Seeking Alpha
, stockmatusow (872 clicks)
Long/short equity, deep value, value, research analyst
Profile| Send Message|
( followers)  

In this article I will list a few smaller bio pharmas I believe are either likely to be bought out, are a good candidate to be bought out, and/or have buy-out rumors associated with the company. Most buy out rumors start with speculation based on public information showing actions taken, or lack-there-of by one or both of the potential parties involved; the buy-out targeted company, and the acquiring company.

From time to time, rumors may come from either sources with material insider information who accidentally leak it or for a variety of other reasons. A good example of this would be in reference to the 1987 Oliver Stone film, 'Wall Street.' Charlie Sheen's character 'Bud Fox' had material information of a buyout occurring from simply over hearing Michael Douglas's character 'Gordon Gecko' on the phone talking about a deal to buy out a company. If a person directly over hears such information and/or has direct material insider knowledge and trades a stock on it, and/or advises others to trade on the specific insider information they are in possession of, they could be guilty of violating insider trading laws as this would no longer be just a calculated speculation.

I recently wrote an article on Antares Pharma (AIS) that lists the top 10 reasons (9 actually now after an error in fact was brought to my attention) why I speculate Antares will be bought out applying speculative observation methods demonstrated above. Since Antares was covered in depth for that article, I will leave it out from this one.

Human Genome Sciences (HGSI) 4/20/12 pps: $14.36. Market cap: $2.86B.

HGSI operates as a biopharmaceutical company in the United States. Its principal products include BENLYSTA for systemic lupus erythematosus; and raxibacumab for inhalation anthrax.

Speculation factors: Glaxo Smith Kline's (NYSE:GSK) offer for a $13 per share buyout of the company, roughly $2.6 billion was rejected by Human Genome last week. On this news, the stock nearly doubled from a closing price of $7.17 on 4/18/12, to an opening price of $14.20 the very next day. As a side note, nearly 25% of HGSI's trading float was being held short before the double. This should serve as a great lesson to others why it is one of the most moronic things to ever engage in; holding a bio pharma stock short position overnight.

HGSI has hired Goldman Sachs and Credit Suisse to help explore strategic alternatives, according to news reports that circulated on Thursday. It is extremely obvious to me (and everyone else) that HGSI will be bought out, and the rejection of BMY'S initial offer this is just a leverage ploy to get a better deal.

Buy out likeliness: Virtually 100% certain. An offer over $3.0B, or roughly over $16 a share should win the bid to buy HGSI. A buy-out offer equating to around $20 a share is not out of the question.

Idenix Pharma (IDIX) 4/20/12 pps: $8.27. Market cap: $889.79M

Idenix engages in the discovery and development of drugs for the treatment of human viral diseases in the United States and Europe. Its primary research and development focus is on the treatment of patients with hepatitis C virus (HCV).

Speculation factors: The recent Inhibitex/Bristol-Meyers Squibb (NYSE:BMY) deal revolved around Inhibitex's Hepatitis C treatments. BMY's most recent failed initial bid to buy out HGSI.

Gilead Sciences (NASDAQ:GILD) also acquired Pharmasset for $11 billion for the same reason; HCV drug.

Idenix has been developing drugs for hepatitis virus B and C. The lead drug candidate in its pipeline is IDX184. The results of the most recent clinical trial of IDX184 showed that the drug destroyed the virus during treatment, but it returned again around 12 weeks after the trial ended. Some investors view this as negative; I do not necessarily. While the treatment was being administered, HCV was eradicated.

When off, it returned. If patients stayed on this treatment indefinitely, does this mean the virus would be eradicated again, and will it remain as such while patient stay on the drug? If so, this would provide an even larger money making opportunity for this drug. Obviously, more testing needs to be done here to see if this would indeed be the case, but I do not believe as some do that the relapse factor is necessarily a failure.

Idenix Pharmaceuticals is on my list because larger pharmas obviously are making a play at the HCV market. The drug was shown to be effective while the patients were on it. A large pharma might see this as a plus to generate consistent revenue over a one-time cure treatment as patients would have to indefinitely be on the drug.

Buy out likeliness: Medium, about 65% chance in my opinion. With a market cap of $890m, I can see Idenix being bought for about a 125 to 150% premium, or around $2.0 to $2.3B. Reasonably low enough for a mega pharma to dish out for HCV drug. As mentioned above, more testing does need to be done, and a large pharma may very well be willing to take the gamble on Idenix for the reasons I mention.

pSivida (PSDV) 4/20/12 pps: $2.17. Market Cap: $45.14M.

pSivida develops drug delivery products for treatment of back-of-the-eye diseases that are administered by implantation, injection, or insertion. This small cap company really interests me quite a bit. I recently wrote an article which featured an interview with the company CEO, Dr. Paul Ashton.

