Three Potential Biotech Takeover Targets

Wednesday on CNBC's Fast Money show, it was noted that Big Pharma companies are sitting on piles of cash (read: billion$ and billion$), fueling speculation that M&A activity in the drug sector will probably happen soon due to the depressed stock prices of many of the companies in the sector. Not only did Jim Cramer pick up this ball, but he ran with it in his show. He said that he was going to identify five companies that he feels are ripe for the picking. In a blatant attempt to boost his ratings, he only mentioned one candidate Wednesday—Pfizer (PFE) targeting Allergan (AGN) — and will give his next two picks Thursday and the other two Friday.

I decided that I would try to second guess Cramu (as he used to call himself in his newsletters years ago) and have come up with my own candidates. What I did was run a screen on the biotechs with EPS 5 year growth rate > 8%, average daily trading volume > 150,000, and market capitalization > $1B. Out of the top 25, I then hand-picked those that had positive cash flows and high sales per share. I whittled the list down to the seven listed in the chart below (click to enlarge).

Of this seven, I looked at those that had robust drug pipelines as well as many drug collaborations. [Note: Genentech (DNA) is supposed to be in the process of being acquired by Roche (RHHBY.PK) but rumors are flying that Roche many not be able to come up with the money. If not, Genentech will be back on the block, but with a market cap of $775B, it's not going to be a cheap date.] I don't claim to be a specialist in the drug sector and can only make recommendations based on my short amount of research, but I do think the following are attractive take-over targets:

Biogen-Idec (BIIB): The company already has many drugs on the market and many in development, mostly in the areas of MS, non-Hodgkin's lymphoma, leukemia, and rheumatoid arthritis. It collaborates with many other biotech firms including PDL BioPharma (PDLI), Elan (ELN), and Schering AG (SHR). Technically, the stock is down 50% from its all-time high put in a little over a year ago and is sitting on major support at $40.

Gilead Sciences (GILD): The company engages in the discovery, development, and commercialization of therapeutics for the treatment of life-threatening infectious diseases including hepatitis B, HIV, and the flu (you'll recognize Tamiflu). It has many research collaborations including Abbott (ABT) and Novartis (NVS) and commercial collaborations with GlaxoSmithKline (GSK) and Bristol-Myers Squibb (BMY), to name a few. The stock price has survived better than others in this group, down only about 18% from recent highs so it might not be a great bargain especially considering its large market cap.

Genzyme (GENZ): The company develops and distributes treatments for renal, kidney, and thyroid diseases, osteoarthritis, and provides reproductive testing and genetic counseling among other services. The company has a collaboration agreement with PTC Therapeutics and a strategic alliance with Osiris Therapeutics (OSIR). The stock has slumped 27% from recent highs and is threatening support at $60.

The rest of the companies in the above chart are not primarily involved in drug development (most of them make biotech supplies) and I must confess that I don't know enough about this space to make an educated guess as to who might want to acquire them.

Well, these are my candidates in the biotech area. Let's see if Cramu thinks so, too.

Comments

[ZiggaZagga:]

What does this piece say that hasn't already been said and speculated in the last 18 months? These are all the usual suspects. However all these companies have large market capitals and would require a hefty premium to purchase. The cheapest would be Biogen at 20-25 billion dollars. Only one company has that much cash and most of it is stuck outside the US. You could be waiting a very long time if you're betting on any of these candidates. A much more interesting article would have been to look at companies with market capitals of less than 2.5 billion. These are the more likely take over candidates and premiums can be as high as 500% for some. e.g. Sitris

2008 Dec 05 06:20 AM

[jimmy Turano:]

I also agree with zigga zagga's comment above.
Instead of three biotech takeover targets, I'd like to see the SEC clean up for once, the RESEARCH FIRMS, THEIR EXPERTS, THEIR HIGH TARGET PRICES, INCLUDING THE 5 STAR- STAR MINE EXPERTS WHO ARE MISS-INFORMING THE INVESTORS, BECAUSE THEY HAVE BEEN FOLLOWING THE COMPANY FOR YEARS AND
HAVE FORMED SOME KIND OF ALLIANCE WITH THAT SPECIFIC COMPANY.
MANY CURRENT COMPANIES WITH THE WORSE STATISTICS,FUNDAMENTAL... HIGHEST BURN RATES WITH LITTLE REVENUE
KEEP ISSUING NEW STOCK OR LOOKING FOR PARTNERS SO THAT MANAGEMENT CAN STILL COLLECT A PAY CHECK.
THIS IS BY FAR NOT IN THE BEST INTEREST OF THE SHAREHOLDERS. BUT NO ONE OVERSEES THE COMPANY, THE DIRECTORS DO NOT HOLD MANAGEMENT ACCOUNTABLE,
AND THE SHAREHOLDERS KEEP LOSING THEIR SHIRTS WHILE THE INVESTORS BECOME THE COMPANIES BEST PIPELINE TO STAY IN BUSINESS.
THE FOUNDATION OF TRUST IS SHATTERED IN AMERICA!

2008 Dec 05 07:27 AM

[Dan Jacome:]

MRK should buy GILD for the HIV franchise and PFE will prolly look @ BIIB again next year...AMGN keeps getting tossed around, but its a monster pill to swallow

2008 Dec 05 08:46 AM

[nova:]

What a garbage.

2008 Dec 05 09:33 AM

[je:]

I would be very careful lining up with Cramer.

2008 Dec 05 12:03 PM

[Ledgy:]

Expect Pfizer to pick up, for a song, a small Aussie biotech for their gene therapy IP in the RNAi frontier. Alnylam hold the lions share of RNAi IP, but their's is synthetic delivered moecules - and everyone's starting to realise it's incredibly difficult to deliver these for the immune response.

Benitec's IP does it via viral vectored genetic contructs (gene therapy). Listen into City of Hope presentation at the American Society of Hematology 50th Conference on Mon 7th as they update their first in human trial for HIV Lymphoma using genetically modified stem cells to provide HIV immunity.

Proof of concept for this as a possible HIV cure provided fortuitously by Dr Gero Hutter via bone marrow transplant using a naturally immune donor earlier this year.

2008 Dec 06 09:38 AM

[charles hay...:]

don't you think with all this money the drug companys have it would be a good time to buy amedical device company like zmh

2008 Dec 06 10:48 AM

[Dan Jacome:]

big pharma buying med tech? Unlikely - the reimbursement rates for that stuff is a different game altogether - the trend is for Big Pharma to buy small biotech for its R/D and then leverage the acquirer's distribution/sales to effectively get the drugs critical mass.

2008 Dec 07 11:49 AM

[Furd Turgeson:]

What a worthless article. Zigga is right on the money.

2008 Dec 07 07:47 PM

[Furd Turgeson:]

How exactly could MRK buy GILD right now? GILD would be a 55-65+ billion dollar acquisition.

2008 Dec 09 07:29 AM

[Hoobligator:]

Right, MRK would much rather have INSM for just a couple bucks a share. INSM already has FOB products in the pipeline and recently was approved for worldwide EAP for ALS. The CEO has also been very visable in getting FOB to the marketplace.

2008 Dec 10 06:36 PM