Human Genome Sciences Inc. (NASDAQ: HGSI) is surging on reports that GlaxoSmithKline PLC (NYSE: GSK) could be set to make a $25.00 per share offer to acquire the company. The report surfaced in the Daily Mail out of the United Kingdom, and we would note that this publication pushes out enough rumors that it could be called the Daily Rumor (or Rumour for the Brits). It also has a spotty track record.
The reason for the speculation is simple… GSK was long thought of to be the natural buyer because of the long pacts that are in place already. The two already have Benlysta as the lupus treatment under a collaboration pact. Then there is the issues of HGS’s pipeline.
What is interesting is that the Daily Mail also threw out Biogen Idec Inc. (NASDAQ: BIIB) and Merck & Co. (NYSE: MRK) could also be suitors. Our caution here is that those companies would have to want to be involved in collaboration pacts with GSK either way.
It is always interesting when you see a rumor of a 100% buyout premium. Sadly, even a 100% premium is not an assured price that would get a deal done. It would seem likely, but others may still fight it as the 52-week high is $30.15. The thing that would make a deal simple is that the market cap is only about $2.4 billion.
One issue that current investors could make for undervaluing the company is that the consensus price target from analysts is still above $24.00. If the stock is worth that on its own, investors could argue a buyout should make it worth even more.
A deal would make sense for GSK here, but we would be a bit more cautious on betting the farm that another large player would want to buy the company. It would be normal that GSK would not allow itself to be stuck in a new deal under a change of control if it found the buyer to be difficult or incompetent. That being said, anything is possible. This is not the first time buyout rumors have circulated around Human Genome Sciences.
Shares are up almost 13% at $12.68 and the 52-week trading range is $10.40 to $30.15.
Since this is probably the fourth or fifth time we have heard “HGSI Buyout Rumors,” our odds would automatically put the chance under 50% that a deal is imminent just because of the history of rumors. Still, an acquisition would make sense for GSK or for a large player that GSK would want to work with. That being said, we’d assign a 33% to 40% chance of a deal… 1-in-3 or 2-in-5.
JON C. OGG
M&A Bonanza For Drug & Biotech in 2011 (MRK, PFE, ALXN, DNDN, HGSI, CEPH, UTHR, CADX, AMAG, SNY, GENZ, AMGN, BEC, TEVA, SGMO, LLY, ALTH, CBST, VVUS, AUXL, VRTX)
The game of predicting mergers and acquisitions in the biotech and in pharma sectors is not a new one. The talk heats up, then it dies down. A deal comes, followed by another deal, and the activity goes quiet. This next week is likely to have at least more chatter in the biohealth sector for possible mergers and acquisitions after Barron’s gave a cover story called “The New Doctor in the House: Consolidation.”
Barron’s noted that “as big drug firms buy up smaller, specialty outfits and their most innovative products, better pipelines and sales-force efficiency will boost profits.” Here is the thing to consider: Barron’s did not really offer anything new or ground-breaking this weekend. It will have rekindled some hope that M&A is coming in the space. At issue: pipeline fatigue. A note we’d throw in as well, dead-dead stocks. We are going to at least address some of the Barron’s roster, but we want to show you many others which are just as or even more likely acquisition targets. Some of ours have even been in-play before.
Barron’s threw in Merck & Co. (NYSE: MRK) and Pfizer, Inc. (NYSE: PFE) as the largest of the Big Pharma players and it threw out biohealth names with stock-market values below $10 billion:
- Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) with a $7.5 billion value after a hueg run-up;
- Dendreon Corporation (NASDAQ: DNDN) for Provenge for prostate cancer (and future cancers) with a $5 billion market value today;
- Human Genome Sciences, Inc. (NASDAQ: HGSI) for its Benlysta in patients with severe active lupus nephritis and CNS lupus and a $4.5 billion market cap;
- Cephalon, Inc. (NASDAQ: CEPH) is one we have rarely looked as since things quieted down there;
- United Therapeutics Corporation (NASDAQ: UTHR) for its treat pulmonary arterial hypertension and an almost-$4 billion value;
- Cadence Pharmaceuticals Inc. (NASDAQ: CADX) was noted for its pain medication without the addiction aspects of morphine and its value is only $369 million;
- AMAG Pharmaceuticals, Inc. (NASDAQ: AMAG) was called a value stock despite its recent weak sales and despite its cash burn with a $368 million market cap.
