Pharmaceutical companies' love for biotech has been generally anemic: Johnson & Johnson's
The reason for pharma's newfound infatuation is quite clear. Many pharmaceutical companies are facing a patent cliff in the coming years, with numerous small-molecule drugs losing market exclusivity. The companies need to replace all of those blockbusters with something.
While they could stick with small-molecule medicine, drugs made by biotech companies -- called biologics -- offer a distinct advantage. Unlike small-molecule drugs that see generic competition as soon as their marketing exclusivity runs out, biologics have a de facto marketing exclusivity even after they go off their U.S. patent. That's because unlike other countries, the U.S. has no pathway to grant FDA approval of generic biologics. At some point, Congress will jump in and give the FDA that power -- but until then, biologics look like a pretty good replacement for the drugs going off-patent.
The year started with AstraZeneca picking up MedImmune for the hefty price tag of $15.2 billion. That equated to about 10 times MedImmune's revenues, which even at the high margins biologics enjoy was still a whopper of a price tag.
Then in September, Bristol-Myers Squibb
Even larger-than-life Pfizer
Now that Biogen Idec
As my Foolish colleague Brian Lawler astutely points out, the most likely reason Biogen wasn't able to find a buyer was that its partnerships made purchasing the company difficult for most pharmaceutical companies. Therefore, the most likely candidates to get swallowed up are companies such as Genzyme, which hasn't licensed the rights to any of its top-selling products to other companies. Even if the company doesn't get picked up, it has the advantage of collecting all the revenues from the drugs.
Unlike Biogen, PDL Biopharma
Infatuation turns to stalking
My theory is that you should never buy a company because there's a chance it will be bought out. That's just bad logic, and, as the Biogen shareholders who bought in at $80 per share can attest, it's sometimes very costly.
Nevertheless, it's clear that pharma has an appetite for biologics that's quickly turning into an obsession. Whether they buy companies outright or just license the rights to drugs in development, my guess is that there will be more money flowing into biologics.
While the prices pharma is willing to pay for biotech companies may be overblown, its logic for investing in biotechs seems pretty sound. At the very least, it gives investors a reason to research biotech investments. Just don't get caught up in the hoopla. Wait for a company such as Genentech
Biogen is a pick of the Stock Advisor newsletter, and Pfizer is a pick of the Inside Value newsletter. Johnson & Johnson is a selection of the Income Investor newsletter. Whether you like your companies big, small, dividend-laden, or with "multibagger" written all over them, we've got a newsletter for you.