Marcial: Pharma Firms May Vie for Vertex

Telaprevir is a potential blockbuster drug for treating hepatitis C, with a multibillion-dollar market. Vertex could get FDA approval for it next year

Vertex Pharmaceuticals—52-week stock price

By Gene Marcial

BW's Gene Marcial

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Expect merger-and-acquisition activity to heat up in the biotechnology sector. That's the prognostication of many analysts who have become more upbeat about the industry, with share prices now outpacing most other small-to-mid-cap stock groups.

The Nasdaq biotech stock index gained 3.15% in the week of Sept. 14, vs. the broader Nasdaq composite index's 2.50%, notes Simos Simeonides, senior biotech analyst at investment firm Rodman & Renshaw (RODM), who believes the biotech rally will likely persist this year. Both the profitable biotech companies as well as those that are still trying to develop and produce drugs for approval by the Food & Drug Administration have been gaining ground, he adds.

Analysts note that the young biotechs that have yet to earn a penny are again attracting accelerated interest from large pharmaceutical companies. Health-care analysts at Credit Suisse (CS) believe there is a higher likelihood of large drugmakers pursuing smaller biotech outfits to augment their drug pipelines. They believe there will be less likelihood of megamerger deals occurring among the major drugmakers.

One of the biotechs the Credit Suisse analysts believe will be a target of major drug firms: Vertex Pharmaceuticals (VRTX), which focuses on the discovery and development of small-molecule drugs to treat viral infections, inflammation, and cancer. Its chief product is telaprevir for the treatment of hepatitis C (HCV).

Expiring Patent Pressure

Vertex's name emerges whenever the subject of merger deals in the biotech sector pops up, says Steven Silver, biotech analyst at Standard & Poor's. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).) He notes that a number of the major pharmaceuticals, particularly those likely to lose huge revenues because of drugs facing patent expiration, are eager to buy biotechs with drugs that could replace those medicines.

Vertex's attraction: Telaprevir is a potential blockbuster drug with a multibillion-dollar market that could get approval next year, notes Silver. The product, he says, is "likely to emerge as a leader in treating hepatitis C (HCV), which afflicts more than three million people in the U.S."

He rates Vertex a buy with a 12-month target of 43. However, "My price objective of 43 doesn't include a takeover premium," he adds.

Vertex spokesman Cach Barber declined comment, saying the company doesn't respond to market speculation.

Analyst Rachel McMinn of Bank of America Merrill Lynch (BAC), who rates Vertex a buy, projects a higher price target of 48, mainly based on her "high expectations" for telaprevir. Vertex is "well positioned," she says, to be the first to bring to market a "novel, highly potent oral medicine to treat a broad range of patients with HCV." She forecasts telaprevir sales of $3.6 billion in 2013, which she says would make it "one of the highest-profile biotech product launches in the next 18 months." (Bank of America Merrill Lynch has done business with Vertex.)

Embraced by J&J

Who could be the potential suitors? Credit Suisse believes Vertex could well be a takeover target of Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY), or Gilead (GILD).

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