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Biotech Investments Prosper from Takeovers

Written By Brian Hicks

Posted July 19, 2012

The domestic biotech industry is heating up, and some big investment firms are going to hit the jackpot.

Reuters conducted a study of the average cost for investors in the sector and named six U.S. biotech firms that could yield high returns to their major shareholders—big investors like Wellington Management, Fidelity Management & Research, and Capital Group Cos.

This is assuming current share prices hold and these six fulfill their designation as likely takeover targets.

In 2012, the Nasdaq index for biotech has already shot up around 29 percent. As takeover rumors have flown around with increasing rapidity, the holdings for these investors have multiplied in value.

The rumors aren’t completely unfounded. Just this Monday, GlaxoSmithKline Plc (LON: GSK) bought out Human Genome Sciences (NASDAQ: HGSI) for $3 billion.

Naturally, examining shareholder costs is just one part of exploring investment opportunities in biotech. It is also essential to study the existing drugs roster of a company, area of research, pipeline, and other relevant aspects, Reuters says.

From Reuters:

“When investing in biotech stocks, I am not speculating that a big pharma company is going to come in and scoop it up,” said Rajiv Kaul, portfolio manager of Fidelity Investments’ Select Biotechnology Portfolio. “If I see value in a biotech stock, it’s possible a big pharma firm may see value in them as well.”

The original flagging of companies as potential takeover targets was done by Morningstar. These companies include Alexion Pharmaceuticals Inc. (NASDAQ: ALXN), BioMarin Pharmaceutical Inc. (NASDAQ: BMRN), Onyx Pharmaceuticals Inc. (NASDAQ: ONXX), Regeneron Pharmaceuticals Inc. (NASDAQ: REGN), Seattle Genetics Inc. (NASDAQ: SGEN), and Vertex Pharmaceuticals Inc. (NASDAQ: VRTX).

But investors have to be careful. Morningstar’s list includes two companies, Exelixis Inc. (NASDAQ: EXEL) and Human Genome, where the average costs for their biggest shareholders is higher than the current trading level of stocks.

This means that such shareholders—in this case, Fidelity, T. Rowe Price, and Wellington—may insist on high premiums from any bidders.

But high costs don’t necessarily mean shareholders would resist if a bid comes their way. This happened with Human Genome, whose shareholders agreed to a deal despite taking a measurable loss on it.

Human Genome had been troubled by a 69 percent stock decrease in 2011 and the anemic sales of its lupus drug, Benlysta.