The economy continues to recover from the pandemic impact, but the currents are flowing in multiple directions at once. Emblematic of the situation is the combination of high inflation and improving jobs numbers, each tugging in opposite directions on the economy.
Still, there are some unequivocal signs of economic health that investors can latch onto. One of these, a boost in buyout activity, presents a particularly interesting set of data. In 2021, the US economy saw buyout transactions worth a total of $2.5 trillion, more than 25% higher than the previous record, 2015’s $1.96 trillion. Perhaps the best indicator of economic health was the broad base of that corporate buying activity; the total number of deals was some two-thirds higher than in the previous record year, reaching a total of 20,000, while the largest single deal was worth $50 billion.
Underneath the overall strong buyout activity were three factors that appear poised to repeat in 2022. First, companies are sitting on plenty of cash, and second, they have the financial ability to conduct mergers and acquisitions. Finally, even if the Federal Reserve does raise interest rates three times this year, rates will remain historically low. The cheap cost of borrowing will make it easy to finance acquisitions.
For now, Wall Street’s analysts are busy picking out likely targets for M&A activity. Writing from Credit Suisse, analyst Judah Frommer has found two stocks that he sees as potential candidates. According to TipRanks database, both are Strong Buys with triple-digit upside potential. Let’s take a closer look.
eFFECTOR Therapeutics (EFTR)
We’ll start with a clinical-stage biopharma company, eFFECTOR. This firm has a research pipeline focused on selective translation regulators, or STRs, a new class of cancer drug candidates. STRs are designed to prevent the formation of proteins needed by cancer cells, thus preventing tumor growth and halting the disease process.
The company’s research program currently has two novel drug candidates undergoing clinical trials. The leading candidate, tomivosertib, is the subject of two Phase 2 studies featuring two cohorts, patients with PD-L1>50% and patients with PD-L1>1%. These two patient cohorts are taking tomivosertib as a combination therapy with pembrolizumab, and topline data is both patient cohorts are expected for release in 1H23. The two cohorts together are expected to enroll up to 120 patients.
Concurrently, eFFECTOR has a Phase 2a trial underway to evaluate zotatifin, the second drug candidate. This trial is testing the drug in the treatment of various solid tumors, and the company announced at the end of January that it had dosed patients in two expansion cohorts of the study. eFFECTOR is on track to release data from an earlier Phase 1 study in 1H22, with the Phase 2 results to follow in 2H22.
Maintaining multiple simultaneous clinical trials requires capital, and eFFECTOR raised that money by going public through a SPAC transaction last year. The combination was conducted with Locust Walk Acquisition Corporation, and was completed on August 25, bringing more than $175 million in gross proceeds to the biopharma.
Among the bulls is Credit Suisse’s Judah Frommer who sees this company as a potential buyout target, based on the strength of the clinical program.
“We believe EFTR could be viewed as an attractive M&A candidate based on the differentiated targets and more advanced stage of clinical development for its lead program tomivosertib, although additional clinical data will likely be required to better clarify tomivosertib’s commercial potential… We continue to expect the 2022 updates for tomivosertib as the key catalysts to further elevate acquisition expectations for the name,” the analyst wrote.
To this end, Frommer rates EFTR shares a Buy, along with a $16 price target. Should this target be met, a twelve-month gain of 247% could be in store. (To watch Frommer’s track record, click here)
Overall, Wall Street would tend to agree with this bullish outlook – as shown by the 3 to 1 breakdown in recent reviews, favoring Buys over Holds and supporting a Strong Buy consensus view. The stock is trading for $4.61 and its $20.04 average price target implies a potential upside of ~335% in the next 12 months. (See EFTR stock forecast on TipRanks)
Fulcrum Therapeutics (FULC)
Next up is another clinical-stage biopharmaceutical researcher. Fulcrum Therapeutics is working on new treatments for genetically defined diseases, with a pipeline that features novel medicines that are based on modulating gene regulation. In short, Fulcrum is aiming to take control of the genetic ‘switches’ that underlie disease conditions, and treat the diseases at their source.
Fulcrum has recently hit some important milestones in its two leading clinical programs, and has several catalyst upcoming on both. The lead program, losmapimod, has shown potential in earlier clinical studies as a treatment for facioscapulohumeral muscular dystrophy (FSHD). The company is on track to advance this drug candidate to a late-stage Phase 3 clinical trial in the near future, with a program update expected during 1Q22.
The second candidate is FTX-6058, an investigational treatment for sickle cell disease with potential for label expansion to multiple indications. In recent months, the company has completed a preclinical toxicology study for label expansion, and has dosed the first patient in a Phase 1b clinical trial for sickle cell. Fulcrum expects to release initial data on that trial during 2Q22, and to initiate additional Phase 1b trials for select hemoglobinopathies also in the second quarter.
The company is well positioned to fund these clinical activities, as it has $218.2 million in cash on hand. According to management, this is sufficient to fund operations – both R&D and administrative – into 2024.
Looking at Fulcrum, Credit Suisse’s Frommer sees the sickle cell track as the key point for potential buyers, writing, “We see the potential for FULC to emerge as an attractive M&A candidate as FTX-6058 moves forward in SCD patients and is potentially de-risked beyond HV data and an accepted MoA. While less impactful in our thesis, losmapimod does de-risk the FulcrumSeek platform, in general, as well.”
Based on the above, Frommer sets a $30 price target on FULC shares, implying ~166% upside potential for the year ahead and supporting his Buy rating.
The Wall Street view on FULC shares is unanimous – a Strong Buy based on 6 positive analyst reviews. The stock is currently trading for $11.29 and its $37.40 average price target suggests it has room to gain a robust 231% during the course of 2022. (See FULC stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
