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Put Down <i>Barron's</i>, Read This InsteadBy Rob Fannon, editor Phase 1 InvestorFriday, August 22, 2008 Who's the next buyout?
That's the question everyone scrambled to answer after Swiss pharma Roche made a multibillion-dollar offer for Genentech, a biotech blue chip. Drugmaker Bristol-Myers Squibb's unsolicited $4.5 billion bid for Imclone, a mid-cap biotech, spurred the frenzied search even more.
So last weekend, Barron's, Wall Street's popular weekend rag, jumped into the fray. It nominated five biotechs – Onyx, Amylin, United Therapeutics, Alexion, and Vertex – as the most likely buyout targets.
I think Barron's was way off.
Amylin and Onyx – the two cheapest ones by price to sales – have big problems. This week, the FDA issued safety warnings about Amylin's diabetes drug Byetta. Shares are down 25% since the article. And Onyx is a one-hit wonder: Nexavar – a cancer treatment – is its only product.
The rest of the companies are way too pricey. United Therapeutics, Alexion, and Vertex are already trading above 10 times this year's revenue. For shareholders to agree to a buyout, a suitor would have to offer another 30%-50% on top of that. I think that'll be too rich even for deep-pocketed Big Pharma.
But while Barron's is way off the mark on who... I completely agree large drugmakers are eyeing the best biotechs for big buyout offers. So I thought I'd tell you about my three favorite candidates: Omrix, Rigel, and Crucell.
Omrix (OMRI), an Israeli biotech, sells for a reasonable five times revenue and 34 times earnings. It markets its products – which reduce bleeding during surgery – through Ethicon, a Johnson & Johnson division.
On Monday, an Israeli newspaper (citing unnamed sources), reported a $25-per-share buyout offer from a U.S. hedge fund. Apparently, the Omrix board of directors wasn't interested. And according to the report, company execs declined a buyout offer from the most logical suitor – Johnson & Johnson – earlier this year. But I believe a J&J takeout will eventually happen for as much as $30 per share – a 35% premium to yesterday's close.
San Francisco-based Rigel (RIGL) is up more than 160% since December, when the company reported positive results for its rheumatoid arthritis (RA) drug, R788. The drug is the hottest commodity in the fight for a piece of the $13 billion per year RA market. Unlike the current blockbusters – Enbrel, Humira, and Remicade – R788 is a pill, not an injection.
Depending on results from ongoing clinical trials (due late next year), I expect a Big Pharma player to strike a rich partnership deal for the drug... or gobble up Rigel altogether.
Finally, Dutch vaccine maker Crucell (CRXL) has long been a favorite of mine. Phase 1 readers are up more than 150% on the stock. But the Crucell of today is much different than the tiny player we first discovered in 2004... The company is cash positive for the first time this year, with several products on the market and licensing revenue coming through the door. Moreover, it has about a dozen new vaccine candidates in its deep pipeline and plenty of cash on its balance sheet.
I'd be surprised if Crucell stays independent much longer. And late last month, Sanofi-Aventis bought vaccine maker Acambis for a 64% premium. I'd expect Crucell shareholders to get nothing less than $30 per share – about 75% above where it's trading now.
Omrix, Rigel, and Crucell are all smaller than Barron's nominees... and I think have a better shot at winning a big premium takeout offer. So if you're looking to dabble in the biotech takeout fever, put away your copy of Barron's. Start your speculation with these three names.
Good investing,
Rob Fannon
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