Biotech Buying Binge About to Begin?

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Is Roche's (RHHBY) bid to acquire the remaining 44% of Genentech (DNA) it does not already own for $44 billion ($89 per share) the start of widespread consolidation in the industry?

The chart above compares the S&P 500 Index versus four popular biotech exchange-traded funds [ETFs], which have all outperformed the overall market during the last year. Also, several buyouts in the out-of-favor micro-cap biotech space have been announced recently with 100%-plus takeover premiums, including:

(1) SGX Pharma (SGXP) was acquired for $64M cash or $3/share by Eli Lilly (LLY) for its cancer drug discovery platform.

(2) Kosan Biosciences (KOSN) was acquired by Bristol-Myers (BMY) for its cancer drug pipeline.

(3) Barrier Therapeutics (BTRX) was acquired by privately-held Stiefel Labs.

Several biotech and diagnostic companies in the $1 - $4 billion market cap range are likely on the radar of larger biotech or diversified pharmaceutical companies looking to bolster their pipeline and product offerings, including BioMarin Pharma (BMRN), Alexion Pharma (ALXN), Xenoport (XNPT), Invitrogen (IVGN), and Sequenom (SQNM). Among the biotech ETFs, Biotech HOLDRs has a 38.7% stake in Genentech and 22.8% stake in Gilead (GILD) with just 18 total holdings; so it represents a poor choice for investors looking for a diversified investment option to capitalize on future consolidation.

Disclosure: None

Comments

[ContrarianProfits]

How to Play the Uptrend in Biotech With ETFs

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[BioInvestor]

There are a couple of things happening that signal activity in this market. Major pharma needs a pipeline; emerging pharma has pipeline opportunities. Emerging pharma raised lots of cash at the end of the dot.com bubble--that cash is now showing up as pipeline. However, that cash is also running out. Emerging companies are, relatively speaking, inexpensive. It's the perfect time for big pharma to go on an M&A spree.

[nova]

Presently Big Pharma companies suffer from lack of vision. They became drug marketing companies.

Dealing with biotech companies, Big Pharma can either acquire biotech or have a partnership agreement.

A good partnership has many advantages:
- it removes a lot of risk for Big Pharma, i.e., they do not have to pay a lot for buying a failure
- they can buy a partner at a later date

The only problem with a partnership is when a biotech has good management and is more than one drug company. In this case, an acquisition at a later date may be impossible.

The best acquisition candidates are biotech companies with a very good pipeline and bad management. The best names coming to my mind are AMLN and IMCL.

Finally, with falling US$ , I would expect a strong acquisition drive by foreign companies. They can afford the best [such as DNA by Roche, MLNM by Toshiba, etc.,]