Read This Before You Buy Any New Cancer Drug Stocks

If you’ve been paying attention to merger and acquisition activity in the oncology space, you’ve probably seen plenty of headlines related to exciting new cell-based cancer therapies and the use of bi-specific antibodies. Unless you’ve been watching very closely, though, you probably haven’t noticed that biopharma companies with money to burn are more interested in simpler, easy-to-swallow solutions.

Among 2018’s top-selling cancer therapies, four of the top 10 were small molecule drugs. Over the past two and a half years, cash-laden biopharma companies have spent a stunning $32 billion to acquire smaller biotechs at steep premiums and hoping their candidates will be the next to reach the top-10 list.

Company (Symbol) Acquirer Deal Valuation Acquisition Premium Lead Asset Target
Cascadian Therapeutics Seattle Genetics $614 million 151% tucatinib HER2
Ignyta Roche $1.7 billion 70% entrectinib TRK and ROS1
Tesaro GlaxoSmithKline $5.1 billion 119% Zejula (niraparib) PARP
Ariad Pharmaceuticals Takeda $5.2 billion 75% Iclusig (ponatinib) BCR-ABL
Loxo Oncology Eli Lilly $8.0 billion 67% Vitrakvi (larotrectinib) TRK
Array Biopharma(NASDAQ:ARRY) Pfizer(NYSE:PFE) $11.4 billion 80% Braftovi (encorafenib) BRAF

DATA SOURCE: COMPANY FILINGS.

Let’s look at two key reasons bigger companies are paying steep premiums to acquire these drugs, before trying to figure out which one Big Pharma wants to buy next.

1. They hit the spot

All six of the drugs in the table are designed to shrink tumors by inhibiting specific proteins that are stimulating their growth. That might sound easy, but getting a small molecule to bind to a particular pocket in a folded protein and prevent its activity is like stopping a motorcycle by throwing a wrench at it.

In recent years, the rate of tumor genome sequencing has exploded, which means plenty of potential targets are showing themselves, but it isn’t easy to find a pocket for a drug to bind to. With some help from computational models, though, investigators can also aim for pockets that exist for only a brief moment while the target protein is changing and then freeze them into an inactive shape.

Lab technician pipetting reagent into blood samples.

IMAGE SOURCE: GETTY IMAGES.

2. They’re easier to market and manufacture

Cells can begin dividing uncontrollably for all sorts of reasons, but mutated genes producing overactive proteins that stimulate tumor growth are usually to blame. Drugs that target overactive proteins to prevent them from stimulating tumor growth have been gaining ground against indiscriminate chemotherapy for two solid decades. Until recent years, though, targeted cancer treatments have usually been so large that they must be delivered slowly by infusion under the watchful eye of healthcare professionals.

Biopharma giants know that compliance isn’t as much of an issue with small-molecule drugs. Chemotherapy’s ruthless side effects are often so fierce that many patients would rather let their disease take its own course than suffer through another round of any infused treatment. Patient compliance with capsules and tablets that can be taken in the comfort of their own home are higher. That means more recurring revenue from patients as they remain in remission.

Oncologist looking at a colorful report.

IMAGE SOURCE: GETTY IMAGES.

Who’s next and who isn’t?

Exelixis (NASDAQ:EXEL) owns a small-molecule drug called Cabometyx that treats patients with kidney and liver cancer. The odds Exelixis will receive a juicy buyout offer seem mighty slim, though. Cabometyx has been shown to inhibit 13 different tyrosine kinases, all of which play a role in the life of normal healthy cells.

When it comes to targeted cancer therapies, specifically inhibiting the overactive proteins at fault while leaving the rest unaffected might be the most important factor. If so, Mirati Therapeutics (NASDAQ:MRTX) could be the next midsize biotech to receive a juicy buyout offer.

With a recent market cap of just $3.7 billion, Mirati is within range of a midsize buyout, and its lead candidate, MRTX849, has an exceptional pedigree. It was Array Biopharma that discovered half of the drugs in the table, and MRTX849 could be its most exciting accomplishment to date.

The candidate Mirati commissioned from Array inhibits KRAS, a protein that scientists have known for decades to play a role in a variety of aggressive malignancies. Recently, Mirati stock jumped after a potential competitor from the same class as MRTX849 produced interesting human proof-of-concept results from 10 evaluable patients.

Guy wearing a tie and looking through binoculars.

IMAGE SOURCE: GETTY IMAGES.

Look before you leap

It’s easy to see why Pfizer is acquiring Array for a whopping $11.6 billion. Its drug discovery program has an uncanny knack for developing drugs that hit targets previously considered impossible.

We won’t get our first look at results for the KRAS inhibitor that Array designed for Mirati until the end of the year, but after a string of successes, it would be surprising to see MRTX849’s first clinical trial produce data that isn’t exciting.

While Array’s track record might give you confidence in Mirati, you should know that there’s a lot to lose if Array didn’t hit a bull’s-eye again. If MRTX849 doesn’t look like it can compete, Mirati will be left with practically zero clinical-stage new drug candidates.

