Big Pharma Needs Growth: Two Severely Undervalued Companies Ripe for a Takeover
At any given moment, there are literally hundreds of severely undervalued companies that are ripe for takeovers. In this article, I will focus on the pharmaceutical industry, where many investors have borth struck it rich when they find a blockbuster, and have gone broke with others as the company’s trials fail. This sector can be a bit of a casino, but a wise investor can tip the scales in their favor.
I have spent many hours of research in this sector. My PhD is in epidemiology and so this sector has long been one of my favorites. I am long two big pharma names – Pfizer (NYSE:PFE) and Gilead Sciences (NASDAQ:GILD). Both of these companies are flush with cash, but will eventually need sources of growth. That is why Pfizer and Gilead should be constantly on the lookout for companies that it can either buy outright or propose mergers with. Gilead has long been a growth story, whereas Pfizer has long been a reliable high dividend payer. Both companies and its stocks have been very rewarding. However, it needs to inorganically grow and not just rely on its own research and development teams.
Currently, there are two companies that are severely undervalued in my opinion and can easily be scooped up or absorbed by one of these larger names. Perhaps Pfizer should be most concerned, as its growth has really stalled. The two companies in question that I will discuss are Exelixis (NASDAQ:EXEL) and Synta Pharmaceuticals (NASDAQ:SNTA).
Trading at measly $4.25 per share, Synta may be sitting on a drug that could generate billions in revenue and result in the stock moving magnitudes higher than current levels. Why wouldn’t Pfizer or another competitor step in and scoop it up? The purpose of Synta has a leading anti-cancer drug candidate, ganetespib, which is showing extreme promise. Ganetespib belongs to a new class of drugs known as heat shock protein 90 (Hsp 90) inhibitors. Hsp90 plays a role in the maturation of client proteins, which help cells growth, divide, and survive. Compared to healthy cells, cancer cells are more dependent on elevated levels of Hsp90 to proliferate. As such, inhibiting the production of Hsp90 could stop certain types of cancer. Unlike other targeted therapies that seek out specific mutations — like Pfizer’s Xalkori, which are specifically tailored to seek out and attack specific mutated cells — Hsp90 inhibitors are believed to be able to disrupt several signaling pathways simultaneously to stop tumor cell proliferation.
Why am I so excited about this company? Well, the data is pretty convincing. Treatment with ganetespib has been shown in preclinical models to reduce some aggressive features of tumors, such as the ability to induce the growth of new blood vessels, the ability to spread to other organs in the body, and to resist attack by traditional therapies, such as chemo. Synta is primarily focusing on developing ganetespib as a treatment for non-small-cell lung cancer (or, NSCLC) breast cancer and colorectal cancer. If approved, the drug is expected to hit annual peak sales of $425 million to $600 million.
Here is the one problem: While its anticancer properties are not in question, successful formulation of a drug that can actively treat cancer in patients is indeed in question. It has been tough to move from the biochemistry to the in vivo therapy. If you are looking for the one company with a real shot to get FDA approval for an HsP90 inhibitor, then Synta is the best bet. Let’s review some of the data.