Inhibitex: The Negatives Of An Acquisition And The Odds Of It Occurring

| About: Inhibitex, Inc. (INHX)

Inhibitex (NASDAQ:INHX) has posted gains of 240% over the last month after a string of acquisitions and positive data suggest that it could be acquired in the near future. According to a Reuters report the treatment of Hepatitis C is expected to increase from $1.7 billion annually to $16 billion in 2015. This level of growth has created an unbelievable amount of optimism among investors and has resulted in some biotech stocks trading with massive gains.

By now everyone knows about the 89% premium that Gilead (NASDAQ:GILD) paid to acquire Pharmasset (VRUS). Several Wall Street pros believe that GILD paid too much to acquire VRUS and that it could've been purchased for much less than $11 billion. However, the asking price for Hep. C treating drugs is high, and companies that don't have a product in the pipeline to treat the disease are racing to join. Therefore it's caused a massive amount of speculation that INHX could be the next company to be purchased, after it released encouraging data surrounding its ongoing phase 1b clinical trial of INX-189.

There have been some to suggest that VRUS's lead candidate PSI-7977 could reach $4 billion in annual sales by 2018, and even more beyond. I suppose the same can be said for INHX's drug since it will be used to treat a disease in a very large market. However, my stance on large pharma buying out small biotech companies, to capitalize on a drug, is a bit different than most. In addition, I wonder if INHX is positioned for purchase, and if it's even possible since it's still so early in the drug's development process.

To better explain my opinions on small biotech companies, with a breakthrough product, being acquired I will use Questcor Pharmaceuticals (QCOR) as an example. Questcor has returned over 10,000% since August of 2007 with its breakthrough multi-purpose drug Acthar. And to put this gain into perspective, if you would have purchased $7,500 worth of stock your return would be nearly $800,000, give or take a few thousand, in just over 4 years. This level of return in such a short time is what drives investors to small-cap speculative biotech companies. But in QCOR's case, its drug was an outcast that no other pharma company wanted, that is very hard to develop. And most believe that it's only tapped its full potential, yet if it would have sold the product to a large pharma company for a 100% premium after its phase 1 trials then it wouldn't have been near as great for the stock long-term. And although there were many problems with manufacturing, selling, and producing its drug, the company hung in there and decided not to let another company profit from its discovery. (To read the story on QCOR's drug click here.) The point is that if the product is good and it's truly transcendent then why sell for a quick 100% return when a 10,000% return could be around the corner.

The second question is whether or not INHX's product is great and will return large gains in the future. I am undecided on this question because I base a lot of my opinions on a small-cap biotech company by the insider trading. Because as an investor we only see what the company releases from its updates and trial results, we don't know the ins and outs of the company nor do we know every little issue that may cause the FDA to deny the product, however the company does know. And I know that if I were a CEO or executive of a small-cap biotech company and had a blockbuster product, similar to QCOR, then I would not sell my shares at any price near $12. Yet since April the company has been selling shares with authority. Therefore I question the product and find it hard to value this stock higher than $12 a share when the CEO and other directors are selling their shares at $3 and $4 a share. The competition among biotech companies to develop a drug that fights Hepatitis C is highly competitive, and although the company released encouraging data in its initial trial I wander what studies will show in further testing.

For those of you buying this stock hoping to get a premium you will probably be disappointed. Why would a big company purchase a small company for a premium on $12 when it was selling for under $4 less than a month ago? The gains over the last month are a result of the Pharmasset (VRUS) and Andys Pharmaceuticals (NASDAQ:ANDS) purchases, and have little to do with any developments related to the company itself. Investors are buying in hope that it will be purchased and are attempting to capitalize on a quick pop. However, I don't believe any company would purchase INHX at a premium on $11.77, it makes no sense, and with a long road before an FDA approval there are still too many questions and not enough answers.

The bottom line is that this is a speculative company with an unknown product. Most feel that the $11 billion purchase of VVUS was way too much, yet the company's PSI-797 candidate has shown to be highly effective on a large number of patients. Therefore the company's purchase may not be at too high of a price if the market will grow in the way that some experts believe. Inhibitex's candidate has been successful in its initial trials but it's still far from an FDA approval. I believe that investors will be let down and that its large gains will be short lived. But then again, if the company does have a good product then why would investors want the company to sell? Why not become the next QCOR and turn a $7,500 investment into a near $1 million return?

There are simply too many questions with this company and not enough answers to validate its high valuation. As an investor if I owned stock in this company I would follow the executives' lead and sell this stock and take a large profit from the stock's 215% gain, and then if you still believe in this company, buy back at a cheaper price. The goal of investing is to return more money than what you put in, and if you've owned this stock for longer than a month then you have a very nice return. And then after selling the stock, buy it back at a much lower price, because when you stop and look at the position of this stock, it makes no sense that a large company would buy at this price, especially when executives are selling under $5.

Disclosure: I am long QCOR.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy but rather informational purposes only.