Biotech Beauty Is In The Eye Of The Big Pharma Beholder... And Big Pharma Is Smitten
Smart Profits Report Issue #524
By Marc Lichtenfeld
Investment Director, Smart Profits Report The Pharmaceutical & Biotech Licensing and Deal Making Summit. Sounds like a pretty grand title, doesn't it? But it's actually a rather intimate gathering of business development leaders and investors in the sector. And in terms of the healthcare sector's future growth potential, this a major opportunity to showcase strengths, build relationships, and discuss deals and developments. Companies of all sizes were represented – from tiny startups to pharmaceutical giants such as Merck (NYSE: MRK). And although Merck didn't admit it, the trend was abundantly clear throughout: Big Pharma needs new drugs in its pipeline – and firms are willing to pay for them. Here's an inside look at the conference... the scoop on the M&A deals done already... and the next potential deals in the works... How Much Would You Pay To Get What You Want? Ask Glaxo... Although I made a speech at the conference, there was also plenty of time to discuss deals. And in this arena, beauty really can be in the eye of the beholder. For example, several of us were chatting about GlaxoSmithKline's (NYSE: GSK) recent acquisition announcement of Sirtris Pharmaceuticals (Nasdaq: SIRT). Here's a deal where Glaxo paid 80% more than Sirtris' closing price to buy the company. Many of us speculated that a bidding war must have taken place in order for Sirtris to attract such a high price, given that its technology is unproven. Finally, a gentleman who had been silent during the conversation spoke up. He's the head of business development for one of the major pharmaceutical companies and revealed that Sirtris had courted him about a buyout deal. He passed on the offer, but informed us that there was actually no bidding war for Sirtris. Glaxo merely paid the price that it believed was necessary to get the deal done. Perhaps the firm feared other companies were interested, or maybe just wanted to be certain that its offer would be the best. But 80% is a serious premium to pay. And it's not even the highest... With Piddly Pipelines And Expiring Exclusivity, Big Pharma Is On The Prowl When I was in my early twenties, I had one friend who was always on the prowl for Mrs. Right (or at least Mrs. Right Now) whenever we went out. The evening would kick off with him boasting about how he would end up with the most beautiful girl in the bar. As the night wore on, though, he gradually lowered his standards. By the end of the evening, fueled by desperation (and perhaps a little Jagermeister), he was willing to be with any woman that had a pulse. The healthcare M&A picture right now reminds me of that situation – with one exception. Some Big Pharma companies have become even more desperate than my buddy! With patents expiring and pipelines empty, they need to add some in-house research and development stat! That's why you're seeing firms like Glaxo pay premiums of 80% to acquire their object of affection. Even that sky-high amount wasn't the highest. Last week, Intercell paid a whopping 126% premium to acquire Iomai (Nasdaq: IOMI). With small firms able to garner such high prices, it puts virtually every small-cap biotech in play. Here's my favorite... Top Of My Biotech List Already recommended to Xcelerated Profits Report readers back in August 2007, BioMarin (Nasdaq: BMRN) is a profitable biotech company. Let me repeat that: BioMarin is a profitable biotech company – a rarity in the sector. Therefore, a deal for BioMarin would be accretive (i.e. would add profits to the buyer's bottom line). And even if BioMarin doesn't get bought, we can just continue to watch the company grow its profits and revenues, as well as watching our investment grow. Since recommending it in August 2007, we took 99% gains on the first half of the position on December 14, 2007 and are currently up 116% on the second half. I love the long-term prospects of this company. It has three marketed products that treat rare diseases. And although the patient populations are small, the drugs carry a hefty price tag – well into six figures per year – and insurance companies have signed on to pay for it. But BioMarin isn't alone... The Key To Finding Biotech 10-Baggers There are several other companies on my biotech watchlist that I'm very excited about. Some could easily be acquired in the next 12–24 months. However, buying a stock hoping that the company gets sold is not a great investment strategy. The very best healthcare and biotech firms are the ones that have game-changing technologies or drugs. If they get acquired along the way, so be it. But if not, these kinds of companies can double, triple, or more. So how do you find them? Stay tuned. On Thursday, I'll give you more details on my selection process for finding stocks poised to double (and that's a minimum expectation), taught to me by two of the greatest contrarian investors in recent decades. Meantime, suffice it to say that I'm very bullish on biotech right now. Promising new drugs, combined with Big Pharma's desperation for growth, should enable the sector to outperform over the next several years. If you can handle a little risk, you'd be wise to add some exposure to the sector in your portfolio. Marc
Today's Smart Profits Notes:
- May is turning in the "Month Of Icahn." The famous activist investor has made plenty of headlines recently – most notably when he ruffled feathers in the Yahoo (Nasdaq: YHOO) boardroom and announced his willingness to engage in a proxy fight for the firm. But flying under the radar in comparison is news that he snapped up a $200 million position in Amylin Pharmaceuticals (Nasdaq: AMLN). Why? One thing sure: This guy is no wall flower! He doesn't sit around waiting for things to happen; he makes things happen. And in typical, Icahn-like fashion, it seems likely that he's either going to lobby management for changes, or suggest an outright sale of the company, as he's done with others. Specifically, Icahn could urge management to boost its marketing policy for diabetes drug Byetta, whose sales are under pressure from competitors. As his dealings with Yahoo have proved, investors should welcome intervention from Icahn, as his M.O. is simple: Boost shareholder value.
- Elsewhere in the biotech world, Biogen (Nasdaq: BIIB) re-affirmed its long-term compound annual revenue growth rate of 15% per year between 2007 and 2010. This comes despite a drop in prescriptions for its Avonex multiple sclerosis drug to less than 10,000 per week – down from between 13,000 and 14,000. However, that performance is offset by its fellow MS treatment, Tysabsi. The drug is still regaining ground with strict new safety measures in place, following a high-profile failure a few years ago and the firm expects to have 100,000 patients by 2010. Biogen says it will have four new products by 2010 and almost half its annual revenue will come from overseas.
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