Which Of These Smaller Companies Could Roche Buy?

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over this past year, the oncology treatment industry has been a hotbed of acquisition rumors, which caused analysts and investors to endlessly speculate on which companies will be swallowed up next by the larger fish in the sea. In a previous article, I visited the eye of the storm: Onyx Pharmaceuticals, which put itself on sale after a failed $8.7 billion buyout attempt from Amgen. Amgen is reportedly still battling Bayer and Pfizer for control of Onyx’s three primary cancer treatments - Nexavar, Kyprolis and Stivarga.

In this article, I’d like to visit a second, more speculative storm that centers around Roche Group (NASDAQOTH: RHHBY), the largest maker of cancer treatments in the world. Persistent rumors that Roche is financing an acquisition to take over Alexion Pharmaceuticals (NASDAQ: ALXN) to add its blockbuster treatment Soliris to its portfolio has fueled speculation that other companies like ImmunoCellular (NYSEMKT: IMUC), Celldex Therapeutics (NASDAQ: CLDX) and Immunomedics (NASDAQ: IMMU) could be next.

The eye of the storm

Roche’s sales growth can be primarily attributed to three blockbuster cancer treatments (Rituxan, Herceptin and Avastin), its best-selling flu medication Tamiflu, and its arthritis drug Actemra. Roche launched Kadcyla, an ADC developed with ImmunoGen’s linking technology, in the United States in February. However, sales of its hepatitis treatment Pegasys have been dropping, due to growing market anticipation for new triple-combination and interferon-free therapies by the end of the year or early 2014.

Alexion, on the other hand, is a comparably easier company to understand since it only has a single marketed drug, Soliris, which is expected to generate $1.52 billion in sales by the end of 2013, up from $1.13 billion in 2012.

Soliris is a humanized monoclonal antibody that is the world’s first and only approved treatment for PHN (paroxysmal nocturnal hemoglobinuria), an extremely rare disease which causes the body to create abnormally formed red blood cells which are mistakenly destroyed by the immune system. Soliris is also used to treat aHUS (atypical hemolytic uremic syndrome), another rare disease that causes blood clots throughout the circulatory system, resulting in kidney failure, organ damage and death.

Due to the rarity of PHN (one to two cases per million) and aHUS (0.4 cases per million), Soliris is the most expensive drug in the world, costing over $400,000 annually per patient. Although buying Alexion would immediately give Roche a steadily growing revenue stream, there are concerns that paying an estimated $25 billion to $30 billion for a company that is trading at 62 times trailing earnings might be too high of a premium.

Investing in a chemo-free future

Amid the doubts that Roche will actually buy Alexion at current prices, ImmunoCellular Therapeutics, Celldex Therapeutics and Immunomedics have been cited as possible acquisition targets for Roche.

ImmunoCellular Therapeutics, with a market cap of $160 million, would be a cheap purchase considering its lucrative pipeline of cellular immunotherapies. Immunotherapy is a new form of cancer treatment that attempts to train the immune system to fight cancer cells. By comparison, traditional methods of chemotherapy weaken the immune system, killing infected and healthy cells alike. Other companies that have been developing immunotherapies include ImmunoGen and Heat Biologics, which recently went public.

ImmunoCellular is a development-stage company with no reported earnings or revenue growth. Its pipeline includes three cell-based vaccines that seek to activate a patient’s immune system to fight against tumor-associated antigens, and a vaccine that triggers a specific immune response to the CD133 protein commonly expressed in cancer stem cells. The company’s most advanced treatment is a brain cancer treatment that is currently in Phase II trials. Although ImmunoCellular is a speculative biotech, the stock has risen 30% over the past month on speculation that the company could be bought out.

Roche could be a likely suitor since the two companies have collaborated in the past in the development of monoclonal antibodies. Adding ImmunoCellular’s research and development resources to its own could substantially boost Roche’s current investigations in immunotherapies. Bringing a viable immunotherapy treatment to the market would also enhance its core portfolio of cancer treatments.

The lucrative cancer smart bomb

Celldex Therapeutics and Immunomedics, which both develop antibody drug conjugates (ADCs), are two likely targets for Roche or a larger company that seeks to expand its oncology portfolio.

ADCs are antibodies that carry a toxic payload that is more potent than chemotherapy toxins. These antibodies are trained to identify the cancer cells, link to them, and the deliver the toxins to kill the cancer cells individually while sparing the healthy ones. Just like immunotherapy, ADCs could render painful chemotherapy obsolete. Roche currently has a single ADC treatment, Kadcyla -- one of only two FDA approved treatments available today. The second approved treatment, Adcetris, is made by Seattle Genetics.

Celldex’s most advanced ADC is CDX-011, used to treat GPNMB metastatic breast cancer. CDX-011 completed Phase II trials with very positive results, exhibiting a 32% response rate in comparison to a 13% placebo response rate. CDX-011 was developed with technology licensed from Seattle Genetics. In addition, Celldex has two immunotherapies, one for front-line glioblastoma (brain tumor) in Phase III trials, and another one for recurrent glioblastoma in Phase II trials.

A smaller, smarter buy

In June, Immunomedics, which is much smaller than Celldex and Seattle Genetics, announced that two of its three tested ADCs, IMMU-130 and IMMU-132, showed high efficacy rates in patients with metastatic colorectal cancer and triple-negative breast cancer. IMMU-130 is designed for colorectal cancer, while IMMU-132 is being tested on 13 different types of cancer.

On August 12, the company announced that those three Phase I ADC trials had advanced to Phase II trials, and that epratuzumab, its treatment for a type of non-Hodgkin lymphoma, showed positive results in extending patients’ lives by an average of 3.5 years. Epratuzumab notably showed these positive results when combined with Roche’s drug Rituxan, opening the doors for a possible combination treatment. Shares of Immunomedics surged nearly 7% after the announcement.

Acquiring either Celldex and Immunomedics would give Roche a huge advantage in ADCs, and if any of these experimental ADCs are approved, it could have more than one marketed ADC -- a first in the biotech industry.

A Foolish Final Thought

Although I don’t believe investors should flock to Alexion, Immunocellular, Celldex or Immunomedics simply because they think Roche might make an offer, they should keep an eye on the emerging demand for immunotherapy and ADC, which could displace traditional chemotherapy in several years. This area of oncology, in my opinion, will be much more interesting to watch than the ongoing drama over Onyx and its established cancer treatments.

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Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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