Another day, another buyout rumor. Yesterday it was Onyx Pharmaceuticals (Nasdaq: ONXX ) that jumped after Bloomberg said the company was in the early stages of exploring the possibility of putting itself up for sale. Before that it was Achillion Pharmaceuticals (Nasdaq: ACHN ) . And BioSante Pharmaceuticals (Nasdaq: BPAX ) before that. The rumor list is a mile long.
Here's a news flash for you: Every public biotech could be sold at any point.
Boards of directors have a fiduciary duty to maximize value for shareholders. They have to entertain offers and make decisions about approaching potential acquirers; it's in the job description.
Just because an unnamed source says the drugmaker is up for sale, that doesn't mean it it's going to happen. Heck, even if the CEO says the company is entertaining offers, I wouldn't ascribe a higher value to the company. It takes two tango; you need a willing buyer to actually complete a sale. Throwing out a for-sale sign on the front lawn isn't good enough.
Not an investment thesis, but ...
While you can't count on a company to be acquired, I think it's reasonable to find high-quality companies that might be acquired. As long as you don't assign any value to the potential for an acquisition, it's a free kicker. Gilead Sciences (Nasdaq: GILD ) took out Pharmasset this month for a 59% premium over its all-time high.
And knowing that a drugmaker might be acquired helps you to know that you're on the right track with your due diligence. If another company might be interested in buying the drugmaker, it seems reasonable that investors will be, too.
What makes a good acquisition target? Attractive drugs and the least complicated deal possible.
It certainly helps to have a drug that's in a growing market with little competition, but what I think pharmaceutical companies really want is to be able to quantify the risk. They haven't reached the point where they're so conservative that they only want to buy drugs already on the market, but if they're going to invest in a drug that is still in development, it had better be clear what the chances of approval are. That's one reason I think BioSante isn't likely to be acquired until the phase 3 data is revealed, and potentially not until after the drug gains FDA approval. There are just too many unknowns at this point.
The less complicated the deal, the better. It's not a deal-breaker for a company to already have a partner; Eli Lilly bought ImClone Systems even though it already had Bristol-Myers Squibb as a partner. But all things being equal, pharmaceutical companies would rather acquire the full rights to a drug than have to deal with developing it with another drugmaker.
Even after the purchase of Pharmasset and Anadys, the hepatitis C space is still ripe for further consolidation. Idenix Pharmaceuticals, Inhibitex (Nasdaq: INHX ) , and Achillion Pharmaceuticals (Nasdaq: ACHN ) are all potential acquisition targets if their phase 2 data come out positive.
I used to think that Exelixis (Nasdaq: EXEL ) would never be bought out because it had so many partnerships with different drugmakers, but after Bristol-Myers Squibb handed back rights to cabozantinib, it's looking more likely. The development-stage drugmaker still has other partnerships, but considering that most of its value is tied to cabozantinib, I think a potential acquirer could deal with the other partnerships.
Finally, there's Amarin (Nasdaq: AMRN ) , which has been on my likely-to-be-bought list for some time. After two successful phase 3 trials for its triglyceride-fighting AMR101, the risk of approval seems low. The market seems large enough; GlaxoSmithKline's competing, but inferior, triglyceride drug Lovaza registered sales of $659 million in the U.S. alone during the first nine months of the year. My guess is that pharma is still trying to figure out the risks of patent issues on both Lovaza and AMR101 before jumping in.
You can follow the Foolish news on the potential acquisition targets by adding them to the Fool's free My Watchlist service.
And while you're waiting for the next big biotech buyout to happen, download a copy of The Motley Fool's special free report, "The Motley Fool's Top Stock for 2012." See which company our analysts hand-pick as a high performer next year.