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Why Sagent Pharmaceuticals Inc. Jumped Today

By Brian Orelli, PhD - Jan 13, 2016 at 3:53PM

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Confirmed buyout rumors give investors confidence in an exit.

What: Sagent Pharmaceuticals (NASDAQ: SGNT) surged this morning and was up as much as 19% today after Reuters reported that the company has hired an investment bank to solicit bids to buy the generic-drug maker.

So what: Reuters appears to have multiple sources that confirmed the rumor -- and even named the investment bank, Perella Weinberg Partners -- so it seems likely that Sagent Pharmaceuticals really is looking for a buyer. The JP Morgan Healthcare Conference is going on right now, so it's certainly a good time to shop a company around since all the potential buyers are hanging out in San Francisco this week.

Sagent Pharmaceuticals had a rough 2015, falling 38% because it failed to meet its own expectations. The company started the year with 2015 guidance of net revenue in the range of $325 million to $375 million. In March, founder and CEO Jeffrey Yordon retired and the company's president, James Hussey, left the company. By the third-quarter conference call in November, the revenue guidance was down to a range of $305 million to $330 million.

Now what: Buying a company solely because you hope it'll get sold is akin to gambling since it's hard to know whether other companies might be interested in buying at the current price.

That being said, there's a lot of consolidation in the generic-drug business where small margins make it advantageous to be larger. Because the acquirer can reduce redundancy, it's possible that Sagent Pharmaceuticals could be taken out at a higher price than investors are willing to pay for the stand-alone company.

Adding Sagent Pharmaceuticals' $300 million in revenue isn't going to amount to much for one of the large players like Teva Pharmaceutical or Pfizer (PFE -1.18%). I doubt Pfizer would even consider buying Sagent; the $17 billion purchase of Hospira is more Pfizer's size. But it's certainly possible for a smaller company to buy Sagent Pharmaceuticals to try to make itself an acquisition target for Pfizer or some other larger pharmaceutical.

It seems more likely than not that a deal gets done, but without knowing what other companies might be willing to offer, it's risky buying Sagent Pharmaceuticals right now. If a deal doesn't get done, it's not hard to see the price falling below where it was before the Reuters report.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical. 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.

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