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For the Best Bargains, Look AbroadBy Rob Fannon, editor Phase 1 InvestorFriday, October 10, 2008 Last week, I bounced through Europe by air, rail, and taxi with fellow biotech analyst George Huang. We hit five companies... in five countries... in seven days.
You might think we're crazy to leave home amid the financial crisis. But we've been sizing up European biotech opportunities for about a year now. The risk-aversion bug sucked the European markets' appetite for biotech completely dry in the last 12 months. So European biotech stocks are way cheaper than their U.S. counterparts. They have much richer pipelines. And a few recent events have confirmed our hunch that Europe is biotech's latest hotspot...
Investor interest in European biotech might be about as low as it gets right now. But the acquisitions market is heating up. Cash-rich European drugmakers are drooling over the dwindling valuations in the biotech sector.
Of course, the biggest pending acquisition by a European drugmaker is Switzerland-based Roche's $43.7 billion takeover of U.S. biotech Genentech, the first and most prominent company in the industry. This summer, a few smaller deals continued the trend...
The same line of thinking applied to two additional European takeouts: France-based Sanofi-Aventis paid a 65% premium to buy British vaccine company Acambis in late July. Earlier in the month, Swiss drugmaker Novartis bought out Swiss biotech Speedel for a 94% premium.
Jerini and Speedel – two of the summer takeouts – had been on our short list. So you can see our hurry to hop on a transatlantic flight. Here's what we found...
Public financing and other types of biotech funding are down 70% from this time last year in Europe. So the best companies have to hold plenty of cash. Most of the biotechs we visited had about half their market cap in cash... enough money to keep the lights on for roughly two years.
Also, all the companies we visited offered a product near market launch along with multiple projects behind the most advanced drug in development. In other words, all the companies had "multiple shots on goal."
While they may have cash and plenty of promising projects, none of the companies we visited can catch a break in the public markets. Their stocks are down an average of 49% over the last year... One is 78% below its year-ago level.
Biotechs with cash – and deep clinical pipelines – are the stocks to own right now. The fact that they're cheap makes our timing that much more perfect. It's a win-win scenario: If markets improve, these stocks will explode as independent entities. And if valuations stay cheap, these names will remain at the top of the takeout list for Big Pharma – particularly European drugmakers.
Investors who buy in at today's levels will likely collect a few double-digit premiums before the year is out. If not, they'll be rewarded when positive sentiment returns to the sector.
Most American investors don't know or care about the European biotech sector right now. Conference halls are empty when European CEOs appear on the U.S. biotech presentation circuit.
So if you're interested in beating the crowd to this story, make sure you have a brokerage account that can trade stocks on the London, Swiss, and Brussels stock exchanges. As Big Pharma picks off more of these top-quality biotechs at double- and triple-digit buyout premiums, American investors will start digging abroad, and prices will soar.
Good investing,
Rob Fannon
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