A Steal for $6 Billion

Mirati Therapeutics (MRTX) had many suitors...

Mirati is a biotech company in the early stages of growth. It's focused on cancer treatment, and its lead product candidate is Krazati... which was approved for colorectal and lung cancer less than a year ago.

So far, the drug has had a pretty slow rollout. Revenue in its first six months was just $19.7 million.

That's not much, considering blockbuster cancer drug Keytruda brings in more than $20 billion per year. Even "orphan" drugs that treat smaller diseases can generate billions of dollars.

But that didn't stop Mirati management from pursuing a sale. And it didn't stop big biotech companies from wanting in on the action...

The list of possible acquirers read like a "Who's Who" of biotech – featuring industry leaders like Merck (MRK), AstraZeneca (AZN), Pfizer (PFE), Sanofi (SNY), and Bristol-Myers Squibb (BMY).

In the end, Bristol-Myers won out. The drugmaker just announced a deal to buy Mirati for almost $6 billion.

As we'll explain, there's more to this lucrative deal than meets the eye. Bristol-Myers is after a lot more than Krazati. And it might have gotten a big bargain...

This isn't the best time for a shopping spree...

With interest rates above 5%, global merger and acquisition (M&A) activity is on pace to fall at least 38% this year.

Companies don't want to tap into their cash reserves in case we hit a recession. And debt is just too expensive to make most deals worthwhile.

So on the surface, it seems like Bristol-Myers jumped the gun... particularly since Mirati's main claim to fame hasn't taken off yet.

Some folks believe Krazati will become the next blockbuster drug. Even so, if that's all the company has going for it, it's hard to justify paying almost $6 billion.

But biotech companies rarely work on just one drug. They usually have a whole pipeline of drugs at various stages of development.

That's what Bristol-Myers is after.

In addition to Krazati, Mirati has five other molecules in its pipeline. Bristol-Myers got to skip the early development phase.

And unlike Mirati, Bristol-Myers has a massive distribution network. It's a lot easier for the bigger company to sell drugs. So it's that much easier to turn Krazati into a blockbuster.

Even so, we still don't know if a $6 billion valuation was too much (or too little)...

To understand whether Bristol-Myers overpaid, we can check our Embedded Expectations Analysis ("EEA") framework.

The EEA starts by looking at Mirati based on Bristol-Myers' acquisition price. From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what Bristol-Myers is paying for it today.

Mirati's Uniform return on assets ("ROA") has been negative for years. The market anticipates it will flip positive by 2025... and reach 6% a year later.

Take a look...

Said another way, Mirati has never generated a profit. Bristol-Myers is paying for a higher performance than Mirati has ever generated.

That being said, the biotech giant is thinking far bigger. Mirati just got its first drug approved. For biotech, that tends to trigger a quick shift from unprofitable to profitable... which is what the EEA shows.

It's not showing what comes next. Mature biotech companies average Uniform returns of about 20% per year.

Remember, Bristol-Myers is only paying for a Uniform ROA of 6%. If it helps Mirati grow into a mature biotech company, it could benefit from decades of 20%-plus returns.

From where we're standing, Bristol-Myers got Mirati for a steal. This is great news for shareholders.

Regards,

Joel Litman
October 19, 2023