Investing in Biotech Stocks: The Buyout Binge Continues


"The biotechnology buyout deals just keep coming, meaning those investing in biotech stocks have scored some juicy profits, with more on the way."

The biotechnology buyout deals just keep coming, meaning those investing in biotech stocks have scored some juicy profits—with more on the way.

Watson Pharmaceuticals (NYSE: WPI) announced Wednesday it would buy competitor Actavis for $5.6 billion- the latest deal in an already-white-hot market for biotech buyouts.

In fact, get this: Although healthcare deals in the first four months of 2012 are down 32% on a year-over-year basis compared with the same period in 2011, biotech mergers-and-acquisition deals are up 38% so far this year.

And biotech merger mania is far from over.

AstraZeneca PLC (NYSE ADR: AZN) early Monday offered to pay $1.1 billion for Ardea Biosciences Inc. (Nasdaq: RDEA).

And Amylin Pharmaceuticals Inc. (Nasdaq: AMLN), a San Diego-based diabetes drugmaker whose shares recently surged after allegedly spurning a $3.5 billion offer from Bristol-Myers Squibb Co. (NYSE: BMY), appears to be seeking a buyer.

On Sunday, Reuters reported that Amylin has hired Credit Suisse AG (NYSE ADR: CS) and Goldman Sachs Group Inc. (NYSE: GS) as its financial advisers and Skadden Arps as its legal adviser.

These deals have been going on all year.

Back on Jan. 25, Swiss giant Roche Holding Ltd. (PINK: RHHBY) made a $5.7 billion hostile takeover bid for gene-sequencing leader Illumina Inc. (Nasdaq: ILMN). The very next day, Celgene Inc. (Nasdaq: CELG) and Amgen Inc. (Nasdaq: AMGN) each announced buyout deals. The aggregate value: $2 billion.

Indeed, thanks to the Amgen deal, Money Map Report subscribers have already benefitted from biotech buyouts. Amgen's buyout target was Micromet Inc. (Nasdaq: MITI), a Money Map Report portfolio company since June 2010. When the deal was announced, Chief Investment Strategist Keith Fitz-Gerald recommended that MMR subscribers sell the stock, resulting in a 62% gain for the portfolio.

In its most recent "Beyond Borders" global biotechnology report, consultant Ernst & Young said biotechnology firms were looking to produce increasingly effective drugs with fewer financial resources. The upshot: Investors were going to see a lot more biotech buyouts, with deals in the $1 billion to $5 billion range serving as the "sweet spot," E&Y said.

Developing new drugs can take a decade and cost more than $1 billion. And there's a lot of risk: Only one drug candidate in five that enters Phase I trials ever makes it to market. Companies with drugs already in Phase II or Phase III trials will continue to draw the biggest interest.

That's why big companies are bolstering their drug pipelines through partnerships, the acquisition of "orphan" drugs, or the outright purchase of smaller firms with promising drugs.

As Merck & Co. (NYSE: MRK) CEO Kenneth Frazier recently told an investor group: "My goal is to augment the pipeline. The way to augment is to find those assets that we can acquire."

Money Morning

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe