Every Biotech Is for Sale

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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.

Names, please
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.

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Exelixis. Motley Fool newsletter services have recommended buying shares of Gilead Sciences, Exelixis, and GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2011, at 10:33 AM, skm1965 wrote:

    What about Patents situation for ACHN,IDIX,INHX?

    Please explain Amarin's patent issue.Is it not properly filed or offers nothing NEW?

  • Report this Comment On December 06, 2011, at 12:01 PM, skm1965 wrote:

    I see articles by Motley fool contributors with worthless bits of information.

    You made a comment on patents.Have you checked Mochida's Epadel patent and further research into its test results for their products.Their product did not offer significant improvement for LDL and there is no mention of Trigylceride lowering.

    Suggest you read Mochida's research work for Epadel.It is all on their website.Then inform the public-rather scare them.

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