Synageva 2.0 – Which Biotech Stock Will Be Bought Next?

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Synageva Biopharma Corp (GEVA) delivered a doubler overnight in early May, after a roughly $8.4 billion deal with Alexion Pharmaceuticals Inc (ALXN) sent shares of GEVA stock from under $100 to over $200.

The deal is noteworthy for a number of reasons, the least of all being the big move for Synageva stock. For those who missed out on the initial pop, consider that the deal is not fully priced in yet, with GEVA stock boasting a market cap of only about $8 billion as of this writing.

Also, Alexion paid one of the highest buyout premiums in history to snap up Synageva. Check out the accompanying graphic from the Wall Street Journal for details.

geva stock buyout alexionALXN stock actually responded negatively with a double-digit sell-off immediately on the news, hinting that some think the biopharmaceutical stock overbid … though admittedly, shares have risen since then.

Perhaps most interesting of all, however, is the continued trend of big buyouts in pharma — and the hope that the small-cap biotech in your portfolio will be the next acquisition target.

So who will be the next Synageva?

Possible Biotech Buyout Targets

Keep in mind that GEVA stock is only the latest chapter in this story of consolidation. Teva Pharmaceutical (TEVA) bought Auspex Pharmaceuticals for $3.5 billion in March, and Horizon Pharma (HZNP) picked up Hyperion Therapeutics for $1.1 billion around the same time.

Of course, speculation regarding biotech buyouts is just that — speculation. However, the premiums paid for some of these fledgling drug companies makes it worth an aggressive investor’s while to target some of the more attractive stocks in the space.

So what makes biotech stocks likely acquisition targets? In a phrase, “orphan drugs.”

So-called orphan drugs are frequently the only medication out there for treating a rare and often serious disease. These drugs are needed badly as a result, so often get fast-tracked approval — and command big premiums once they hit the market, being the only treatment available.

According to research firm Evaluate Group, orphan drugs are seeing breakneck growth and huge potential right now. In a report on these niche medications last year, the group notes that orphan drugs will make up 19% of all prescription drug shares by 2020, hitting $176 billion in total sales.

And in the short term, the 11% growth rate in sales predicted this year will be nearly double the 5% growth rate of overall drug sales that include mainline prescriptions and generic medications.

In other words, if you’re a big pharmaceutical company and want a path to growth and big margins, get yourself a new pipeline of orphan drugs.

A few companies that specialize in these medications that could be acquisition targets include:

BioMarin Pharmaceutical Inc. (BMRN) — Thanks to a portfolio of drugs focused on rare genetic diseases — four of which are already in the commercialization phase, BioMarin is a bit more proven than smaller biotechs. It’s also pretty pricey after the run-up, however, at nearly $20 billion in market cap. Add a premium on top of that and any acquisition would be big-ticket indeed, but not impossible. And besides, given that the underlying business is sound, you can hold without depending on a white knight buyout.

Isis Pharmaceuticals Inc. (ISIS) — Isis focuses on “antisense drugs” that use genetic therapies to fight cancer, cardiovascular diseases and other rare disorders. It also has a few treatments already in commercialization, but “only” has a market cap of around $8 billion. Shares are up 100% in the last 12 months, however, so it may be cheaper for a buyer to act now than to wait any longer.

Vertex Pharmaceuticals Incorporated (VRTX) — Innovative treatments being developed by Vertex include a drug targeting cystic fibrosis in children, and the $30 billion company has a good track record of bringing successful orphan drugs to market. Of course, as the priciest of this group, an acquisition may be immediately out of reach. But it’s important to focus on quality here so you don’t get stuck with a speculative development-stage biotech if a buyout never happens.

Of course, you could always just buy my favorite healthcare ETF to play this trend, too. The SPDR S&P Biotech (ETF) (XBI) owns a share of some of the most attractive biotechs on the market so you have a diversified way to play the space without all the risk.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/synageva-biotech-buyout-isis-vrtx-brmn/.

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