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Investment Thesis
Back in January 2021 I wrote an article about Mirati Therapeutics (NASDAQ:MRTX) entitled “Paying $220 Per Share Sounds Excessive But Cracking KRAS Is A Big Deal.”
The article covered Mirati’s progress developing lead drug candidate Adagrasib – a small molecule drug that inhibits the KRAS G12C oncogenic driver mutation – and explaining why successfully targeting KRAS – expressed in ~85% of all RAS mutations, which themselves account for ~25% of all cancers, and 1m deaths worldwide (according to data shares by Mirati on its website) – is a multi-billion dollar opportunity.
To date, only the big pharma concern Amgen (AMGN) (revenues of ~$26bn in FY21) and Mirati have been able to successfully develop a KRAS targeting drug. Amgen’s Sotorasib has now been approved by the FDA for the treatment of adult patients with KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer (“NSCLC”), and is now marketed and sold as Lumakras.
Lumakras achieved a 36% objective response rate (“ORR”) in its pivotal study in NSCLC, while Mirati’s Adagrasib achieved a 43% ORR in its own pivotal study. Lung cancer, alongside breast cancer, is the largest and therefore most lucrative market for cancer drug developers.
To return to my January 2021 article my argument that Mirati could be worth paying $220 per share for – given that was the traded stock price at the time – was based on Mirati’s first – or to be more precise, second – mover advantage in an important new market of KRAS expressing tumors, which encompassed not only NSCLC, but also colorectal, pancreatic and potentially almost any other type of solid tumor cancer.
As Mirati failed to move forward at a sufficient pace for the market and analysts’ liking however, and Amgen’s Lumakras made it to market first, Mirati stock slipped in value rather than gaining. In May 2022, shares hit their lowest price since December 2018, trading <$40.
The core investment thesis – that Adagrasib could win approval in second line NSCLC – did not essentially change between January 2021 and May 2022. In fact, Mirati was able to release mid-stage data from its pivotal Phase 2 trial confirming an ORR of 43% – high enough to secure approval (although the market was disappointed by a duration of response of 8.5 months – nearly 3m less than Lumakras).
As such, perhaps it was inevitable that Mirati’s share price would begin to climb again as its Prescription Drug User Fee Act (“PDUFA”) date – when the FDA advises whether it will approve the drug for commercial use or not – of Dec. 14 drew closer.
That has begun to happen, as Mirati stock has crept to a value of $88 at the time of writing, more than 2x what it was worth in May. In recent days, however, analysts have been speculating about a potential acquisition of Mirati by a big pharma.
Apparently, Bloomberg News has reported that management has been considering a sale for some time, and the suggested bid price could be as high as $185 – $200 per share, according to JPMorgan analysts, with pharma giants Merck (MRK), Pfizer (PFE), Bristol Myers Squibb (BMY) and AstraZeneca (AZN) all interested.
The interest is at least partly based on a potential later approval of Adagrasib in first line NSCLC – Phase 2 studies already have been initiated in that setting for the drug, both as a monotherapy and in a combo regime alongside Keytruda, Merck’s mega-blockbuster cancer drug which earns ~$17bn per annum, with as much as half of that figure derived from the 1st line lung cancer setting.
Potential buyers also would be acquiring Mirati’s other portfolio assets Sitravatinib, a multi-kinase inhibitor in Phase 3 studies as a combo therapy for NSCLC alongside Bristol Myers Squibb’s Keytruda rival Opdivo, and alongside Beigene’s Immune Checkpoint Inhibitor (the same mechanism of action as Opdivo and Keytruda) Tislelizumab, and earlier stage assets such as PRMT5 inhibitor MRTX1719, and KRAS G12D inhibitor MRTX1133, targeting solid tumors.
In this post I will take a brief look at why each of Merck, Pfizer, BMY, and AstraZeneca may be interested in making a bid for Mirati, flesh out the market opportunity a little more, and offer some concluding thoughts around whether Mirati will end up rewarding investors who paid $220 per share back in early 2021.
The Case For Merck Buying Mirati
Merck management has made it clear that it’s planning for the patent expiration of Keytruda after 2027 (as I explained in a recent note on the company). The drug accounted for ~35% of Merck’s $48.7bn of revenues in 2021 and its revenues will likely decline by ~20% per annum after loss of exclusivity (“LOE”).
