Even as investors have been dumping stocks, corporate America is eager to open its wallet.
Bristol-Myers Squibb (BMY), last week ponied up $74 billion, a 54% premium, for biotechnology heavyweight Celgene (CELG). Big Pharma needs the next generation of treatments to fuel future growth. The deal came a few days after a rout in stocks that left the S&P 500 Index (.SPX), with the biggest calendar-year loss since 2008.
Another massive purchase was IBM’s (IBM), $33 billion takeover of software firm Red Hat Inc. (RHT), The fact that Big Blue paid a premium of more than 60% in October, one of the worst months for stocks in recent memory, is proof that mega-cap technology companies aren’t afraid to shell out big bucks even amid talk of a tough stock market.
The specifics of those deals and how the target companies will be integrated are worth exploring. Big picture, they speak to an insatiable appetite for acquisitions in both the tech and biotech sectors.
Regardless of where the S&P 500 winds up at the end of 2019, one thing is certain: Those two sectors will see persistent buyout interest from deep-pocketed players looking to the long term.
Here are six potential takeover targets to ride this trend, with three in the tech sector and three in biotech and pharmaceuticals sector.
3 technology buyout targets
1. New Relic Inc. (NEWR), delivered for shareholders from early 2016 through mid-2018, racing up from the low $20s to over $110 in a little over two years. The catalyst was 32% revenue growth in 2018 and 26% growth expected this year. The numbers aren’t just impressive on the top line, either, as NEWR has shown material profitability in 2018 after the cloud-based data-analytics firm operated largely at break-even in 2017.
Unfortunately, forward growth is about to get much harder to come by — and not just because investors have largely lost confidence in “risk-on” tech stocks lately. NEWR faces decent competition from peers such as Splunk (SPLK), which boasts roughly three times the market value and roughly four times the annual revenue, and a perpetual fear that integrated tech giants like Google parent Alphabet (GOOG), (GOOGL), Microsoft (MSFT), or Amazon.com (AMZN), will eventually tighten the screws on any niche player.
But if you can’t beat ’em, join ’em! Alphabet has a long history of making billion-dollar buyouts to keep its dominant position in the ecosystem of internet stocks, and Microsoft is no slouch either. Both have deep pockets and will continue growing their cloud arms, and New Relic may make a compelling buy now that it’s proven itself. Plus, the company is digestible — its market value is about $5 billion.
2. CyberArk Software Ltd. (CYBR), shares many of the same appeals of New Relic: It’s comparatively small at a $3 billion market cap, has an established growth trajectory that includes 26% revenue expansion in fiscal 2018 and solid profitability, and operates in a fast-growth arena of tech that the big boys are looking to dominate.
An added bonus is that, unlike some of the more hype-driven corners of tech, cybersecurity solutions are increasingly seen as necessities for businesses of all sizes. That provides a bit of countercyclical appeal for companies that are worried about enterprise spending drying up if times get tough in the coming year or two.
What makes CYBR particularly appealing is its expertise in fighting advanced cyber threats, and using a proactive approach to protect institutions and networks to ensure attacks do not escalate. The software company is a go-to solution for Fortune 100 companies and the world’s top banks as a result. And as a big vote of confidence at the end of 2018, tech firm Gartner named CyberArk a leader in its iconic magic quadrant analysis of “privileged access management” — what it called “one of the most critical security controls, particularly in today’s increasingly complex IT environment.”
Expertise in this specialized corner of cybersecurity makes CYBR an obvious target by larger enterprise technology providers. As proven via Cisco Systems (CSCO), bidding $2.35 billion for Duo last year, deep-pocketed tech firms are eager to consolidate power in the security space by poaching attractive mid-sized firms like CyberArk to supplement operations.
3. Veeva Systems Inc. (VEEV), exemplifies the high-growth potential of both tech and biotech. The cloud-computing company is focused on pharmaceutical and life sciences applications including unification of clinical trial data and quality control management processes to bring training and documentation practices into the 21st century.
