Here's an article where Reuters says that StreetInsider wrote that Bloomberg reported that AstraZeneca's (NYSE:AZN) CEO Pascal Soriot said that the pharma would consider buying Juno Therapeutics (NASDAQ:JUNO).
I kid you not:
"AstraZeneca Plc would consider buying a company such as Juno Therapeutics Inc, Bloomberg reported AstraZeneca's CEO as saying, according to StreetInsider." -- Reuters
The smaller biotech jumped as much as 15.8% on the report from Bloomberg and hype from other news agencies.
This is not news. Juno doesn't deserve an elevated valuation based on the quote. There are so many things wrong with this situation.
Biotech buyout news 101
You typically find biotech buyout reports in three different flavors:
1) "Unnamed sources close to the situation" whose job is to get the potential buyout into the public realm -- typically to float an initial idea by investors to see what they think, or to drum up support when negotiations have stalled.
2) "Unnamed sources close to the situation" that have gone rogue and want to impress reporters. (Rarer, but I'm sure it happens.)
3) "Unnamed sources" without the close-to-the-situation designation, who feed reporters lies for unknown reasons (perhaps to profit from the inevitable buy-the-rumor pop).
Between option three and the difficulty of finalizing a buyout even when one really is on the table, buying the rumor is generally not a safe idea.
The AstraZenca-Juno situation is unusual because the quote came directly from AstraZeneca's CEO. Most CEOs, when asked about whether they'd be interested in buying a specific company, give a canned response about how the company is always open to considering potential acquisitions without actually answering the question.
Soriot was more loose-lipped, but that doesn't mean AstraZeneca is going to buy Juno anytime soon. Think about it: if AstraZeneca had immediate intentions of buying Juno, saying the company might buy Juno is just going to raise the starting price for negotiations.
All Soriot was really saying is that Juno could be purchased by AstraZeneca -- or some other company for that matter -- in the future.
But that's true of every biotech
Most biotechs either crash and burn because their drugs don't end up helping people or succeed and are bought out by a large pharma. There are only a handful of biotechs that have developed 10 or 15 drugs and look more like large pharmas than their biotech brethren.
Pharmaceutical companies -- and the aforementioned big biotechs -- typically want to leave the drug-development risk in the hands of smaller biotechs and their investors. Pharmas are perfectly willing to trade dollars for proven assets.
Early-stage drugs may be licensed, but the deals typically come with milestones making up a vast majority of the committed funds. Acquisitions, on the other hand, typically happen after biotechs have proven that their drugs work -- and sometimes not until they've proven their drugs can be sold.
That pretty much puts Juno off the table for now. While the biotech's CAR-T technology is certainly promising, we need more data to confirm the technology can help cancer patients without harming them with immune-system side effects.
A horrible investment thesis (but not really)
Superficially, the potential for a buyout is a horrible investment thesis. It's hard to quantify the needs of larger drugmakers and the perceived value of the drugs a biotech is developing. If you're buying solely because you think a company will be bought out, you're buying for the wrong reason.
That being said, the same reason a company might be bought out -- because it has drugs or a platform technology that larger drugmakers might want -- is the kind of characteristic that you should be looking for in a development-stage biotech company.
The fact that Juno has a promising technology is potentially a reason to buy the company. The fact that AstraZeneca or some other pharma might want to buy supports that thesis, but investors just have to be careful not to overpay for that potential.
Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.