Interestingly, Keytruda, and two partnered assets – Lynparza, indicated for ovarian cancer and marketed and sold by AstraZeneca, and Lenvima – indicated for thyroid cancer and marketed and sold by Eisai.
There were strong rumors that Merck could move to acquired Seagen (SGEN) for ~$40bn, or ~$200 per share, but that deal has failed to materialize and Merck could certainly do with bolstering its oncology division with new assets, given how established its sales and marketing infrastructure must be in oncology on account of the success of Keytruda.
There’s an added bonus in that Adagrasib may work in combo with Keytruda – although this must be proven in clinical studies and the data to date is underwhelming – a trial success in that regard could be the tipping point for Merck to make a move. Merck recently spent $1.5bn acquiring Imago Biosciences Inc, so we know the company is in the mood for M&A.
The Case for Pfizer Buying Mirati
Thanks to nearly $100bn of additional revenues from its COVID vaccine Comiraty and COVID therapy Paxlovid in 2021 and 2022, Pfizer is a cash rich company with ambitious growth plans. Management recently outlined how it intended to compensate for $17bn of revenues lost to patent expiries of key products between 2025 – 2030 with $25bn of revenues from its M&A activity, and $20bn from internal new product launches.
The pharma has made a series of multi-billion dollar acquisitions, as I discussed in a recent note for Seeking Alpha covering Pfizer’s Q322 earnings:
a $7bn deal for Arena Pharmaceuticals and its late stage autoimmune candidate Etrasimod; an $11.6bn deal for Biohaven and its lead candidate Nurtec, indicated for migraine treatment; a $5.4bn deal for Global Blood Therapeutics and its ~$200m per annum commercial stage drug Oxbryta, indicated for Sickle Cell Disease (“SCD”), and lead candidate GBT601, which may offer a functional (permanent) cure for SCD; and, finally, a $525m deal for Reviral and its antiviral therapeutics targeting respiratory synctial virus (“RSV”).
Pfizer could easily afford to make further acquisitions – using some of its $35bn of near term cash – and Mirati fits the bill, as a biotech with a late stage product with blockbuster (>$1bn per annum) sales potential, very close to the full approval finish line.
Pfizer has a strong and diverse oncology division with 17 products making >$100m sales per annum, although only three of these are blockbuster assets. Revenues from the division were $12.3bn. If management wants to make good on its promise to investors to offset lost COVID and LOE revenues in the next five years, the blockbuster promise of Adagrasib has a genuine appeal.
The Case for Bristol Myers Squibb Buying Mirati
Bristol Myers Squibb (BMY) has a powerhouse oncology division that earned $19bn in FY21, led by blood cancer therapy Revlimid which earned $10.8bn of revenues, and Immune Checkpoint Inhibitor (“ICI”) Opdivo.
BMY, like Pfizer, faces key patent cliffs within the next few years as Revlimid, $3.3bn (in 2021) selling Pomalyst and >$2bn per annum selling Yervoy all lose their patent protection, meaning other companies can market generic versions of these drugs at cheaper price points.
As such, the opportunity to acquire a breakthrough drug such as Adagrasib may appeal to BMY, who, again like Pfizer, have promised to more than offset revenues lost to patent expiries with sales of new products (as I discussed in a recent note for SA) – between $10 and $13bn, management has suggested.
BMY would have the added advantage of potentially being able to pair Adagrasib with Opdivo, denying rival Merck the opportunity to partner it with Keytruda. Merck may be motivated to move for a buyout of Mirati for the same reason – to prevent BMY partnering Adagrasib with Opdivo.
BMY is heavily in debt after its $74bn of Celgene but management has shown it’s not afraid to make a deal if it has strong faith in the a product’s potential, as it did by paying $13bn to acquire Myokardia and its lead candidate Mavacamtem last year. Mavacamtem is now approved for cardiovascular disease under the brand name Camzyos, with peak sales anticipated to be ~$4bn. As such, a deal for Mirati may suit both parties.
