Cancer treatment makes Endocyte premium takeover target

March 28, 2014

Now that Indiana-based Endocyte Inc.’s experimental cancer treatment is proving successful, the company may command a takeover bid at one of the industry’s highest premiums on record.

Endocyte surged last week after saying its vintafolide drug slowed the progression of lung cancer and won European backing to treat ovarian cancer. The results suggest the company’s treatment approach is effective and could spark a takeover by Merck & Co., which already has a partnership with Endocyte, said Royal Bank of Canada. AstraZeneca Plc or Roche Holding AG also could be interested, according to Cowen Group Inc.

While Merck has rights to sell vintafolide, Endocyte controls the underlying technology and future therapies developed with it. The biotechnology company is already working on a drug that could compete with vintafolide. Endocyte may command about $50 per share in a sale, up from $23.07 Thursday, according to the average of four estimates compiled by Bloomberg. That would be the second-highest takeover premium on record among similar U.S. deals in the industry.

“It’s a very interesting approach,” Robert Hazlett, a New York-based analyst at Roth Capital Partners LLC, said. “This might have appeal to any number of different companies that have a presence in oncology.”

A representative for Endocyte said the West Lafayette-based company couldn’t be reached for comment. A representative for Whitehouse Station, N.J.-based Merck didn’t have an immediate comment.

Drug details

Vintafolide works by targeting characteristics of cancer cells to better direct chemotherapy. A European Union panel last week recommended the drug be approved for treatment of ovarian cancer and also backed Endocyte’s imaging tool, which screens for patients who will respond best to the treatment. Endocyte shares rose to a record $28.17 after the announcement.

Studies also showed that combining vintafolide, whose brand name is Vynfinit, with chemotherapy reduced the risk of death from or a worsening of non-small cell lung cancer by 25 percent, compared with chemotherapy alone.

The results put Endocyte “on the radar screen,” Craig Kessler, chief investment officer at Kessler Investment Group LLC, said. The company “would be really appealing to somebody that’s larger and get them a foothold into a unique cancer treatment.”

Kessler oversees about $110 million, including Endocyte shares.

More uses

If vintafolide is approved for ovarian and lung cancer in the U.S. and Europe, it could bring in as much as $2 billion in revenue, according to Edward Tenthoff, a New York-based analyst at Piper Jaffray Cos.

Treating those two cancers is “just the tip of the iceberg” for Endocyte, Adnan Butt, a San Francisco-based analyst at RBC, said. The company can modify its technology with different drugs and targeting agents to be used for other cancers and diseases, such as inflammatory conditions, he said.

Endocyte is now developing another cancer treatment that targets cells in the same way as vintafolide, though with a potentially more potent chemotherapy drug. The company also is working on technology that can hone in on qualities of cells with prostate cancer.

While Merck has the right to market vintafolide worldwide and take half the U.S. profits, the $164 billion drugmaker doesn’t have a claim to Endocyte’s next-generation treatments nor the technology used to develop them.

Better drugs

That may motivate Merck to buy Endocyte, whose market capitalization is less than $1 billion, to get its hands on future drugs, particularly if more studies prove the technology’s capabilities, said Roth Capital’s Hazlett.

“If you have other ones that might be better, that might be problematic for Merck,” Hazlett said. “It may need to seriously consider Endocyte.”

Because the agreement with Merck is narrow, it leaves the door open for other suitors, said Simos Simeonidis, a New York-based analyst at Cowen. Possible buyers include AstraZeneca or Roche, he said.

“This could be a machine that produces multiple drugs,” Simeonidis said. “I think definitely big pharma or big biotech would be interested in bringing this in house.”

Buyer list

Biotechnology companies Gilead Sciences Inc., Biogen Idec Inc. and Amgen Inc. could be drawn to the company, said Kessler.

Representatives for Basel, Switzerland-based Roche, London- based AstraZeneca and Cambridge, Mass.-based Biogen declined to comment on market speculation. Representatives for Thousand Oaks, Calif.-based Amgen and Foster City, Calif.-based Gilead didn’t respond to requests for comments.

Even though Endocyte has no marketed products yet, it may lure about $50 a share in a takeover, according to the average of four estimates from analysts and investors that range from about $35 to more than $65.

That would be a more than 100-percent increase from the $23.07 closing price yesterday and one of the highest premiums among deals of more than $500 million for a U.S. biotechnology company with no net income, according to data compiled by Bloomberg.

Endocyte fell 3.3 percent to $22.31 at 9:51 a.m. in New York today. The company sold 4.5 million shares at $21 in a secondary offering after the close yesterday.

Not time

It may be too soon for a takeover of Endocyte by either Merck or other drugmakers, said Tenthoff of Piper Jaffray. Merck is probably satisfied with its partnership at this point, and the other drugs Endocyte is developing are still in too early stages to entice other suitors, he said.

“Acquirers are typically risk averse and would want to see the data before stepping out,” Greg Wade, a San Francisco-based analyst at Wedbush Inc., said.

Merck, though, should consider having discussions about a possible takeover “sooner rather than later” because the price of a deal will probably increase as Endocyte gets more positive data on its drugs, said Hazlett of Roth Capital. Results that add to the case for vintafolide as a treatment for lung cancer could make for a good entry point, he said.

“It’s a multi-billion-dollar therapy with a screening regimen built-in,” Hazlett said. The attractiveness of the underlying technology “adds a layer of complexity and maybe even a layer of urgency to what Merck might have to do over the long run.”


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