April 26, 2023 – The first documented lottery was held in China during the Han Dynasty between 205 and 187 BC. These lotteries raised funds for large projects, including the Great Wall of China.

Thousands of years later, the first lotteries began in the U.S. around the 18th century to finance public infrastructure projects such as roads and bridges.

In the modern era, there is no lottery more popular than Powerball, in which the prize available for the winning ticket has reached in excess of $2 billion.

Despite the long odds of winning, which are about 1 in 292 million, it is estimated that upward of 20 million or more people play the Powerball lottery. For context, the odds of being struck by lightning in a given year are about 1 in 1 million.

Throughout the ages, humans have been attracted to long-shot bets. In the capital markets, nowhere do you find these lottery-ticket-like payoffs than in the biotech sector.

Many biotech companies are highly dependent on the success of a single drug or therapy, which means that the failure of that drug or therapy can significantly impact the company’s financial performance and future prospects. A negative clinical result can devastate a biotech company, sending its stock plunging and putting its future in doubt. Conversely, a positive clinical result can send a drug developer’s share price soaring, creating significant momentum for the company and opening up new opportunities.

When a biotech company develops a treatment with best-in-class clinical results, would-be acquirors take notice.

A “patent cliff” is a term used to describe a period when a pharmaceutical company’s patents on some of its most profitable drugs are set to expire. This expiry can be a significant challenge for pharmaceutical companies, as it means that they will no longer have exclusive rights to sell these drugs and will likely face increased competition from generic drug manufacturers.

Typically, once a pharmaceutical company’s patent expires, it becomes overwhelmed with generic competition and profitability plummets. This rapid decline in the profitability of a drug can be especially challenging if the company does not have any new treatments in development to replace the revenue from the expiring products.

Pharmaceutical companies often try to mitigate the impact of a patent cliff by developing new drugs or acquiring other companies with promising drug pipelines. However, when a biotech company has an experimental new treatment that possesses multi-billion-dollar future sales potential, a large pharmaceutical company desperate for growth will often pay an astounding price for that commercial potential.

Recent activity in public mergers and acquisitions has demonstrated this dynamic well. For example, several biotech companies that exhibited positive clinical results recently struck deals to be acquired by major pharma companies at significant premiums.

Investors should pay attention because some of the prices paid for life sciences M&A targets over the past two months were significant:

  • On March 13th, Pfizer inked a deal to buy Seagen, a developer of cancer medicines, for $43 billion, representing a 42% premium.
  • Also on March 13th, Sanofi signed a definitive agreement to acquire diabetes therapy company Provention Bio for $2.9 billion, struck at a shocking 273% premium.
  • On April 16th, Merck announced the takeover of Prometheus Biosciences, a developer of treatments for immune-mediated diseases, for $10 billion (a 75% premium).
  • On April 18th, GSK signed a transaction to buy BELLUS Health, which is developing a treatment for refractory chronic cough, for $2 billion, representing a 103% premium.

These four $1 billion+ biotech acquisitions were agreed to in the past several weeks at an average premium of 123%. Year-to-date, there have been eight public U.S. M&A deals in the life sciences sector, executed at an average premium of 99%.

Investors who were long these biotech lottery tickets were rewarded with share prices that nearly doubled overnight after the acquisitions were announced.

The prices paid for speculative but prospective biotech firms are significantly higher than merger targets in other sectors. For example, in non-biotech M&A this year, the average premium paid was just 43%.

Nevertheless, a deal for a target company’s shares tends to be rewarding for investors, as it typically accompanies a significant lift in its share price. Biotech M&A is not only notable for its above-average premiums paid (along with the accompanying reward for target company investors), but also the fact that life sciences mergers represent 20% of all public U.S. M&A thus far in 2023.

While the odds are slim, and most biotech firms may produce an unpleasant result for investors with failed drugs, those who successfully navigate the sector have substantial upside potential through the current bull market in biotech M&A.

And if you’re looking for a lottery-like payoff, you’ll find significantly better odds in the shares of a biotech with promising clinical results than the upcoming Powerball.

Disclosure: The Accelerate Arbitrage Fund (TSX: ARB) holds shares of Prometheus Biosciences and BELLUS Health.

The AlphaRank.com Merger Monitor below represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized returns of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.

Each individual merger is assigned a risk rating:

  • AA – a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
  • A – a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
  • BBB – a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
  • BB – a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
  • B – a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
  • CCC – a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
  • NR – a merger-rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.

The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.

* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit Alpharank.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.


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