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It is the start of earnings season and with the recent upswing in M&A in the biotech sector, investors will be focused on reading the tea leaves to see if this will continue and in what manner. Biogen (BIIB) is frequently believed to be a potential buyer and the earnings release provides some interesting tidbits as to their longer-term goals.

The Cuts

Biogen provided a clear signal that pipeline prioritization is important as they prepare for the additional assets they will bring into the company. The cut programs in stroke, gene therapy, and ophthalmology. The deepest cuts appear to be in the stroke space as they discontinued BIIB093 that is in a Phase 3 study for large hemispheric infarction and a Phase 2 study for brain contusion. In addition, they paused the initiation of a Phase 2b study for BIIB131 for acute ischemic stroke. They noted that they are only assessing whether to start it, but I suspect that the decision will be end development.  It seems a clear indication that Biogen is moving out of the stroke indication with these changes. The company also noted that they were discontinuing the development of BIIB132 in spinocerebellar ataxia type 3.

There are probably other changes and cuts that were not significant enough to make it to the press release, but decisions are being made as to where to focus. The culling process is likely to continue and while it does not have to end before they start announcing deals, I suspect they are more in the evaluation phase with deals coming later in the year.

The Additions

Obviously, Biogen did not announce any deals and they are not going to provide a list of companies they are evaluating but they did comment that they are interested in near-term revenues. This makes sense and is a larger theme in the M&A environment. A significant portion of the larger deals have targeted companies with revenues or near-term revenues, i.e. Seagen, Horizon, and Prometheus. Why?

Generally speaking, the revenue generating small caps come with higher valuations and the biotech bear market has made these companies relatively cheap (in historic terms) and it is easier for the buyers and sellers to agree upon a price. In addition, as drugs come off patent protection in the near-term larger companies need to fill those upcoming revenue gaps. As such, there appears to be a nice confluence of circumstances that make larger deals for revenue generating small caps a more attractive option. 

I strongly suspect that Biogen will continue with that trend with any larger deal that they announce but I would not completely rule out smaller deals for earlier stage assets. Biogen has traditionally focused more on the earlier stage high risk/high reward type of deals and I do not see them completely abandoning those type of deals. Biogen has the capacity for both but clearly, we are setting up a situation for a larger deal later in the year for a revenue generating company and then some smaller deals for earlier stage assets.

The Targets

I do not want to name specific companies, which is a popular parlor game when it comes to this sort of speculation as it is pure speculation. I never buy a stock because of takeover speculation but if you own high quality companies then you increase the odds of owning a company that gets acquired as higher quality companies are more likely to be taken out. In terms of Biogen, it seems like their larger deal (or potentially deals) will be companies within the neurology or I would think the psychology space with approved products or one about to launch (although I would significantly lean towards a company with a product already approved).

I also strongly believe that the pace of deals increases as we get later into the year and would not expect anything in the immediate term. The evaluation process seems to be continuing and quite deliberate. As such, the odds are this is a late 2023 if not early 2024 story.

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