On the of 21st of February the share price of ASX junior biotechnology company Viralytics Limited (VLA) jumped 168% in a single day.  The catalyst was news of a takeover bid from US pharma giant Merck & Co (NYSE: MRK) at $1.75 per share, with the pre-offer trading price of $0.63 rising to $1.69 by the close of trading. 
While the train has left the station for newcomers to VLA, that kind of move invariably attracts the attention of investors searching for other biotech stocks with takeover potential. 
While the potential rewards of getting it right with this strategy are substantial, the risks suggest most investors should proceed with extreme caution. 
Potential targets you might find on financial websites are companies known to everyone in the market, raising the possibility the share price is already reflecting the takeover. The moral here is insiders often smell takeover long before retail investors get wind of the deal.
In addition, retail investors with market experience know rumours are a tool used by some investment banking and private equity firms to drive up share price, with the increase rapidly fading away once the rumours prove untrue.
Announced acquisitions do not always come to fruition, with the share price crashing once problems with the takeover become known.
Given these risks it is somewhat surprising even the most prestigious analyst firms from time to time release speculative lists of companies ripe for a takeover.  For the intrepid investor with high risk tolerance, there are steps one can take to increase the odds of a successful investment.
First, merger and acquisition activity tends to increase during periods of stellar economic growth.  Despite market volatility in recent months, the most recent Global PMI (Purchasing Managers Index) from JP Morgan in conjunction with London-based financial services firm IH Markit suggests we are in a robust global economy.

The PMI represents a survey of manufacturing purchasing managers around the world, assessing manufacturing activity overall, and in six sub-categories.  Readings over 50 indicate growth.  The following table shows the numbers comparing January and February of 2018.

The index is at its highest level in seven years, prompting the following summary from JP Morgan:
• “The February PMI surveys signaled a further acceleration in the rate of expansion in global economic output. According to the PMI, growth hit a near three-and a-half year high, as inflows of new business strengthened. The acceleration was mainly led by the service economy, as signs of growth slowdown from recent highs were observed in manufacturing. With economic conditions remaining solid overall, global growth should remain solid in coming months.”
Financial websites offer a variety of characteristics to look for in a potential takeover target.  
• Larger companies are less attractive due to acquisition costs. • Ample cash on hand helps the acquiring company with acquisition costs.• Stocks with low Price to Book Ratios (P/B) are seen as undervalued.• Institutional Investors own stock in the company• Experienced Management in place• Large market potential• Viable product line.
There are sophisticated valuation formulas used by professionals that are often beyond the capabilities of the average retail investor.  However, one could make a convincing case that the most important criteria are market potential and a viable product line, preferably one already generating revenue.  Despite the protestations that acquiring companies are looking to pay no more than fair value, the history of M&A activity is replete with examples of overpriced acquisitions chasing a perceived “hot” product.
“Reverse engineering” Viralytics to attempt to identify its allure for Merck strongly supports the notion of viable product as a determining factor.
Intellectual property patents are critically important for most biotech’s.  Viralytics has a patented cancer treatment called CAVATAK®, a proprietary formulation derived from a common cold virus. The formulation is injected into cancer cells – both primary and metastatic – to stimulate the body’s immune system to destroy the cancerous cells without harming healthy tissue.  The treatment can be used alone or in conjunction with traditional chemotherapy and is suitable for a variety of cancers, from melanoma, to prostate, to lung, to bladder.  The company has multiple clinical trials underway, with a history of collaborating with Merck.  Viralytics has an impressive list of institutional investors.  The share price was languishing prior to the blockbuster Merck announcement.

