BiQ: SpringWorks Rises on Buyout Rumors (SWTX)

There was a lot of excitement around SpringWorks Therapeutics (SWTX) today as rumors of a potential buyout by Merck KGaA drove shares to an intraday high of $60 and a close at $54, a 34% gain for the day.

I believe there could still be upside for the shares if a buyout happens; however, there's no way to be certain whether or not a deal will materialize. Here are a few things to consider:

1. FOMO can be a powerful force, but I would be cautious about chasing shares at these levels. While I think shares remain attractive over longer time frames, shares will likely fall back in the NMT without a buyout.
2. Even if the buyout rumors are true, I expect a buyout would be contingent on Mirdametinib approval in the US, and possibly Ogsiveo approval in the EU. While both are likely to happen, neither is guaranteed.
3. According to the rumors, the buyer in this transaction is Merck KGaA, not Merck USA. Merck KGaA is a much smaller company than Merck USA, with a market cap of just under $70B. This would make a potential buyout of SWTX a fairly substantial transaction for the company. An estimated buyout price of $8B would represent more than 10% of Merck KGaA's market cap.

Stated succinctly, my core strategy at Biotech iQ is maximizing RAR and minimizing risk as much as possible. If we view the situation through this lens, the current RAR doesn't look favorable enough to me to support an entry at this valuation. Therefore, I am downgrading SWTX's rating from a Buy to a Hold in the NMT. Shares remain a Buy for the LT.

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I have a beneficial long position in SWTX.

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