How to Play the Weak Dollar for 84% Overnight Profits
By Rob Fannon
May 2, 2008
Back in December, my friend Steve Sjuggerud described a British spending spree taking place in America...
At the time, the pound was worth about $1.95, and Brits were enjoying a 50% discount on their Christmas shopping across the pond. Steve called these bargain-hunting foreigners "the new saviors of America," because they were propping up prices in U.S. malls.
A similar spending spree is taking place in the U.S. pharmaceutical industry... and I think it's going to mean big profits for biotech investors. Let me explain...
Early last week, British drugmaker GlaxoSmithKline gobbled up Sirtris Pharmaceuticals, a tiny Massachusetts-based biotech, at a whopping 84% premium. The deal was all cash.
The really crazy thing is that Sirtris has no chance of selling any products for at least five years. Heck, Sirtris only has one compound in clinical trials... and that's in the earliest Phase I safety testing stage. Most of its "drug candidates" are still being tinkered with in the lab.
So, why was GSK willing to shell out $22.50 per share for a company that went public just 11 months earlier at $10? GSK will tell you – "great science." But as you know, the real answer is the cheap dollar.
No American drug company – Merck, Pfizer, or Bristol Myers – could have afforded to pay so much for so little. But like the holiday shoppers Steve described, GSK can pony up such a premium because, by paying in pounds sterling, it essentially got Sirtris half-off.
GSK's fellow British drugmaker, AstraZeneca, made a similar deal last spring. It bought Maryland-based MedImmune for a staggering 12 times sales – a 60% premium.
As the dollar continues to sag against world currencies, the British aren't the only ones eying U.S. biotech assets... Japanese drugmaker Takeda Pharmaceuticals coughed up a 53% premium to buy Boston-based Millennium Pharmaceuticals. Its peer Eisai scooped up U.S.-based MGI Pharma for 10 times sales.
This year, U.S. health care firms have seen $80 billion in merger and acquisition deals... 60% came from foreign buyers. This is not a trend I expect to let up anytime soon.
As I've written before, the world's largest drugmakers are in trouble. Expiring patents, generic competition, and anemic pipelines all point to a bleak future for Big Pharma. At this point, buying up biotechs is the only choice they have. And they're going to have to pay huge "knock out" premiums to outbid their competition.
Now, with lots of extra dollars in the bank, foreign companies are flooding U.S. biotechs with rich cash offers, even if it means paying shareholders astronomical premiums. The entire industry is going in one direction – up. It may be a bad time to own dollars, but it's a great time to be in biotech.
Good investing,
Rob Fannon
