While most sectors see their constituents moved by more benign news such as earnings reports, dividend increases/decreases, share repurchases, insider buying/selling and scores of other typical headlines, that's just not the case with most biotechnology stocks. When you get down to it, most biotech stocks, particularly the small- and mid-cap names, move for one of two or both reasons: FDA news and takeover rumors.
Speaking to the latter point, takeover rumors in the biotech sector are always present, regardless of the broad market environment. That's because for big pharmaceuticals companies such as Merck (MRK) and Pfizer (PFE), it's cheaper and more efficient to bolster their drug pipelines through acquisitions than it does to devote that money to research and development that may not yield results.
The reality is that finding biotech takeover candidates isn't that hard. One just needs to look at the hot niches. For example, Gilead Sciences (GILD) paid a lofty $11 billion last year for Pharmasset, a maker of next generation of hepatitis-C treatments. That set off speculation about what company working on hepatitis-C treatments might be next. Bristol-Myers Squibb (BMY) answered the call by offering $2.5 billion for Inhibitex. That leaves Medgenics (MDGN) as one remaining hepatitis-C takeover target.
Another example of a prime biotech takeover target is Amylin Pharmaceuticals (AMLN), which recently launched a new diabetes drug Bydureon. Diabetes is another hot niche of the biotech arena, but that's only one reason Amylin is in play. Activist investor and legendary financier Carl Icahn is pushing for Amylin to sell itself. Icahn doesn't always get his way, but there's no doubt Amylin is now on the biotech takeover radar.
Along the same lines as diabetes, practically any small-cap biotech company that is making waves with a cancer treatment should be considered a viable takeover target, especially if the FDA has approved or is to be in the process of approving that treatment.
One of the most talked about takeover targets, and it is talked about so much in this vein that one wonders if it's just a matter of time before an offer comes, is VIivus (VVUS). Vivus is developing treatments for obesity, sleep apnea, diabetes and male sexual health. The obesity treatment, Qnexa, has completed phase 3 clinical trials. Making VIivus all the more appealing is that the company had over $140 million in cash on hand and no debt as February. Cash on hand and no debt is something few biotech companies can boast of.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.