You’ll see the same theme at Veeva as with the other two players: revenue growth of 25% in fiscal 2018 with hopes for 19% expansion next year, consistent profitability and a stock price that has soared from under $25 in early 2016 to about $100 a share at present.
The only wild card, however, is that its valuation is a bit more elevated at a hefty $15 billion market capitalization. However, whether it’s an established enterprise cloud stock like Salesforce (CRM), or simply an eager Alphabet looking to bolster its health-care technology arm, there are plenty of players in Silicon Valley who could make good use of this “disruptor” to fuel future growth.
Furthermore, it’s not entirely insane to consider a buyer from Big Pharma out of a desire to ensure future relevance. Just as industry mainstays are eager to prop up profits by purchasing the drugs developed by smaller firms, mega-cap health-care companies can surely find value in using these systems to optimize operations and marketing.
3 biotechnology buyout targets
1. Bluebird Bio Inc. (BLUE), while recording little in the way of sales and nothing yet in profits, is small enough to be easily purchased by a Big Pharma heavyweight. The $6 billion company could prove to be a bargain valuation if the current product pipeline pans out at planned.
The drugs in development today are incredibly compelling, including a therapy for the blood cancer multiple myeloma that has seen big potential about a year ago with more than half of patients seeing a complete recovery from the disease. In the words of a doctor quoted by Reuters: “Some of these patients were going to hospice until they got this.”
Such a success is obviously wonderful for patients. But it also shows the big profit potential for shareholders. Bluebird has other promising clinical trials, too, proving it isn’t hanging its hat on one potential blockbuster alone.
Thanks to a risk-off environment in late 2018, interest waned in BLUE stock and the company has rolled back from its prior peak significantly. That may allow for a bargain purchase by biotech investors before one of health care’s heavyweights opens its checkbook for an acquisition in 2019.
2. Alexion Pharmaceuticals (ALXN), is an interesting investment for those looking for a potential buyout premium but a bit more stability in a biotech that has moved beyond the risks of development-phase cash burn.
Take biotech leader Amgen (AMGN), a firm known for creating many of its own hits over the years, as one potential suitor. AMGN is increasingly coming under threat via competition and increasingly unlikely to invest heavily in research after shareholder pressures have forced it to become more bottom-line focused in recent years. It has room for improvement in its product pipeline.
That’s where Alexion comes in. Ronny Gal, an analyst at Sanford Bernstein, pointed to Alexion as an attractive acquisition target recently. It’s a “Goldilocks” size at $25 billion, not too big to be acquired and not too small as to be just a perfunctory purchase. With $4 billion in sales, it would be a big shot in the arm to AMGN after struggles since early 2018. Those sales are also growing at 14% in 2018 and a projected 17% next year — a feature that makes it even more attractive to bigger companies that have hit a ceiling.
Alexion has also seen hopeful clinical results in both the Europe and the U.S., and is exactly the kind of established biotech that larger players would find attractive now if they can secure proper financing.
3. BioMarin (BMRN), is another mid-sized biotech stock that’s long been a buyout candidate. The California company focuses on rare diseases with so-called “orphan drugs.” These are treatments that target conditions afflicting a comparatively small group of patients — and thus have historically been overlooked by Big Pharma companies looking to hit a home run.
However, orphan drugs frequently are fast-tracked for approval when they attempt to bring relief to an underserved community of patients. They also are often very high margin because there is little competition and few viable alternatives for those who are ill.
BioMarin has profited nicely from its pursuit of orphan drugs and has a pipeline full of promising products, including treatments for phenylketonuria or complications from dwarfism. BioMarin is not yet profitable; however, its revenue trends show the potential as the biotech stock booked over $1.5 billion in revenue in fiscal 2018, a 15% increase over the prior year.
With much of the work already done and BioMarin well down the path to approval with a half-dozen clinical trials, it is a comparatively low-risk acquisition for a Big Pharma firm looking to add to its drug offerings and fend off the decline in revenue associated with patent expiration and competition.
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