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Biotech Company Buyouts

How to Catch the Building Wave in Biotech Stocks

Written by Brian Hicks
Posted October 22, 2009

When it comes to the millions of sites on the internet, I think eBay is one of the coolest.

It's the only place I know of in the world — physical and cyber — where you can buy a 1957 Johnny Unitas football card, a Florida vacation home, and a lucky tube of air. . . all in the same visit. In miles of digital aisles, eBay sells everything.

But one of the best things about the site is the lesson eBay provides on the free market. Because when buyers and sellers meet, the price of everything from bobble heads to engagement rings can be discovered.

And you need not spend much time online before you realize that everything you learned in school about markets is true: the laws of supply and demand are what determine the price of every single item.

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Fair or not, it is the buyers who set the market. And when there aren't many of them, the price of everything drops.

What happens on Wall Street everyday isn't really that different. On the Street, there are many more buyers and sellers, and a whole lot more money is involved.

When the day is done, your shares finish either in the red or in the green. As on eBay, it is Mr. Market who makes the call.

And in the end, you find out that Mr. Market doesn't care about PE ratios, book values, or patterns on a chart. Instead, all he needed to know to determine what you owe was the price someone else was willing to pay for the same thing.

The bell rings and the next day, the cycle starts all over again.

Occasionally, however, there are times when the pool of buyers completely misses the boat, failing to understand what a company's true value is. When that happens, mergers and acquisitions are close behind as the big fish move in to swallow the small.

You see, more often than not, it is the competition that can see the gold at the end of the rainbow. When they do, they are more than willing to pay a premium to get a piece of it first.

Buyouts Push Biotech Stocks Higher

Nowhere is this more apparent than in the pharmaceutical sector these days, where the big fish — Merck, Johnson & Johnson, and Wyeth, to name a few — have been on a virtual spending spree.

As a result, they've been able to find value in small biotech stocks that the rest of the market didn't see. . . or simply didn't know enough about. Along the way, they have created a steady stream of biotech buyouts, earning some lucky shareholders triple-digit gains in the blink of an eye.

Take Sirtus Pharmaceuticals, for instance: in many ways, the biotech bull market gathered steam with them 18 months ago.

Their share price doubled overnight when GlaxoSmithKline (GSK) stepped in and bought the budding biotech for $720 million. Sirtus's market cap was half that amount before this occurred, as investors failed to see the same promise that Big Pharma did.

In short, GSK wanted access to Sirtus's research on Sirtuins, a class of enzymes thought to be involved in the aging process — a blockbuster story if there ever was one. In fact, the Sirtus story was so big that 60 Minutes reported on it, referring to the discovery as akin to the fountain of youth.

Not too long after, GSK jumped to the head of the line, setting the price in the process.

Since then the rest of Big Pharma has followed them — not out of envy, mind you. . . but out of necessity.

That's because the big pharmaceutical companies are staring down shrinking pipelines and a flood of generic competition. As a result, they have had to use biotech buyouts to jump-start their own research and development.

It's either that. . . or these companies suffer via sagging sales, as we learned last week when Johnson & Johnson (JNJ) reported.

Sales in its drug business dropped in part when generic competition hammered two of JNJ's biggest drugs. Specifically, sales of Topamax and Risperal fell 88 percent and 71 percent respectively, as their patents expired.

That may be why JNJ bought an 18 percent stake in Crucell last month for $444 million, and why they picked up Cougar Biotech in May for $1 billion.

For their part, JNJ and GSK are only the tip of the iceberg. In their wake, this is a story that seems to play out at least twice a month these days, as biotech buyouts add more fuel the growing bull market.

After all, everything has a price — even lucky tubes of air on eBay.

In future issues, we will be helping you to separate the contenders from the pretenders in this sector.

In fact, I had lunch on Tuesday with the CEO of a company who says he could completely change the way we think about vaccines. And as impressive as that may sound, that was just a small slice of the story.

So stay tuned. . . this is one story we hope to bring you in the weeks to come.

By the way, aside from individual stocks, one way to play this trend is to buy the SPDR S&P Biotech ETF (NYSE:XBI). It's an exchange-traded fund tied to S&P Biotech Index.

Its holdings include stakes in Amgen Inc. (NASDAQ: AMGN), Celegene Corp. (NASDAQ: CELG), and Cubist Pharmaceuticals Inc. (NASDAQ: CBST), to name just a few. That allows you to spread out your risk across the entire sector.

Your bargain-hunting analyst,

steve sig

Steve Christ, Investment Director

The Wealth Advisory

P.S. The biotech bull market is a story that we've been following for nearly two years now. Needless to say, this is one sector we still think has plenty of room to run. To learn more about The Wealth Advisory and how to play this rising tide, click here.

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