The Market's Giving Away 30%... Get in Before It's Gone
By Dr. George Huang, editor, S&A FDA Report
November 28, 2008
Last week, ImClone shareholders pocketed $6.2 billion.
Big Pharma Eli Lilly wanted to get its hands on ImClone's Erbitux, a cancer drug on track to generate $2 billion in sales next year. But first, it had to fend off rival Bristol-Myers.
You see, Bristol owned 17% of ImClone's stock. Back in July, it offered to buy the rest for $60 a share – a 30% premium.
ImClone chairman and activist investor Carl Icahn wanted more money. And in September, Icahn announced a mystery bidder offering $70 a share. But the market figured Icahn was lying, crazy... or both. ImClone stock dipped below $60.
As I told FDA Report readers, whether the buyer was Bristol-Myers or Eli Lilly, ImClone was going to collect more than $60 a share. Pharmaceutical companies are sitting on billions in cash. They're facing billions more in lost revenue from patent expirations in the next few years. Acquiring smaller biotechs with blockbuster products is their only way out.
If you had simply bought ImClone shares at their September lows, you would have pocketed about 20% in just one month when Lilly came through with its $70 offer. (My FDA Report readers fared even better. I structured a trade that doubled their money in just three weeks.)
Right now, we're looking at another ImClone-like setup. But this time, I believe our returns could be much bigger. Let me explain...
Swiss pharma Roche owns 56% of Genentech, the king of biotech. But Roche wants full control of a trio of Genentech's top-selling cancer drugs – Avastin ($2.8 billion per year), Herceptin ($1.5 billion), and Rituxan ($2.7 billion). So in July, Roche offered $89 per share to buy Genentech outright.
But Genentech's board rejected Roche's offer as too low. Wall Street analysts immediately issued price targets of more than $100 per share. The market chased Genentech shares north of $99 after the announcement, hoping to cash out on a higher bid from the Swiss giant.
Then, the credit crisis hit...
The market was skeptical of any deal requiring big financing. Investors dumped Genentech shares. Today, with the stock around $75, Genentech is trading as if the Roche bid never took place. It's crazy. But we might as well take what the market's giving away...
Roche has repeatedly said it plans to close the deal. With more than $15 billion in cash on the balance sheet and stable cash flows, Roche will have no problem securing the financing. And the recent market turmoil has given Roche increased leverage at the negotiation table. It's not a matter of if the takeover will happen, only when.
Even if the deal collapses, owning the greatest biotech in history at less than 20 times earnings should prove profitable in the long run.
But I believe Roche will come through with a higher offer, somewhere between $95 and $100 per share, likely in early 2009. Genentech shares are trading about 15% below Roche's initial offer... and at least 26% below my estimate for the final offer. Buying Genentech's stock today could make you as much as 30% if Roche does raise its bid.
Good investing,
George Huang
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