Expect More Drug Deals

by: Dana Blankenhorn

There are two big drug company deals in today's news:

The latter is the big news. Not so much for the premium, but because of the buyer.

Private investment firms look for underpriced assets and tend to re-sell them down the road. PAR, a generic drugmaker, is seen as just such a bargain, despite what looks like a hefty price.

This means that you can now see buyers from outside the industry space. And that should put a spur to all drugmakers.

Drug companies have already been the stars of the healthcare sector this year and are starting to power ETFs like Select SPDR Health Care (NYSEARCA:XLV) forward on a technical basis.

But this is not a technical call. It's a fundamental one. And it's based on takeover speculation. Big drug companies like Abbott Labs (NYSE:ABT), Eli Lilly (NYSE:ELY), and Pfizer (NYSE:PFE) now have more valuable currency with which to make deals, and more important there is going to be competition for those deals.

Traditionally, companies like these are the main buyers. They have sales channels that can take new drugs to market quickly, and teams that can win global approvals. But now they're not the only potential bidders.

This could provide hope even to beaten-down drug stocks like Dendreon (NASDAQ:DNDN).

Here are two interesting plays to consider:

  • Gilead (NASDAQ:GILD), which was hammered early this year when its hepatitis offering proved a dry hole, may also look more attractive -- the company is hoping for good news on HIV treatments next month.
  • Regeneron (NASDAQ:REGN), which has more than doubled this year but may not get some negative trader rotation, may also reverse due to takeover speculation. A market cap at $11.27 billion sounds rich, but this is just table stakes in the present age.

The drug game has changed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.