Mirati doesn’t have anything to sell, and the only other new drug candidate in its pipeline, sitravatinib, hasn’t been on anyone’s radar since it delivered disappointing results in a midstage study. Poor results from MRTX849’s first trial could lead to swift and heavy losses.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Seattle Genetics. The Motley Fool has a disclosure policy.

Aurora Cannabis in 5 Charts

Here’s a quick overview of the marijuana star’s key business drivers.

Jun 24, 2019 at 5:00PM

Aurora Cannabis (NYSE:ACB) has captured investors’ imaginations. Due in part to its aggressive acquisition strategy, the Canadian marijuana company has placed itself on track to become the largest producer in the world — at a time when the global cannabis market is enjoying explosive growth. In turn, Aurora’s stock is up more than 1,800% in the past three years, earning fortunes for its shareholders along the way.

If you’d like to learn more about Aurora Cannabis, the following five charts can help you quickly get up to speed on the core aspects of its business.

A cannabis leaf on top of a $100 bill.

IMAGE SOURCE: GETTY IMAGES.

1. A massive addressable market

Aurora Cannabis estimates its addressable market at $200 billion, including $3 billion in Canadian medical sales, $9 billion in Canadian consumer sales, $70 billion in global medical sales, and $115 billion in global consumer sales

IMAGE SOURCE: AURORA CANNABIS INVESTOR PRESENTATION.

Worldwide cannabis sales will reach $75 billion by 2030, according to investment firm CowenBank of America analysts, meanwhile, believe the marijuana market could eventually reach $166 billion in annual sales. And Canopy Growth (NYSE:CGC) Co-CEO Bruce Linton says cannabis could one day disrupt markets totaling a staggering $500 billion.

Aurora Cannabis, for its part, is targeting a total global cannabis market opportunity of approximately $200 billion. The company believes that cannabis will increasingly be used in place of other products currently produced by industries such as pharmaceuticals, alcohol, and tobacco. As the leading producer of marijuana, Aurora Cannabis stands to benefit more than perhaps any other company from this booming demand for cannabis.

2. Best-in-class production capacity

Aurora Cannabis expects its peak production capacity to grow from 150,000 kilograms in early 2019 to more than 625,000 kilograms in 2020.

IMAGE SOURCE: AURORA CANNABIS.

No other company can match Aurora Cannabis’ peak production capacity. Aurora is on track to produce more than 625,000 kilograms of cannabis annually by 2020. Among its rivals, only Canopy Growth can claim even half that amount in peak production potential.

As such, Aurora Cannabis should enjoy scale advantages over its smaller competitors. Perhaps most importantly, the ability to spread its costs over a larger revenue base should help Aurora generate superior profit margins over time.

3. A leading presence in international markets

Aurora Cannabis has operations in 24 countries on five continents

IMAGE SOURCE: AURORA CANNABIS.

Aurora’s best-in-class production capacity has also allowed it to establish operations in 24 international markets spanning five continents. By comparison, Canopy Growth has operations in roughly a dozen countries.

By getting a jump-start on the competition in key markets such as Germany and Latin America, Aurora has established beachheads from which it can advance its operations in the years ahead. That’s important, since the great majority of cannabis sales will take place outside of Aurora’s home market of Canada in the coming decade.

4. An aggressive acquisition-based strategy

Aurora Cannabis has made 18 acquisitions and 12 strategic investments since 2016

IMAGE SOURCE: AURORA CANNABIS.

Aurora Cannabis has used acquisitions to press its advantage. The company has made more than two dozen acquisitions and strategic investments in recent years to boost its production capacity, expand its international presence, and broaden its product lineup. In turn, Aurora has become one of the most powerful players in the global cannabis industry.

Yet unlike some of its competitors, Aurora has not yet sold a significant equity stake to a larger partner. By contrast, Canopy Growth has received $4 billion in investments from alcohol giant Constellation Brands, while Cronos Group has seen its coffers swell thanks to a $1.8 billioninvestment by tobacco titan Altria. These investments have provided Canopy Growth and Cronos Group with all the capital they need to expand their operations.

Aurora, on the other hand, has needed to use its stock to finance its acquisitions. While these deals could conceivably produce tremendous value for Aurora and its shareholders, the resulting dilution is likely to make it difficult for Aurora to generate meaningful per-share profits in the near term.

5. Turbo-charged growth

Aurora Cannabis' revenue has increased at a 566% compounded annual growth rate since March 2016.

IMAGE SOURCE: AURORA CANNABIS.

Although sustained profitability may be a ways away, Aurora is enjoying torrid production and revenue growth. The company’s cannabis production volume surged 99% sequentially and 1,200% year over year to 15,590 kilograms in the third quarter. Aurora’s net revenue, meanwhile, soared 305% compared to the year-ago period, to $65 million.

And while Aurora’s growth investments will continue to weigh on its earnings, profitability may come sooner than many investors currently expect. Management says rising production volumes and declining per-unit costs will help Aurora generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA) beginning in the fourth quarter.

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