In the eternal words of Queen: "And another one gone, and another one gone. Another one bites the dust." Over the weekend, Bristol-Myers Squibb (NYSE: BMY) announced that it's acquiring Inihibitex (Nasdaq: INHX) for $2.5 billion. The announcement comes on the heels of two other hepatitis C drugmakers getting taken out recently.

Company

Acquired by

Lead Drug

Stage of Lead Drug

Purchase Price (in Billions)

Premium
Anadys Pharmaceuticals Roche Setrobuvir Phase 2 $0.23 256%
Pharmasset Gilead Sciences (Nasdaq: GILD) PSI-7977 Phase 3 $11 89%
Inhibitex Bristol INX-189 Phase 2 $2.5 163%

Source: Company releases.

Idenix Pharmaceuticals (Nasdq: IDIX) and Achillion Pharmaceuticals (Nasdaq: ACHN) were both up substantially today, with investors betting that they'll get taken out.

That seems like a safe bet. Neither has the resources to get its drugs to market. And because hepatitis C is treated with a cocktail of drugs, the exclusive value of their drugs to one company is likely higher than it is as an independent company.

But investors should be cautious about the potential values Idenix and Achillion might fetch. The laws of diminishing returns are in play here:

  • There are fewer bidders for the remaining compounds. Merck (NYSE: MRK) might need one after Victrelis' slow start and could certainly afford it, but it has a deal to combine drugs with Roche, so maybe not. Abbott Labs is also involved in the space but might be distracted with its breakup. Vertex Pharmaceuticals is the king of the hepatitis C space right now, but who knows what its long-term plans in the space are? Vertex has opportunities elsewhere and might decide that the diminishing returns aren't worth the hassle.
  • Roche, Gilead, and Bristol all presumably passed up Idenix and Achillion before deciding to make their purchases. It's not as simple as saying Anadys', Pharmasset's, and Inhibitex's drugs are better because they got acquired -- the drugs need to fit with the different classes of drugs in the acquiring company's pipeline -- but I think it's safe to assume Idenix and Achillion were at least given a look.
  • Investors believe the takeouts will happen, driving up the price. But that doesn't make them any more valuable to the acquiring company, so you can expect lower premiums, everything else being equal.

I'm not saying you should short them -- a takeout would kill you, as would positive clinical trial data -- but as shares go up without any new data, the risk-reward proposition works against you. Before you start singing "We Are the Champions," consider that failure is still a possibility, as is the remaining companies' taking a wait-and-see approach. Neither would be good for Idenix's and Achillion's valuation.

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