Speculation factors: From the article referenced above, Dr. Ashton provided the following response to question number five:

We have the best technology and we are fortunate in that we are going after a new area (diseases of the back of the eye) where none of the big guys has a dominant position in the market. Also the back of the eye space can be addressed with a small sales force; there are only 1,500 retina specialists in the US. However this space now has the attention of a lot of the big players (Merck (NYSE:MRK), Roche,(OTCQX:RHHBY) Glaxo Smith Kline etc) and there is a lot of consolidation, so I'd imagine that we'd likely be acquired before we get there. We are not planning this, but it seems to be the way things sometimes work.

I am not so sure I buy Dr. Ashton's "we are not planning this" statement after suggesting it would be likely at some point (I believe in the near future) his company would be acquired, and here is why;

Insider Holders*

Individual/EntityMost Recent Trans.Shares Owned as of Trans. Date
ASHTON PAUL
Officer
Acquisition (Non Open Market)
Nov 19, 2009
457,522
Nov 19, 2009

Dr. Ashton has stopped buying shares of the company for the last 3 years. Some people would see this as a bad sign, but I see this as a sign of a possible intention on his behalf to actually aggressively pursue selling the company, starting about 3 years ago. A lot of smart small cap CEOs (I consider Ashton to be very smart) enter into a company simply to turn around financial issues from prior management (PSDV had a ton of toxic debt that Ashton wiped off the books), develop the company to a certain point, then sell for a nice premium.

Insiders always stop buying when they intend to sell their company and actively pursue such a deal for legal reasons. This alone would not mean much, but as I got to thinking about other factors, I began to consider that there might be a verbal/hidden agreement in the pSividas partnership deal with Pfizer (NYSE:PFE) to allow for such a buy-out to occur.

In terms of the Pfizer agreement, pSivida pocketed a $2.3 million payment from Pfizer or pSividas bioerodible eye implant designed to provide sustained release of latanoprost, a well-known glaucoma and ocular hypertension treatment. Under a revised agreement, Pfizer will have an option to take over the program after Phase II in exchange for a $20 million payment, and a commitment of $146.6 million in combined milestone payments and double-digit royalties on any sales.

I find the above information very interesting considering the small market cap of roughly $45M for pSivida. The commitment potential after phase II is over three times the entire market cap. At a 125% premium, pSivida can be had for a bit over $100M, or around $5 a share. However, smaller cap companies like pSivida often carry a higher premium, so up to 200% in my opinion is not out of the question.

This would equate to a huge value for Pfizer, paying less to take on the drug in partnership, and retain all of pSividas other IP's, pre-clinical, and clinical treatments for a highly discounted premium. I strongly suspect this is why Pfizer and pSivida have made a revised agreement. It seems to me Pfizer would reject picking up on the royalty deal, and get a better deal by simply buying the company outright, adding to its company an Ophthalmology division for dirt cheap.

It is also worthy to note that Dr. Ashton did not mention Pfizer as one of the companies that have begun to take notice of this segment. Additionally, Pfizer has hinted that its recent efforts to raise even more cash than its currently stock-piled $22B upwards toward $50B, is primarily for acquisitions of other companies. In reference to Dr. Ashton's answer to question five, Pfizer might be getting ready to take an aggressive step into the 'back of the eye' Ophthalmology segment which has been receiving attention from the companies Dr. Ashton mentioned.

Two additional things of note: Pfizer already owns 7% of the stock. pSivida has warrants outstanding, with some set to expire soon. All of the issued warrants have a $5 to $7 a share exercisable price; I find this interesting as well.

As already mentioned, I strongly speculate there is a verbal agreement or a hidden clause somewhere in this deal with Pfizer for a buy-out to occur. I have since been monitoring how the stock trades and back-testing its trading pattern going back a few weeks. It appears to me, with the exception of a catalyst trade run-up that was associated with Alimera Sciences (ALIM),pSivida stock is under quiet accumulation.

Buy out likeliness: Very High, more than an 80% chance in my opinion. A premium of 125 to 200% is the range I believe it will be acquired for, roughly $5 to $6.25 per share.

Worth a look:

Vertex Pharma (VRTX)

Vertex engages in discovering, developing, manufacturing, and commercializing small molecule drugs for the treatment of serious diseases worldwide.

Although Vertex would be very expensive to acquire due to its market cap that tops $7.6 billion, the company potentially has a lot to offer a big-time mega pharma who wants a more mature company with a more robust pipeline. In addition to its HCV work, Vertex is also working on a promising late-stage cystic fibrosis drug.

A quick look at the Vertex pipeline:

Telaprevir (VX-950), treatment of hepatitis C virus (HCV) infection.
VX-222, targeting HCV infection.
VX-770, treatment of cystic fibrosis.
VX-809, targeting cystic fibrosis.
VX-509, treatment of rheumatoid arthritis.
VX-765, targeting epilepsy.
VX-759, treatment of HCV infection.

While I really like Vertex a lot, and have written about it before as one my better long term picks, a buy-out would be a most expensive undertaking for even the largest of Pharmas, including Pfizer with its current $22B and planned $50B cash pile.

Likeliness of buyout: Medium low in my opinion, less than a 25% chance, but still worth a look on this factor notwithstanding the company's solid long term prospects.

*Data sourced from Yahoo Finance.

Source: Bio-Pharma Buy Out Speculation And Rumor Watch List