Genentech's Tanox Buyout And Earnings Potential

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Includes: RHHBY, TNOX
by: Chad Brand

When I wrote about the Merck (NYSE:MRK) deal to acquire Sirna Therapeutics (Pending:RNAI) on 10/31 and predicted more biotech deals were coming, I didn't realize it would only take a week and a half. Thursday night, Genentech (Private:DNA) announced plans to acquire Tanox (TNOX) for $20 per share in a deal worth more than $900 million. The all-cash transaction is expected to close by the end of the first quarter.

Tanox is not a company that has received much attention on Wall Street, in terms of product potential or as a possible buyout candidate. Like I said in my last piece, it is very tough to know which of these small and mid cap biotechs will get bids. It appears there are some royalty synergies with this deal, which explains in part why DNA targeted them.

On another note, shares of Genentech have been flatlined for a while now (see the chart below) and are beginning to not look as overvalued as they have in the past. While a 30 forward P/E would rarely be considered extremely cheap, further weakness in DNA shares might allow for an attractive entry point for a firm that can grow earnings north of 20 percent per year.

DNA 1-yr chart:

dna