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Investing in the Biotechnology Industry

Written By Brian Hicks

Posted March 11, 2010

And while overnight successes in the market are few and far between, there’s nothing better than waking up one morning to find out that a company you own has suddenly gone parabolic.

Moonshots like those are what every investor lives for.

And that’s what makes the biotech industry so attractive these days for investors that are willing to speculate a little. I wrote in an earlier story entitled “The Brewing Bull Market in Biotech” in which I expain to readers why the fast growing market for new drugs is one that Big Pharma just can’t keep it hands off of — no matter how hard it tries.

And the reason is pretty simple…

Faced with shrinking pipelines and falling revenues, the old way of developing drugs through chemistry alone is giving way to modern technologies such as gene sequencing, protein analysis, biologics, DNA vaccines, and nanotechnology.

Biotech companies tend to dominate these areas of development. So acquiring a small biotech or two is one method the traditional big players have turned to these days to add to their own research and development. 

And the truth is that without the cutting edge research that these biotechs bring to the table, growth at the Big Pharma level will likely hit a wall… Which is why the big boys are willing to pay a huge premium to get their hands on the right company.

A Banner Year For the Biotechnology Industry

In fact, the examples of this strategy are simply everywhere you look these days.

I’ll give you an example. Just yesterday, health care heavyweight Abbott Laboratories (NYSE:ABT) announced that it was acquiring Facet Biotech Corp. for about $450 million in cash.

According to the deal, Abbott will pay $27 per share for Facet, earning its investors a 67% premium. Needless to say, shares of Facet exploded on the news rising over $10.00 in a fraction of a second.

Take a look:




Based in Redwood City, California, Facet and its partner Biogen Idec are developing a potential multiple sclerosis drug which is moving into late-stage development in the second quarter. Meanwhile, Abbott Labs also gained access to Facet’s potential cancer treatments in various stages of development with other partners.

And since both companies’ boards of directors have already approved the deal, it is expected to close in the second quarter.

However, not every deal has been quite so friendly.

One Biotech Buyout Turns Hostile

Last week, Astellas Pharma announced a hostile $3.5 billion offer for OSI Pharmaceuticals ( NASDAQ: OSIP) or $52 a share — a 40% premium over the previous close.


osip chart


Even still, shares of OSI have continued to climb, rising more than $5.00 above the offer price in a sure sign that Astellas will likely have to raise its bid to succeed.

You see, just like every other big player, Astellas (Japan’s second largest drugmaker) has been scrambling to develop new drugs as patents on its established products continue to expire.

That’s why the firm has spent the last 13 months courting OSI, since Astellas believes the deal will strengthen its effort to become a global leader in oncology. OSI specializes in molecular targeted therapies addressing needs in oncology, diabetes and obesity — each and every one of them a massive market opportunity.

Specifically, Astellas covets OSI’s Tarceva — an advanced lung cancer therapy — that raked in $359 million last year.

But those two deals weren’t the only ones of late… A third involving Merck (NYSE: MRK) also was announced.

After weeks of speculation, the German pharmaceutical company announced that it would buy U.S. life sciences tools maker Millipore (NASDAQ: MIL) for $7.2 billion.


mil chart


That deal effectively ended the wrangling over the company as Merck walked away the winner. In an earlier bid, Thermo Fisher Scientific Inc. (NYSE: TMO) had made a $6 billion offer for Millipore, only to be denied.

One way to Catch the Biotech Wave

As a result of these three huge deals — and many more before them — shares of the SPDR S&P Biotech ETF (NYSE: XBI)  have jumped by nearly 10% over the last month.

That’s a trend that will undoubtedly continue as the biotech bull market gathers more steam. And for investors who would rather spread out their risk across the sector, XBI is the perfect way to ride this wave higher.

Its holdings include stakes in Amgen Inc. (NASDAQ: AMGN), Celegene Corp. (NASDAQ: CELG), and Cubist Pharmaceuticals Inc. (NASDAQ: CBST), to name just a few…

But whether you decide to invest in a potential moonshot or make a bet across the sector, one thing is for certain: This is a trend that has plenty of room to run.

After all, these three deals are just the tip of the iceberg.

Your bargain-hunting analyst,

steve sig

Steve Christ, Investment Director
The Wealth Advisory