One of These Stocks Will Hit the 85% Buyout Jackpot
By Dr. George Huang, editor, S&A FDA Report
January 23, 2009

Indevus shareholders just made 70% overnight.

On January 5, Endo Pharmaceuticals offered to buy Indevus – a biotech specializing in hormone replacement – for a 45% premium... sweetening the deal with a pile of "milestone" payments. Shares exploded on the news, jumping from about $3 to nearly $5.50 from one day's trading to the next. And my S&A FDA Report subscribers cashed in.

One week later, health care conglomerate Abbott Laboratories took out LASIK manufacturer Advanced Medical Optics for roughly $2.8 billion, a 150% premium. With $4 billion in cash and another $1.5 billion generated every quarter, Abbott can afford to splurge. Even after paying shareholders such a rich sum, Abbott will enter the rapidly growing eye-care market on the cheap.

Finally, Dutch vaccine maker Crucell recently confirmed merger talks with Big Pharma Wyeth. The admission will surely trigger a bidding war between Wyeth and other Big Pharmas, including Sanofi-Aventis and Novartis. Crucell's final price tag will likely exceed $1.6 billion, an impressive 50% premium for Crucell shareholders.

So far, this year has seen four confirmed deals for an average 85% premium. At least three more deals are being negotiated. And the dealmaking is just getting started... So even if you missed the first few whoppers, you haven't missed much. Let me explain...

Big Pharma players like Johnson & Johnson, Pfizer, Wyeth, and Bristol-Myers Squibb have an average $10 billion in cash. Big Pharma executives realize the only way to rebuild their pipelines, while earning a reasonable return on their investment, is to buy biotech assets at distressed prices.

Here's how you can get in ahead of the windfall: Search for biotechs with existing or near-term product revenue, a rich pipeline, and an experienced management team. I prefer companies with revenue of at least $300 million or companies with potential blockbusters (sales of $1 billion or more) waiting for FDA approval.

I'd also stick to companies with market caps between $1 billion and $30 billion. That'll keep you out of the smaller, riskier outfits. For starters, take a look at the premiere biotech names like Amgen (AMGN), Celgene (CELG), Gilead (GILD), Genzyme (GENZ), and Biogen (BIIB).

Get Paid to Wait Out the Market How to Make a Fortune Trading Drug Disasters

Genzyme, for example, is a biotech stalwart focused on rare illnesses. The company's revenue will grow 15% a year for the next few years. Earnings will grow even faster. The company has at least six new drugs ready to launch by 2012. And the experienced management team has grown the company while keeping costs low. Yet, it's trading for a measly 15 times this year's earnings – a downright steal.

The setup is the same for each company from the short list above. I think it's a safe bet one of them will hit the buyout jackpot this year.

Good investing,

George Huang