Much of the biotech M&A game hinges on Sanofi-Aventis (NYSE: SNY) in its chase to acquire Genzyme Corporation (NASDAQ: GENZ). The latest talk is that a work-out could come to $80 all-in if certain milestones were achieved but the deal is still south of there officially. As noted above, we have our own opinions on which biotech companies and drug companies could find their way into the hands of a larger acquirer.
Amgen Inc. (NASDAQ: AMGN) is likely to continue being an acquirer. The company recently announced a deal worth potentially $1 billion to acquire privately-held BioVex. Last year the company said it was aggressively looking for new targets and its $52 billion market cap is the largest of all the independent biotechs in America. The company has more tricks up its sleeve.
Beckman Coulter Inc. (NYSE: BEC) went into play in early December with private equity firms being the likely acquirers of the portfolio of biomedical testing equipment and supplies. We argued at the time of the premium that it seemed shares fully reflected that value, and shares are actually lower now.
And don’t forget Sangamo Biosciences Inc. (NASDAQ: SGMO), where shares rallied in November on rumors of a potential bid interest from Eli Lilly & Co. (NYSE: LLY). It had good news on ZFP Therapeutic program to develop SB-509, a zinc finger protein transcriptional activator (ZFP-TF) of the vascular endothelial growth factor (VEGF)-A gene as a treatment for ALS and the news flow has continued to propel shares higher. It went above $4.50 on the rumors but now shares trade at $7.39. The market cap is still low here at $334 million.
Allos Therapeutics, Inc. (NASDAQ: ALTH) has been another name floated out there for M&A possibilities, but things are looking less and less bright for the company. Shares hit a 52-week low just on Friday.
Cubist Pharmaceuticals Inc. (NASDAQ: CBST) has not really gone anywhere as it is deemed a mature company, but it is one we thought for sure that would find its way into being part of a larger company. Its Cubicin is on the market and it fights severe hospital-induced infections and the market cap is $1.3 billion here.
VIVUS Inc. (NASDAQ: VVUS) remains a wild card due to the FDA. Diet and weight-loss pills have not been given any real love by the FDA. The exception here is that Qnexa does have serious benefits. There are side effects, particularly in cases of pregnancy. We would ask this though: How many pregnant and soon-to-be-pregnant women really diet? Most doctors don’t even want pregnant women taking supplements, let alone drugs. IF the FDA approves Qnexa, that $680 million market cap may be worth far more.
Teva Pharmaceutical Industries Limited (NASDAQ: TEVA)… We have also noted Teva’s mega-cap ambitions, and making more acquisitions would generally get there.
Last year, Morningstar put out a list of three favorites that it sees as acquisition targets in the biohealth space: Auxilium Pharmaceuticals Inc. (NASDAQ: AUXL), Human Genome Sciences Inc. (NASDAQ: HGSI), and Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX). FULL ARTICLE
This should at least give you a better and more concise list of possible deals and deal-makers for 2011. Just remember this, regardless of what Barron’s or other media outlets try to tell you: not all biotechs have to be acquired, not at all.
JON C. OGG
Top BioHealth Research Calls of the Week (MNKD, PDLI, ILMN, CLDA, MRK, PFE, LLY, BMY, ALXN, SVNT, AMGN)
There were some key research calls in biotech and biohealth shares this week. Over in our “top five analyst calls of the week” at 24/7 Wall Street we noted how one firm came out in defense of MannKind Corporation (NASDAQ: MNKD) on its implosion this week and another call was highlighting the potential upside value that remains in PDL BioPharma, Inc. (NASDAQ: PDLI) despite its patent fight concerns. There were many other standout calls though in analyst coverage this last week in biohealth:
Illumina Inc. (NASDAQ: ILMN) has remained impressive after having been one of our “Best of Big BioHealth in 2010″ and was also at the start of the year listed as “an overvalued biohealth names with peers.” This week brought an analyst duel. Citigroup raised its rating to BUY from Hold and the new price target is $85.00 per share. Thomson Reuters has a consensus price target of $66.87 and the Citi target appears to be the street-high price target. Elsewhere, RBC Capital Markets lowered the rating to Sector Perform from Outperform due to valuation. Illumina’s 52-week range is $34.25 to $71.07, and at $68.75 it has a market cap now of $8.6 billion.
Clinical Data Inc. (NASDAQ: CLDA) will be one to watch this coming week after the FDA approved its antidepressant drug to be sold under the brand name Viibyrd. Shares closed at $15.03 on Friday but were much higher after the news and the 52-week trading range is $10.87 to $22.39. What is interesting is that analysts already see peak sales above $2 billion as this antidepressant is believed to not interfere with sexual desire as much as in some rival drugs. The consensus price target is already $29.67 per Thomson Reuters data.
This week came a standout call in Big Pharma from Wells Fargo as the firm raised the sector to “Overweight.” Wells Fargo raised Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) to Outperform ratings and also noted Eli Lilly & Co. (NYSE: LLY) and Bristol-Myers Squibb Company (NYSE: BMY) in the call.
Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) closed the week out at $84.43 and has a 52-week range of $44.86 to $87.14. There was an analyst duel this week. Gleacher & Co. raised its rating to Buy while UBS cut its rating to Hold.
Savient Pharmaceuticals, Inc. (NASDAQ: SVNT) hit new 52-week lows this last week and closed at $10.20 versus a 52-week range of $10.16 to $23.46. Its shares were downgraded to “Underperform” over at Bank of America Merrill Lynch after previous news in its business update of reports of batch failures with its new gout medication called Krystexxa.
Amgen Inc. (NASDAQ: AMGN) is set to report earnings on Monday and Thomson Reuters has estimates of $1.10 EPS and $3.8 billion in revenues; for the next quarter estimates are $1.31 EPS and $3.67 billion in revenues. At $56.97 shares are actually down slightly from 90-days ago and the 52-week range is $50.26 to $61.26. This stock is getting toward its higher end of a 3 year trading band, so we expect that analyst will have to make some adjustments after earnings. Thomson Reuters has an average price target above $65.00 currently.
At the end of December, we gave a list of Big Biotechs With teh Most Upside in 2011.
Those are definitely not all of the research calls of the week in biotech and biohealth names, but this was a fairly busy week.
JON C. OGG
Amgen Inc. (NASDAQ: AMGN) may have a recent trading history of being dead money. There is at least a small chance that this could finally change through time. If the implications end up coming to fruition, Amgen could be sitting on perhaps what could be the next Avastin-like franchise.
Two recent pre-clinical mice studies show that the osteoporosis drug Prolia from Amgen may actually treat breast cancer in a manner that is separate from its bone-related function. While you will hear “may” and “could” a lot, this is something to watch for Amgen due to a long-standing range bound stock price.
Bisphosphonates as a class, from Merck & Co. (NYSE: MRK) with Fosamax and even from Roche Holding AG (RHHBY) with Boniva, could reduce the risk of breast cancer.
Prolia was approved in June as an osteoporosis treatment and it is expected to add to the growth of the biotech giant. Amgen is seeking to expand its approval for the bones of cancer patients. Additional data is not expected until late in 2010. Prolia is already approved to treat osteoporosis, but Amgen also has filed for FDA approval to help bone complications in cancer patients at much higher doses.
One study published by the journal Nature showed that RANK Ligand and its receptor seemingly play a key role in hormone-induced breast cancer and the study shows an indication so far that it decreased and delayed breast cancer onset.
Another Nature article may be a bit more pointed or less independent due to ties with Amgen. That article follows the same lines and implies that the blocking RANK Ligand lowers or weakens breast tumor development.
The implication today is that the studies suggest that Prolia could actually help to delay or prevent cancer rather than just treating bone-related issues that come up in cancer treatment.
Whether Prolia is a Holy Grail treatment is not going to be known in the immediate future. Maybe years. Amgen is in a long-term clinical study aimed at testing Prolia’s efficacy in early stage breast cancer that has a higher risk of recurrence and the study will measure if Prolia extends the time period that women live before breast cancer returns and before it ultimately spreads into bones.
Why do we call this an Avastin-like ‘potential’ franchise? Amgen is still studying whether or not the drug helps to prevent advanced prostate cancer (in men, obviously) from metastasizing and entering the bone structure. That data is also due in the fourth quarter per our expectations. Treating cancers in men and women can often be very different because of hormonal differences. If Prolia is a success in one cancer, the theory would be that it has other cancer treatments in hiding.
Again, all of these points are highly dependent upon success from the start, and human data often is grossly different than in mice, monkeys, and in static environments.
