With all the rumors in the past month about big pharmaceutical companies buying the relatively large Biogen IDEC
Both of Sepracor's
All of the bad news has driven Sepracor's stock down 57% off its 52-week high and brought its market cap down to less than $2.9 billion -- chump change for some of the large pharmaceutical companies. Sepracor managed to squeak out $567 million in sales of Lunesta last year, but a pharmaceutical company with a large sales force might be able to increase those sales substantially. With patent protection until 2012, Lunesta could certainly replace the sales of a drug about to go off patent. With Sepracor having just inked a deal with GlaxoSmithKline
The one-hit wonder
Whoever would acquire Onyx Pharmaceuticals
Sales of Nexavar totaled $142 million in the first half of this year, but with expensive clinical trials for almost every cancer imaginable, the drugmaker hasn't been able to break into the black yet. If Nexevar is shown to be effective against cancers with a large market, such as breast cancer, the drug will be a cash-generating machine.
The obvious suitor for Onyx would be its marketing partner, Bayer, and such an arrangement could consolidate overhead to cut costs slightly. The approval of its drug's label expansion into treating liver cancer expected later this year -- along with the subsequent increased sales -- has already been priced into its valuation, so any company interested in Onyx would be buying based on future clinical trial results.
Stay focused, Fool
With its acquisition of partner New River Pharmaceuticals, Shire Pharmaceuticals
Roche has been trying to buy diagnostic-test maker Ventana Medical Systems
Ventana has suitors not for its current revenues but for its potential for growth in the next few years. Ventana is the leader in pathology instruments and reagents that stain tissue. In the era of personalized medicine, pharmaceutical companies would like to use these tests to determine whether a patient will respond to a drug, thus increasing a drug's effectiveness and its chances for FDA approval.
Not a reason, but ...
The fact that these companies might be bought isn't a reason in and of itself to buy their stock. Trying to predict when pharma might act is like trying to predict when Britney Spears might next end up in court -- you know it could happen, but the timing is unpredictable. If you do buy these companies, do it because you think they're undervalued -- or because you think their value will grow -- not because you hope you might get a one-time payoff from one of their big brothers.
That said, I would like to point out a common theme among these companies so that you can find other potential targets: They all have drugs on the market. With patents expiring, big pharma needs to use its cash to buy drugs now, not years down the line. That doesn't mean that drug developers will get the cold shoulder from pharmaceutical companies; they're just more likely to receive milestone payment-laden deals than upfront buyouts.
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Biogen IDEC is a Stock Advisor pick. GlaxoSmithKline is an Income Investor recommendation.