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Pharmaceuticals: A Prescription For Opportunity

Posted: Mar 17, 2009 11:39 AM by Eric Fox

Tickers in this Article: GILD, DNA, CVTX, MRK, SGP

There's one sure thing on Wall Street: The Street loves deals. Despite being in the midst of the most dismal stock market period in at least a generation, there's still some deal flow going forward, concentrated largely in the pharmaceutical and biotech industries.

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Merck & Co. (NYSE:MRK) led the week off with a bid for Schering-Plough (NYSE:SGP) in a deal valued at $41.1 billion. Merck & Co. offered 0.577 shares of its own stock and $10.50 in cash for each share of Schering-Plough owned. Since stock was used as leverage in the deal, the value may change constantly and investors will have arbitrage opportunities as well. (Learn how to invest in companies before, during and after they join together in The Merger - What To Do When Companies Converge.)

Gilead Sciences (Nasdaq:GILD) played the white knight role and announced a deal to buy CV Therapeutics (Nasdaq:CVTX) for $20 per share. The purchase by Gilead Sciences makes CVTX one of the best performing stocks in the market in 2009. CVTX was previously being pursued by Astellas Pharma Inc. (OTC:ALPMY) which had made a bid of $16 per share for the company. The offer was rejected by CVTX's board in February. It was trading in the $11 range before the Astellas offer was made public and now is trading around the offer price by Gilead. Since Gilead Sciences' $20 offer, Astellas has retracted its previous $1.1 billion bid.

Genentech (NYSE:DNA) is already 56% owned by Roche, yet the two companies spent six months haggling over a price for the balance of the company. Finally, they settled at $95 per share for the remaining 44% of Genentech.

Why Now?
Why are so many deals concentrated in this industry? Mostly because the buyers are flush with cash or not very levered and the cash flows are currently not as volatile as they are in other extreme pressure sectors.

Also, some of the larger companies may be looking for promising new drugs to fill their pipelines and, if their own research efforts fail, the only other action to take is to purchase a pipeline of drugs from a third-party company.

Finally, the plethora of buyouts has led to large payouts for Wall Street firms that are advising on the deals and writing fairness opinions. Wall Street desperately needs these fees, and this can't be dismissed as the motivation behind planting a suggestion in the mind of a CEO about the need for the company's growth in order to compete.

The Bottom Line
Although we are in the worst bear market since the 1930s, a few deals are still occurring as companies with revenues that are not too impacted by the recession look to fill out their product lines - and perhaps pad their egos as well. (Read more in Measuring The Medicine Makers and Using DCF In Biotech Valuation.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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