Dendreon Corporation (NASDAQ: DNDN) and others have signaled multiple cancer treatments from the same process. Dendreon noted that other cancer cell antigens play a role in immune reactions that may help the body’s resistance against cancer and noted that CA9 is present on approximately 75% of cervical and colon cancers and 95% of renal cancers. It also noted that the carcinoembryonic antigen is present on 70% of lung cancers, virtually all cases of colon cancer and about 65% of breast cancers. Does that mean a treatment for one is a treatment for another? No, but it keeps the door open to endless treatment avenues. Oncolgists have always said that each person’s cancer treatment will vary drastically from another’s.
IF… THEN… Amgen finds itself in a giant “IF THEN” scenario. The good news is that these revenues are not apparently factored in for finite revenues in the years beyond 2011. New potential uses can bring great expansion in revenues. It has happened with Avastin, and ultimately Genentech was acquired.
Amgen may be too large to ever be acquired because its market cap is roughly $52.5 billion. At $54.75, its 52-week trading range is $50.26 to $61.85. Amgen peaked around $80 in 2005 to 2006 and the trading band since early 2007 has for all practical purposes been $50 to $60 for most of the time. There is also a value component here despite its market cap. Thomson Reuters has estimates of $5.11 EPS and $15.02 billion in revenues for 2010 and $5.38 EPS and $15.43 billion in revenues for 2011.
How many biotech stocks trade at 10 to 11 times earnings? Not many. That is why we have called Amgen the biotech that trades like a stodgy Big Pharma company rather than a growth biotech stock.
JON C. OGG
In an effort to combat Alzheimer’s disease, global health care giant Merck & Company, Inc. (NYSE: MRK) has entered into a deal for $289 million with Canada’s Alectos Therapeutics to develop new therapeutic molecules. The deal is meant to jumpstart a collaboration between the two companies to tackle the enzyme O-linked N-acetylglucosaminidase, which is believed to have causal effects in the development of Alzheimer’s disease.
Merck has experienced poor results in the past with regards to treating Alzheimer’s, however outlook seems positive with this new outing.
-Michael B. Sauter
According to the Honolulu Star Advertiser, Merck & co. has agreed to a deal to purchase a vaccine research branch of the small, bankrupt biotech firm, Hawaii Biotech. The sale of the unit, which develops treatments for the Dengue virus, is good news for the small biopharma company, which recently filed for chapter 11 bankruptcy, and is in need of cashflow to catalyze the rebuilding proccess. The sale involved an undisclosed amount of capital.
Merck stands to add to its impressive lineup of what spokesman Ian McConnell calls “vaccines that meet global unmet medical needs.” The pharma giant was down 0.11% this afternoon. Shares of MRK closed on a three-month high of $35.49 last week.
-Michael B. Sauter
Is VIVUS Inc. (NASDAQ: VVUS) the next stock that could double in emerging pharma and biotech? It depends upon whom you ask. The stock was started as “Buy” at Wedbush with an price target of $20.00 per share. This follows a long line of positive research initiations from last year and this year, but $20.00 is now the highest target we see from the recognized research outfits in Thomson Reuters. The prior highest target was $18.50, and the average target was roughly $14.00.
Wedbush’s note calls VIVUS as being one of the most attractive in the mid-cap biotech space. The firm noted that the $775 million market cap is well below what it should be and could be for a drug that addresses such a large and virtually unmet need of treatment. The company also still holds all of its own rights, and we’d throw in the note that this puts it among the potential pool of biotech acquisition candidates out there.
After Amgen Inc. (NASDAQ: AMGN) and Sonofi-Aventis (NYSE: SNY) are both reportedly out looking for target acquisitions, it is hard to leave VIVUS entirely off the list of potential buys. The issue is that the FDA decision is still pending.
Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) is slowly becoming one of the biggest drug makers in the world. This morning the company is up on the news that it won the bidding process to acquire German generic drug maker Ratiopharm GmbH. The price tag: 3.6 billion Euros, or about $5 billion today in a cash and debt deal. Had this been 2009, the price tag would have been closer to $6 billion in the Euro currency.
Ratiopharm is a top generic drug maker in Germany and Pfizer Inc. (NYSE: PFE) was supposed to be one of the other bidders as it has not frowned upon having generic drugs of its own. Ratiopharm had about 750 drugs and a solid pipeline.
Teva is now one of the top drug companies in the world with most operational sales in North America and in Europe. Teva’s last big transaction was Barr Pharmaceuticals Inc. for about $7.46 billion. The company said this deal will allow growth in Germany, as well as higher growth markets in Spain, Italy and France.
