Every biotech is for sale

But a few are more likely to sell than others. Here are some names.

By Motley Fool Pick of the Day Nov 30, 2011 3:08PM

Image: Pills (© Corbis)By Brian Orelli

 

Another day, another buyout rumor. Monday, it was Onyx Pharmaceuticals (ONXX) that jumped after Bloomberg said the company was in the early stages of exploring the possibility of putting itself up for sale. Before that it wasAchillion Pharmaceuticals (ACHN). And BioSante Pharmaceuticals (BPAX) before that. The rumor list is a mile long.

 

Here's a news flash for you: Every public biotech could be sold at any point.

 

Boards of directors have a fiduciary duty to maximize value for shareholders. They have to entertain offers and make decisions about approaching potential acquirers; it's in the job description.

 

Just because an unnamed source says the drugmaker is up for sale, that doesn't mean it it's going to happen. Heck, even if the CEO says the company is entertaining offers, I wouldn't ascribe a higher value to the company. It takes two tango; you need a willing buyer to actually complete a sale. Throwing out a for-sale sign on the front lawn isn't good enough.

 

Not an investment thesis, but ...
While you can't count on a company to be acquired, I think it's reasonable to find high-quality companies that might be acquired. As long as you don't assign any value to the potential for an acquisition, it's a free kicker. Gilead Sciencestook outPharmasset this month for a 59% premium over its all-time high.

 

And knowing that a drugmaker might be acquired helps you to know that you're on the right track with your due diligence. If another company might be interested in buying the drugmaker, it seems reasonable that investors will be, too.

 

What makes a good acquisition target? Attractive drugs and the least complicated deal possible.

 

It certainly helps to have a drug that's in a growing market with little competition, but what I think pharmaceutical companies really want is to be able to quantify the risk. They haven't reached the point where they're so conservative that they only want to buy drugs already on the market, but if they're going to invest in a drug that is still in development, it had better be clear what the chances of approval are. That's one reason I think BioSante isn't likely to be acquired until the phase 3 data is revealed, and potentially not until after the drug gains FDA approval. There are just too many unknowns at this point.

 

The less complicated the deal, the better. It's not a deal-breaker for a company to already have a partner; Eli Lilly bought ImClone Systems even though it already had Bristol-Myers Squibb as a partner. But all things being equal, pharmaceutical companies would rather acquire the full rights to a drug than have to deal with developing it with another drugmaker.

 

Names, please
Even after the purchase of Pharmasset and Anadys, the hepatitis C space is still ripe for further consolidation. Idenix Pharmaceuticals, Inhibitex (INHX), and Achillion Pharmaceuticals are all potential acquisition targets if their phase 2 data come out positive.

 

I used to think that Exelixis (EXEL) would never be bought out because it had so many partnerships with different drugmakers, but after Bristol-Myers Squibbhanded back rights to cabozantinib, it's looking more likely. The development-stage drugmaker still has other partnerships, but considering that most of its value is tied to cabozantinib, I think a potential acquirer could deal with the other partnerships.

 

Finally, there's Amarin (AMRN), which has been on my likely-to-be-bought list for some time. After two successful phase 3 trials for its triglyceride-fighting AMR101, the risk of approval seems low. The market seems large enough; GlaxoSmithKline's competing, but inferior, triglyceride drug Lovaza registered sales of $659 million in the U.S. alone during the first nine months of the year. My guess is that pharma is still trying to figure out the risks of patent issues on both Lovaza and AMR101 before jumping in.

 

Fool contributorBrian Orelliholds no position in any company mentioned. The Motley Fool owns shares of Exelixis.Motley Fool newsletter serviceshave recommended buying shares of Gilead Sciences, Exelixis, and GlaxoSmithKline. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.


1Comment
Dec 1, 2011 11:35AM
avatar
Is it possible for a person who is flat broke living out of their car to invest in the stock market?And is it a good idea?I thought I would put up questions instead of commenting.The economy  is aweful.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.