Get Ready For a Buyout
Boom in the Healthcare Sector
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By: Marc Lichtenfeld
Senior Analyst
Xcelerated Profits
Report & Smart Profits Report
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Published:
May 12, 2008
In a few days, I'm giving a speech
at the 13th Annual Pharmaceutical and Biotech Licensing and Deal
Making Summit.
To prepare for my presentation, I spoke to many of my hedge fund
contacts. Given that I'm already a biotech bull, I wanted to
know what they expect from the merger and acquisition landscape
regarding the biotech sector.
And what I heard from my sources made me more positive than ever
on the future outlook for the biotech sector. So if you'll
pardon the pun, here's the deal...
The Sugar Daddies Of The Healthcare World
Big pharmaceutical companies are analogous to "Sugar Daddies." You
know, the rich, older guys who want some pretty young girl to
spice up their lives.
In the healthcare world, the Sugar Daddies are the large-cap
pharma companies who are loaded with cash, but their patents
are getting quite gray. And their pipelines (drugs in
development that haven't yet been approved) are, shall we say,
not quite as robust as they used to be.
But just as it means nothing to the Daddy to lavish his new
object of affection with cars, diamonds and apartments in the
city, a large-cap pharma can easily drop $800 million for a
biotech company.
For example, GlaxoSmithKline (NYSE: GSK) has nearly $7 billion
in cash, while Novartis (NYSE: NVS) boasts more than $10
billion. And Pfizer's (NYSE: PFE) coffers are bursting with
$25.4 billion in cash.
And some have already splashed their fat wads of cash in a big
way...
Two Reasons For An Imminent Biotech Buyout Boom
Take Glaxo, for example, which spent $720 million of its $7
billion horde to buy Sirtris Pharmaceuticals (Nasdaq: SIRT) last
month. That was an +84% premium to SIRT's closing price
the night before.
And on the other side of the world, Japanese drug giant Takeda
Pharmaceuticals is buying Millennium Pharmaceuticals (Nasdaq:
MLNM) for $6.6 billion
-- a +53% premium. That's also roughly one-third of
Takeda's $18 billion of cash and securities.
My sources tell me this type of activity is going to continue --
and for a couple of key reasons:
Patent Problems: Many of Big Pharma's blockbuster drugs are set
to lose their patent exclusivity in the near future. This means
the door opens for more generic competition and eats into a Big
Pharma company's previously exclusive revenues from the drug.
Poor Pipeline: Surprisingly, the large-cap companies don't have
particularly full drug
pipelines. Since a pipeline is the lifeblood of these
corporations, it's easy to see why they go after smaller rivals
who do boast stronger pipelines and/or cutting-edge technology.
Some consider it less risky to buy a drug midway through
development (or even in the latter stages) than to develop it
from the start.
And this is why I think healthcare will become a rich addition
to your portfolio...
Wanted: Drugs... Price: A Boatload Of Cash
The bottom line is this: Big Pharma companies have cash and want
drugs. And for the right price, biotech firms will be happy to
sell to them.
Moreover, based on the recent M&A activity within the healthcare
sector and laws of supply and demand, the prices may stay high
or go higher.
For example, imagine you're the CEO of a promising biotech firm
and you're seeing the +50% to +80% premiums that Big Pharma
companies are paying for your fellow biotechs -- many of which
have unproven technologies. You can be sure that if a potential
buyer comes sniffing around your firm, you're going to try to
extract as much money from them for your shareholders as
possible.
With drug patents expiring and sparse pipelines, Big Pharma will
continue to pay up for smaller biotechs because it has to. And
it's these small-cap biotechs that will reap the benefits. So
although the big Sugar Daddy pharma firms have all the cash, it
will really be the small biotechs that will be asking, "Who's
Your Daddy?"
Hoping your longs go up and your shorts go down.
Marc Lichtenfeld
Senior Analyst
Smart Profits
Report
About Marc Lichtenfeld
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