The Case For AstraZeneca Buying Mirati
AstraZeneca also has a strong oncology division – across the first three quarters of 2022, four of its oncology drugs have achieved blockbuster sales. Tagrisso, AstraZeneca’s best-selling drug, has racked up sales of $4.1bn so far this year.
Astrazeneca does have a large portfolio of assets however and its $39bn acquisition of rare disease specialist Alexion last year suggests the company may be looking to strengthen in other areas, and even trim some dead wood in oncology. With that said, the company has a blockbuster lung cancer product in Tagrisso, and the temptation to become a dominant player in this indication may be irresistible.
AstraZeneca is not cash rich with just $6bn of near term cash available and total liabilities totalling $66bn. This may not be the ideal time to make a bid for Mirati unless there is no bidding war and the price of such a deal is <$10bn – but would management sell at a lower price?
The Wilcard Option – Could Moderna or BioNTech Make A Bid
It’s unlikely that either Moderna (MRNA) or BioNTech (BNTX) would bid for Mirati, since the MRNA giants prefer to develop their products in house or in partnership with larger pharmas. With that said, however, both are cash rich as a result of earnings generated by the their respective COVID vaccines SpikeVax and Comirnaty, and both would ideally like to launch a revenue generating product in 2023 as vaccine revenues are likely to fall drastically next year.
Both are interested in targeting KRAS, also, and expect to develop large and diverse oncology franchises. Would scientists at BioNTech and Moderna relish the opportunity to work with the people who discovered how to drug KRAS? I suspect they might, and if approved, Adagrasib would bolster their flagging revenue generation. It’s an outside bet that I wouldn’t completely rule out.
How Much Is Mirati Worth and What Would A Buyer Pay?
Mirati – despite its share price woes – still has a market cap of >$5bn. Realistically, an approval in KRAS-G12C expressing NSCLC is far from a guarantee of blockbuster sales. As I wrote in a September piece comparing Mirati vs Amgen:
GlobalData has suggested that Lumakras’ first mover advantage would result in a sales difference of ~$822m in 2029, when it anticipates Lumakras generating $1.1bn of revenues, and Adagrasib – so long as it’s approved – just $292m.
$300m of sales works out as a price to sales ratio of nearly 17x based on curenet market cap of ~5bn, which is an unattractive ratio for a potential buyer. The main attraction for buyers is an approval in the first line setting, and the opportunity to chase label expansions in other solid tumors. The former remains in the balance whilst the latter will take time and considerable financial resources.
If a company were to pay $200 per share to acquire Mirati, the deal would be worth $11.5bn. For that kind of money a company would need to be confident that Adagrasib is capable of making at least $3bn in peak sales, I would estimate, based on e.g. BMY’s paying $13bn for Myokardia ($4bn of anticipated peak sales of Camzyos) and e.g. Pfizer paying $11bn for Biohaven, on the basis it can extract $6bn per annum peak sales from the migraine franchise.
I suspect that the likes of Merck, Pfizer and BMY would believe they could turn Adagrasib into a blockbuster drug and win the necessary add on approvals to add on a few more billion dollars of revenues. Perhaps each of these three are waiting to see whether the FDA approves Adagrasib – it’s too late to bid for the company before the PDUFA date arrives after all – although I’m slightly surprised at this, since my guess would be they have studied the science closely.
This make me less confident that Mirati will get the acquirer it’s apparently seeking, and it will undoubtedly be tough for a company with no commercial experience to take on Amgen, Keytruda, etc., in NSCLC. As such, I would not necessarily be confident that we will see Mirati’s share price reach $200 any time soon.
An approval could push the share price as far as $150, perhaps, and such is the perverse nature of the stock market, that may pique the interest of a big pharma acquirer for no other reason that market sentiment.
Big pharma does not mind paying a premium for a sure thing, but my feeling is Adagrasib approval in 2nd line NSCLC may not be enough. It may come down to combo data, and luckily, Adagrasib / Keytruda data is scheduled to be released this year before a Phase 3 is initiated in early 2023.
Perhaps we will see that >$200 share price sooner rather than later, after all, although if the combo data is not strong, the price tag for Mirati may not be considered much of a premium to current traded price by its would-be buyers.
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