to longer-term.
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“You Need Potential Buyers.
“We recommended Tesaro stock $38 on October 1st, 2018. And it was taken over by Glaxo 63 days later for 91% gain.
“Just like today’s company, Tesaro also developed a platform treatment. But it was for cancer, not Alzheimer’s.
“And that got Big Pharma’s attention. They believed this new platform would treat not just one form of cancer but several.”
That’s pretty much a no-brainer one, at least for biotech — if a company has a drug that a larger company thinks is likely to be approved, or if it has a valuable and proprietary development pipeline, there will be potential buyers. Every pharma buyer would be different, of course, and some will want to buy a drug early to get it cheaper while others would want to wait until more risk is removed by additional clinical trials, but if there’s a good drug there will be a buyer. Doesn’t mean they’ll offer the price you want, but pharmaceutical companies are almost always serial acquirers, and most of the big ones are always looking for the next drug to slot into their portfolio.
And how about some specific clues for the takeover target we’re being pitched today?
“Today’s Takeover Target Invented a New Way to Treat Alzheimer’s Disease….
“What makes it so exciting is that it’s able to cross the blood-brain barrier.
This allows patients to actually get the Alzheimer’s medicine they need.
“It was first developed by a scientist at Harvard Medical School….
“They Discovered a New Genetic ‘Key’ that Can Penetrate the Blood-Brain-Barrier
It attacks Alzheimer’s on a genetic level.
“You see, what they learned is that you can cross the “blood-brain-barrier” if you’re able to target a gene located on chromosome 6.”
If you’ve been reading the missives of our own Doc Gumshoe, you know that crossing the blood-brain barrier is a big deal — most small molecule drugs (like monoclonal antibodies, for example), are too big to get easily into the brain, which is but one of many challenges for finding Alzheimer’s Disease drugs that are safe and effective.
More about this drug? Here you go:
“… the medicine that’s delivered is called an “inhibitor.” And this inhibitor finds the gene that sends out signals to the individual cells that cause Alzheimer’s disease.
“And what it does is forces the Alzheimer’s gene to stop sending these signals.”
OK… other hints about the company?
“… they signed a $1 billion deal with a Big Pharma giant….
“And that’s with just one drug. That doesn’t include the three other drugs the company has in front of the FDA for approval right now.”
And apparently they’re focused not just on Alzheimer’s, but also on other neurodegenerative diseases like Parkinson’s Disease. And we’re told that “the biggest rivals have all been taken over by Big Pharma” already, so they’re next in line.
More from the ad:
“Johnson & Johnson and Pfizer are the 2 most logical buyers.
“Those two companies would both have a lot to lose if the other purchased this new technology first….
“I think the most likely buyer is Johnson & Johnson because their Alzheimer’s drug flunked in clinical trials….”
And the rationale behind “quick gains”:
“Neurodegenerative-focused biotech companies go for 2 – 3 times expected future pipeline sales.
“At 2 times expected sales that’s a $7.5 billion deal. At 3 times sales its a $11.2 billion deal.
“At the Low-End of the Range You’d Turn Every $5,000 into $41,250…
…At the High-End of the Range, every $5,000 Becomes $68,100.”
Other clues? We’re also told that they’ve won “orphan” drug status for at least one of their drugs, and that the company’s CEO was “Director of Neuroscience” at a big pharmaceutical company.
But that’s about it… so what’s the takeover target? Thinkolator sez this is almost certainly… Denali Therapeutics (DNLI)
Denali is a pretty high profile biotech that had a splashy IPO a little over two years ago, and we’ve seen it teased quite a few times before (Ray Blanco has touted it as being on the verge of announcing a cure for Alzheimer’s for over a year now, for example), so you might remember the name — this is a biotech focused on neurodegenerative disease, formed less than five years ago by a bunch of Genentech/Roche scientists with venture capital backing, so it’s new but has very experienced leadership and pretty strong financial backing.
How else does it match those clues? The putative gains are a relatively close match to the actual size of Denali, though it’s not particularly exact at the moment (the returns cited imply that a valuation of $7.5 billion would be an eightfold return, which would mean a current valuation in the $1 billion neighborhood… and DNLI has been below $1.5 billion fairly recently but is currently at about $2.4 billion).
And the CEO is, yes, the former Director of Neuroscience for Genentech. They did make a $1 billion deal with Sanofi a couple years ago to partner on one of their drugs.
And yes, Denali did have three drugs in “early clinical trials” a few months ago, though that number has now swelled to six according to their pipeline page. A key part of their drug discovery is their work with degenogenes, which are the genes that, when mutated, create a major risk factor for neurodegenerative diseases — and they are also, as you might imagine, very focused on delivery of drugs to the brain across that blood-brain barrier, either through molecule design or with various proprietary “transport vehicles” they have developed to deliver larger molecules to the brain.
But that is now further than I should have gone in talking about the science part of this, because I’m a low-functioning idiot in that area and still get a nervous twitch when I picture my high school chemistry teacher. Suffice to say that yes, they are a high-profile R&D company trying to develop drugs and drug-delivery systems for neurodegenerative diseases.
On the financial side, they’ll probably always be a tempting takeover target because they have a strong team and are addressing some very large potential markets (meaning, there are a ton of people suffering from Alzheimer’s, Parkinson’s, Lou Gehrig’s Disease and the others they’re trying to treat, so the bucket of gold at the end of the “FDA approval” rainbow is a large one), but they’re also still very high risk because they’re at the very first stages of clinical trials.
They don’t need to be taken over or rescued, Denali has a lot of cash still from the IPO and their early financings and joint venture deals, and just raised another $180 million in a secondary offering last month, so they should have something like $600 million in cash, far more than they’ll need for their clinical trials in the next year or two (though those trials will get very expensive in the later stages, when they likely would aim to test at least their Alzheimer’s Disease drug on thousands of patients), but that’s likely to be a good thing given the long time it will take to get pivotal clinical trial results.
Right now, their lead drugs are in Phase 1 — their most advanced drug, DNL201, reported good phase 1b results a few weeks ago in Parkinson’s disease, though the study was really just looking at whether it was safe and tolerated and hit the biomarkers, not at any real disease impact (they’ll decide which Parkinson’s disease drug to move forward with later this year, most likely), and they are pushing into early clinical studies for a couple drugs that will start Phase 1 trials this year and which they think can prove their “transport vehicle” delivery platform works. In Alzheimer’s, their first drug, DNL747, is in Phase 1b and they expect “data readouts” in mid 2020.
If I were to guess, I’d say that the Alzheimer’s data expected in a few months is the next likely catalyst for the stock, since investors tend to be gaga for Alzheimer’s Disease drugs, though there will be several ongoing early stage trials this year across their pipeline so you never know what results might come.
It would be pretty shocking to me if they get a takeover bid before they even have advanced Phase 2 trial results, since Alzheimer’s and Parkinson’s drugs are notoriously hard to assess in small trials and often fail in Phase 3 once enough patients are involved to really get a statistically meaningful understanding of the risk factors and the efficacy of the drug… but it’s true that “big pharma” has a lot of cash and is looking for their next blockbuster, so maybe some CEO will want to go after this small cap. I’d guess they’re a couple years out from that kind of outcome, but that’s just a guess… it’s an interesting company, and will probably remain high profile thanks to the diseases it’s going after and the pedigree of its team, and I certainly wish them well even if I’m not terribly excited about betting on clinical trial outcomes.
That’s just my take, though, for your money you’ll need to do your own thinking — so what’s your feeling about Denali? Excited about the potential? Think we’ll see a takeover sometime soon? Let us know with a comment below.