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Two of the Best Opportunities in Biotech

Both are potential takeover targets and good buys right now

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I am convinced that now is the time to invest in biotech.

If you’re familiar with biotech at all, you know it has traditionally been a risky sector to invest in — shares of Human Genome Sciences (NASDAQ: HGSI) recently plunged more than 10% in one day after the FDA questioned the effectiveness of its new Lupus drug. But as the industry develops and grows, it’s becoming easier to minimize risk and identify the likely winners. And with the right strategy, you can make big profits in biotech. 

As such, I have been investing in select biotech stocks and am pleased with the money I’ve made. Here are two stocks you’ll want in your portfolio in 2011, and if you don’t buy them now, you’ll end up paying more to get them later!

Finding Biotech Stocks to Buy — Look for Takeover Targets

One of the very best ways to profit from the biotech sector right now is to buy companies that are likely targets for acquisition.  Many of the big pharmaceutical companies are in a precarious position right now.  They’ve cut costs as far as they can and many of their blockbuster drugs are going to go off patent in the next three years.  The next logical step in big pharma’s search for growth is to start going after biotechs with a drug or two in the pipeline. 

Plus, as companies start to feel more confident in the new, more corporate-friendly environment in Washington, merger & acquisition activity is sure to pick up.  I’ve got two biotech companies in particular that are both candidates for acquisition and just plain good buys right now.

Biotech Stock #1

The first stock I want to tell you about is Shire Plc. (ADR) (NASDAQ: SHPGY). I think it’s almost a foregone conclusion that Shire, even with a $13 billion market cap, will eventually go to the highest bidder. But even if this acquisition doesn’t come to fruition soon, Shire has other factors going for it that make it an appealing buy now.

Shire is a biopharmaceutical company based in Ireland, but U.S. investors can own shares by buying the American Depositary Receipts (ADRs). The company has two key business segments: best-in-class ADHD medications and “orphan drugs.” These are drugs that treat diseases affecting fewer than 200,000 people, and the U.S. Orphan Drug Act of 1983 provides incentives to encourage development of these treatments that might otherwise be skipped over because of the relatively small number of patients who would benefit.

Shire has a number of new drugs that should release clinical data or be rolled out of their pipeline during the fourth quarter. There are a total of 11 projects in full development of which eight are in Phase 2 or beyond. Many are expected to be approved and launched in the coming three years. Since most pharma companies have all their eggs in one or two baskets, this gives Shire breathing room in case any of these drugs fail to perform as expected or meet with delays.

In the most recent quarter, earnings rose to $220.3 million from $89.2 million a year earlier, beating analysts’ median estimates of $188 million. Shire reported a surge in its third-quarter profit, as manufacturing problems at rival Genzyme Corporation (NASDAQ: GENZ) helped the sales of Fabry disease drug Replagal nearly double. Increased profit was also aided by higher sales of ADHD drugs Vyvanse (up 17%) and Adderall XR (up 41%), as prescription demand rose and the market for ADHD drugs expanded. Royalties from authorized generic versions of the medicine rose more than eightfold to $18 million. Importantly, Shire raised its earnings forecast for the year, saying earnings, excluding some items, are expected to reach “up to $4.20” per share. The company previously said it expected EPS to be “trending toward $4.”

How to Play SHPGY Now

Given its strength, I recently raised my buy limit on SHPGY to $73. If the company were acquired, I think it would be at a 25%+ premium to current prices. I’m going to stay conservative with our $85 target in the event Shire is not bought, but I think the stock is a good buy here.

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