For the Best Bargains, Look Abroad
By Rob Fannon, editor, Phase 1 Investor
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...

Ireland-based Shire Pharmaceuticals scooped up Berlin-based biotech Jerini for a whopping 74% premium. The stock had wallowed at depressed levels for nearly two years, and Shire was interested in getting access to a few of Jerini's protein-based drugs. But why deal with complex partnership or licensing terms when it's easier and cheaper to simply to buy the company outright?

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.

The Buy Signal You've Waited For How to Turn $5,000 into $175,000

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.

Good investing,

U.S. Government Considers Buying Banks
The Treasury Department is considering ways to inject capital directly into banks, possibly by taking equity stakes, as the financial crisis continues to worsen.

Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up Treasury's newfound authority to "to inject capital into financial institutions" in remarks Wednesday. Mr. Paulson, who won approval from Congress to buy $700 billion worth of distressed assets, had previously focused on Treasury's plan to buy mortgage-related securities from financial institutions that are having trouble getting the assets off their books.
WSJ ($) Read on...

Taiwan, Hong Kong, South Korea Cut Rates
South Korea, Taiwan and Hong Kong cut interest rates a day after reductions by the U.S., Europe and China to stem damage from the global financial crisis.