The Viralytics takeover along with that of Sirtex Medical (SRX), LifeHealthCare Group (LHC), and RHS Limited (RHS), led to inevitable market speculation regarding what company might be next.
An analyst from private advisory firm Wilsons has cautiously identified four potential takeover targets from the ASX pharma/biotech/life sciences sector.  
From the website stockhead.com we find the following conclusion from the Wilson’s research note to clients:
• “We note that other potential takeover targets in our coverage universe based on asset quality, IP [intellectual property] protection and clinical data could be TLX, OPT, ANR and OSL; although we do not anticipate M&A activity for any of these assets in the near term.” 
The following table lists the four by market cap, along with share price history.

Enterprise value is the preferred valuation measure of acquiring companies, since an EV lower than a company’s market cap indicates the company has more cash than debt, a sign the company may be undervalued.  All the stocks in table meet that measure, with Telix Pharmaceuticals (TLX) appearing to be the most attractive.
Telix debuted on the ASX in November of 2017.  Apparently, the stellar reputation of the company’s CEO whetted investor appetite sufficiently to oversubscribe the IPO but the share price has been dropping steadily since. 

Telix is a very young company, starting in January of 2017 to introduce a pipeline of molecularly targeted radiation (MTR) therapies to image and treat unmet needs in cancer patients.  The radiation treatment kills cancer cells and shrinks tumour growth, with minimal side effects.  The company has three treatments in clinical trials, with renal cancer the most advanced trial.  Prostate and brain cancer trials are in early stages.  In stark contrast to Viralytics, Telix has no intellectual property rights to MTR – a relatively new treatment approach being advanced by researchers and other companies, such as Germany’s Bayer HealthCare Pharmaceuticals.  
Some investors would drop TLX from their watch lists for this reason, but the company is already setting the stage for doing business in Japan, first establishing a manufacturing partnership with Japan’s JFE Engineering Corporation (“JFE”), and later opening offices in Japan.  Recently Telix announced the opening of a European operations centre.
Opthea Limited (OPT) is developing treatments for eye diseases, notably wet AMD (Age-Related Macular Degeneration) and DME (diabetic macular edema).  In the US market DME affects approximately 10% of people suffering from diabetes, with 9.3% of the US population currently suffering from diabetes.  AMD currently afflicts 11 million, with that number forecasted to double by 2050. 
The treatments are protein-based designed to promote blood vessel development.  Clinical trials are underway with no results yet released.  The company has US patents, but it seems unlikely an acquirer would come calling before any clinical results are released.
Antara Lifesciences (ANR) is poised to address the global problem of increasing antibiotic use in animals, which can lead to infectious diseases resisting antibiotics, creating “super bugs.”  The company’s lead product is called Detach®, already clinically proven to be effective in treating Scour – a gastro-intestinal disorder in pigs.  Detach® is made from an enzyme extracted from pineapple stems, called Bromelain.  Antara plans an Australian launch of the product, followed by introduction in the European and US markets. Detach® may be useful in treating chicken and calves and the company is developing a human strain for the prevention of diarrhoea in Humans.
Antara is currently negotiating a partnership arrangement with Zoetis, Inc. (NYSE: ZTE) – the largest manufacturer of vaccinations and medicines for livestock and pets in the world, for commercialisation of Detach® globally.  The company is also interested in partnering with pharmaceutical / biotechnology companies for later stage clinical development and commercialisation of the human version of Detach® for human application in travellers and military personnel.  Again, this contrasts with Viralytics that already had a partnership arrangement with the pharmaceutical company that acquired it.  
The final potential target is Oncosil Medical (OSL), a company developing a radioactive isotope – OncoSil™ – implanted directly into pancreatic cancer tumours.  A recent global clinical trial showed positive results and the company is now expecting to present the results for regulatory approval from the EU later this year.  
In 2016 Oncosil received a US FDA-approved IDE (Investigational Device Exemption), allowing the company to proceed with clinical trials without going through the approval process associated with commercial distribution.  The company is now recruiting study subjects in the US to add to subjects from Europe and Australia.
Evidence from a single study does indicate OncoSil™ appears viable, but the company has yet to secure strategic partnership arrangements or licensing approvals anywhere.

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