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For biotech investors a positive phase III clinical trial is like a home run, an FDA approval is like a game winning grand slam but a buyout is like winning the World Series with fireworks, rainbows and unicorns. (OK, not unicorns). A buyout is what every biotech investor dreams of and over this last year there have been some monster buyouts.
Biotech is usually about binary events like FDA approvals. These are long anticipated but a buyout can come out of nowhere seemingly. If you are seriously buying a stock on buyout hopes (which I hope you won’t do) at least think about these considerations. How big is the market cap? Is it at a 52 week high? Acquirers never pay retail. Who might be a possible acquirer? Does the company have a desirable drug at least in phase III trials, or even better an FDA approval or better yet a drug on the market?
There seems to be a ‘sweet spot’ in market cap between 1 billion to a high of 5 billion depending on the company’s pipeline. Inhibitex was trading around $9 and was bought out at $26 a share at $2.5 billion by Bristol Myers Squibb. Human Genome Sciences was trading around $7 when it was offered a bid by Glaxo Smith Kline but the HGSI market cap was just around $1-1.4 billion at the time of the offer. Gilead bought Pharmasset on November 11 at an 89% premium. That market cap was slightly higher than the sweet spot but apparently Gilead wanted a hepatitis C drug real bad.
Who’s Up at Bat?
Recent names bandied about as buyout targets are Seattle Genetics Inc, Alexion Pharmaceutical Inc, Regeneron Pharmaceuticals Inc, BioMarin Pharmaceutical, Vertex Pharmaceuticals, Idenix Pharmaceuticals Inc and Obagi Medical Products Inc.
Seattle Genetics, Inc. focuses on monoclonal antibody based therapies for cancer. On July 13 CEO Clay Siegall said he foresaw $1 billion in sales for Adcetris by 2015, the company’s treatment for Hodgkin’s lymphoma sufferers who haven’t responded to standard of care therapies. Investors saw that as a decision to go it alone especially since Seattle Genetics has more phase I and II trials using Adcetris for other indications and in combinations with other drugs. Its current market cap of 3.02 billion is a little on the high side for a potential acquirer and the company has a strategic collaboration in place with Oxford BioTherapeutics Ltd to research more antibody-drug conjugates. This is a stock that could stand alone but currently has a negative EPS of -1.14 and a 54.40% short float. And the CEO said to all intents and purposes they are not for sale. Case closed.
Alexion Pharmaceuticals Inc (NASDAQ: ALXN) has one approved product, Soliris, for the treatment of paroxysmal nocturnal hemoglobinuria and for the rare disease, atypical hemolytic uremic syndrome. Alexion has a market cap of 18.40 billion, way out of the average take out range. The company specializes in rare and severe disorders which doesn’t mean it’s undesirable as orphan drugs can be very profitable, but Alexion has a big price tag and no big partner in place. It has a P/E of 97.43 and is up 70.61% over 52 weeks. The company has a lot of debt, but it does have earnings and has more products in phase I and II.
Regeneron Pharmaceuticals Inc (NASDAQ: REGN) has had a monster run this year from $42.83 to a high of $145.04. Now it is at a market cap of 11.35 billion with a negative EPS of -1.82. Its big hit Eylia, a treatment for neovascular age-related macular degeneration, is something a company like Allergan Inc would be interested in as it has a well known opthalmological divison but Allergan’s market cap is $25.45 billion, therefore Regeneron is a little hard for Allergan to swallow at half its size. Sanofi, Biogen and Amgen have all been rumored as potential acquirers. Of all these Sanofi with a $97.85 billion market cap would be the likeliest as it is collaborating with Regeneron on a phase III clinical trial of an LDL cholesterol lowering PCSK9 antibody. So here’s a big pharma partner with enough size to actually do a deal. Regeneron reports August 11. (Frankly I’d rather own Sanofi with its 4.40% yield and 12.84 P/E.)
BioMarin Pharmaceutical (NASDAQ: BMRN) is another rare disease specialist. Recently the Guardian reported that Glaxo Smith Kline or Shire Pharmaceutical might be interested in BioMarin. It has a market cap of $4.47 billion and a negative EPS of -0.65. The company recently had a secondary offering to help fund R&D costs. BioMarin has four products on the market, Naglazyme (for mucopolysaccharidosis VI), Aldurazyme( for mucopolysaccharidosis I), Firdapse (for Lambert Eaton Myasthenic Syndrome) and Kuvan for phenylketonuria. BioMarin is already partnering with Merck Serona S.A. on Kuvan and other phenylketonuria treatments and collaborates with Genzyme on the manufacture of Aldurazyme. The company reports August 1.
Vertex Pharmaceuticals Inc (NASDAQ: VRTX) at a $10.20 Billion market cap is still pretty hard to swallow but it’s in the very hot Hepatitis C space. It has a P/E of 34.36 and PiperJaffray sees its Incivek for hepatitis C sales slowing but still gives it an overweight rating and a $75 price target. The hepatitis space has been very fluid recently as companies like Gilead, Bristol Myers Squibb and Merck may try combinations of their drugs with other companies’ in up to boost efficacy.
Idenix Pharmaceuticals Inc(NASDAQ: IDIX)is also in this almost incestuous space and has two compounds IDX184 and IDX 719 that are showing promise. It has a $1.09 billion market cap and -0.33 EPS. It has also pulled back 33% from its high of $15.25. The news is fast and furious with these hep C names and unless you are willing to devote some time to understanding what works with whose and how there are less difficult biotechs to parse. Idenix has a collaboration in place with Novartis on a hepatitis B drug, telbivudine.
Obagi Medical Products Inc specializes in dermatological conditions and has the smallest market cap of these at $288.66 million. The Company has an 18.63 P/E and a successful line of skin products with a sales force in place and recently removed a poison pill provision. This company reports August 2. Possible suitors are rumored to be Avon Products, Allergan and Medicis. See much more here.
If you invest in any of the buyout bios the prudent thing is to discount buyout possibilities and assume a buyout may never happen at all. Especially if the company has no partner or collaborator and has a high market cap over $5 billion. Only invest if you think the company has a future going forward alone. I’m not saying none of these will be bought out, just playing devil’s advocate for you. Just go in with your eyes open and keep a little skepticism about buyout rumors. Here’s hoping for a Monday morning merger in your future.
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