Usually companies buying other companies suffer a drop on dilution concerns. Not Teva. Shares are up 4% after the open and the $62.58 price hit today was not just a 52-week high. That marks an all-time high. Its $55 billion market cap is still far from the mega-cap status of the $100 billion mark. But there are only a handful of companies there at that level of a mega-cap status. Pfizer Inc. (NYSE: PFE), Novartis AG (NYSE: NVS), Merck & Co. Inc. (NYSE: MRK) and Sanofi-Aventis (NYSE: SNY) are all among those which have a $100 billion market cap and higher.
The last date you have to go back to see a TEVA stock double is December 2006 when the stock was just under $30.00. Calling for stocks to double yet again is tricky and that is not quite our intent here. But if the company continues to make acquisitions, the market cap can get there without the stock needing to double.
Teva has shown that it likes to do deals. Analysts are looking for 10% organic earnings growth ahead as the Thomson Reuters estimate for 2010 is $4.55 EPS versus $5.04 EPS in 2011. That is not considering the effects of this merger, and the deal is expected to close late this year.
As far as other top drug companies, here is how Teva’s $55 billion market cap compares:
- Pfizer Inc. (NYSE: PFE) $138.9B
- Novartis AG (NYSE: NVS) $124.7B
- Merck & Co. Inc. (NYSE: MRK) $118.6B
- Sanofi-Aventis (NYSE: SNY) $101.6B
- GlaxoSmithKline plc (NYSE: GSK) $95.9B
- Abbott Laboratories (NYSE: ABT) $84.6B
- AstraZeneca plc (NYSE: AZN) $64.9B
- Bristol-Myers Squibb Company (NYSE: BMY) $44.5B
- Eli Lilly & Co. (NYSE: LLY) $39.8B
JON C. OGG
Ariad Pharmaceuticals Inc. (NASDAQ: ARIA) is seeing elevated trading today after a presentation and ahead of earnings. The difference here is that Ariad’s increased trading is in both the stock and in the bonds.
Joe Kunkle of OptionsHawk.com noted, “implied volatility is 10% higher to 87.8% as shares gain 2.7%, 4,140 calls trading, 4X average, with buyers of April $3 and May $3.50 calls. Shares are at 52 week highs and breaking a long term downtrend, trading as high as $7.50 in 2005. The Company is expected to announce earnings on March 16th and presented at the Cowen Healthcare Conf. This morning. Ariad’s leukemia drug recently received orphan drug status adn is expected to announce Phase 3 results for its soft tissue and bone sarcoma drug, ridaforolimus. Ariad has a $1B+ collaboration agreement with Merck & Co. (NYSE: MRK), potentially making it a takeover target.” (NOON EST)
Ariad’s shares are higher by 4.4% at $3.09 on over 3 million shares with more than an hour to the close. Average volume is only about 1.7 million shares per day and the 52-week trading range is $1.15 to $3.48. Today’s added gain may be as there was another biotech merger as well.
24/7 Wall St.
Contribution from optionshawk.com
Medicis (NYSE: MRX), a specialty pharmaceutical company in treatments of dermatological and aesthetic conditions, has the talk going again about dividends in the drug and biotech sector. The company declared a quarter-end cash quarterly dividend of $0.06 payable on April 30, 2010 for holders of record at the close of business on April 1, 2010. This dividend hike is a 50% increase versus the previous $0.04 dividend and the last hike was in March 2008. But what is more important than Medicis is that this brings up the focus on dividends in both the pharma sector and potentially in the biotech sector.
Many investors have seen scores of dividend hikes since the end of December, which is the yardstick for a vote of confidence issued by a company. We have noted two more dividend candidates which are not currently paying dividends:
- Amgen Inc. (NASDAQ: AMGN) as the world’s largest independent biotech stock;
- Warner Chilcott plc (NASDAQ: WCRX) as perhaps the newest and best up and comer in the pharmaceuticals sector.
Neither pay a dividend. Not yet. It would seem that the most likely candidate of the two would be Warner Chilcott because companies like Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) do pay dividends with roughly a 4% yield. Here is a full dividend analysis we gave earlier on the sector.
So far Amgen is opting for share buybacks right now and it has not indicated that it will pay a dividend.
The two key ETF products we use to follow the biotech/drug sector are the Pharmaceutical HOLDRs (NYSE: PPM) and the Biotech HOLDRs (NYSE: BBH). Both have irregular dividends and he biotech is far more sporadic than the pharma HOLDR.
More dividends coming!
JON C. OGG