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This Insider Is Grooming the Next Biotech WinnerBy Dr. George HuangFriday, October 2, 2009 In 1999, Wall Street analysts thought Johnson & Johnson had lost it...
The health care conglomerate had a famously stodgy corporate culture. But that year, it dropped $4.9 billion to acquire a little-known antibody developer called Centocor. J&J paid 10.5 times sales – mighty pricey even during the 1999 market euphoria. But J&J knew exactly what kind of value it was getting.
A few years back, when J&J lost patent protection on two of its blockbuster drugs, Remicade, Centocor's autoimmune drug, stepped up to fill the gap. Remicade's gross margins are near 90%. This year, Remicade is on track to generate over $6 billion in worldwide sales. A single year of sales will more than cover J&J's acquisition price.
As the Centocor buyout indicates, J&J is one of the industry's sharpest insiders. But it's hard to profit from J&J's expertise by owning its stock. The company is simply too large. You're not going to double your money in a $165 billion blue chip.
A better bet is to invest in the companies J&J partners with.
Centocor shareholders, for example, ended up collecting about 50% from the buyout. Or take Israeli biotech Omrix... In 2003, J&J snatched up marketing rights to Omrix's technology, which reduces bleeding during surgery. Last year, my colleague Rob Fannon wrote a J&J takeover was likely. And that's exactly what happened... Growth Stock Wire readers could have pocketed a quick 20%.
So who's next on J&J's to buy list? Troubled Irish biotech Elan. And I think this opportunity is even bigger for shareholders...
In July, J&J spent $885 million on an 18.4% stake in Elan. It paid another $500 million to acquire 50% of Elan's Alzheimer's drug candidate. The deal valued shares at over $9. But today, the stock is trading below $7. Due to lousy management and problems with Elan's multiple sclerosis drug, investors have no confidence in the company.
Still, with data from the phase III Alzheimer's trials arriving in 18 months, Elan makes for an interesting speculation. If the results are positive, the drug could easily become a multibillion-dollar seller. And J&J would snatch up the rest of the company in a heartbeat.
If you figure Elan's Alzheimer's drug can pull in $5 billion a year – conservatively – Elan is worth at least $7 billion to J&J right now. That's about $14 a share: 100% above today's price. And the downside risk is limited. After all, J&J values its stake in Elan's existing business at $9 or more.
Judging from its history of successful investments, I agree.
Good investing,
George Huang
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