Buyout Excitement Is Already Priced Into Momenta Pharmaceuticals

After a headline-grabbing deal between small biotech Momenta Pharmaceuticals (NASDAQ:MNTA) and health care giant Johnson & Johnson (NYSE:JNJ), there’s a strong temptation to load up on shares of Momenta Pharmaceuticals stock.

rows of pills on a table
Source: Iryna Imago /

This deal is earth-shattering for Momenta and its stakeholders, no doubt. Just the price tag alone is a real head-turner. And Johnson & Johnson doesn’t just make deals with any company. So, it’s understandable if traders want to load the boat with Momenta Pharmaceuticals stock.

In response to that, though, I would advise caution amid the euphoria. If you believe that markets are efficient, then you might agree that all known events, good or bad, are promptly priced into assets.

To the efficient market principle I would add another, equally important concept. Price is king, meaning that you don’t just want to buy a stock at any price, even if it represents a good company.

A Closer Look at Momenta Pharmaceuticals Stock

Johnson & Johnson clearly believes that Momenta’s a good company, but investors should time their entry points carefully and this might not be the right time to jump in.

All we need to do is examine the price action of Momenta Pharmaceuticals stock. This is a stock that basically went nowhere from 2004 through 2019.

Even during the onset of the novel coronavirus, when the broader stock market was crashing, Momenta shares dipped moderately but mostly just went sideways. By the middle of August, long-term shareholders were undoubtedly wondering whether the stock would ever break through the $35 and $40 resistance levels.

Then came Aug. 19, the day when Momenta’s deal with Johnson & Johnson was announced. With that, Momenta shares ripped higher, settling at $52 and change. As you might expect, this share buying spree occurred with heavy trading volume.

After that, the daily trading volume dwindled quickly over the next couple of trading sessions. Moreover, the Momenta share price started to drift sideways again. Therefore, it’s questionable whether the bulls have enough conviction to sustain the rally. Given the sharp decline in volume, it’s conceivable that the bulls might run out of steam in the near future.

Biotech Deal of the Year

Admittedly, what precipitated Momenta’s momentum was indeed momentous (sorry, I just couldn’t resist that one). To wit, Momenta Pharmaceuticals entered into a definitive agreement with Johnson & Johnson in which the latter would acquire the former at a cash cost of $52.50 per share.

This was a high-ticket deal, to say the least. The price tag, in fact, was a jaw-dropping $6.5 billion. Suffice it to say that Johnson & Johnson sees tremendous value in Momenta.

It’s likely that Johnson & Johnson sees strong profit potential in Momenta’s FcRn inhibitor, known as nipocalimab. This treatment is designed to address autoantibody-driven autoimmune diseases during pregnancy.

Getting Ahead of Themselves

We don’t have to be science experts to appreciate the magnitude of this acquisition. Momenta Pharmaceuticals President and CEO Craig Wheeler certainly didn’t mince words when he described the enhanced value proposition:

“This acquisition provides strong value for our shareholders and ensures a level of investment in our exciting portfolio that will further enhance its potential for patients. I believe J&J is the right company to advance our portfolio of novel drug candidates for autoimmune and rare diseases.”

To put it another way, Johnson & Johnson is a massive company that will provide a substantial capital infusion. This, in turn, will make Momenta a more active competitor among biotech firms.

But we all knew that, didn’t we? Again, the market is efficient and now that Momenta has been thrust into the spotlight, the share price is trading at a premium.

The idea, my friends, is to get in before these kinds of events happen. It’s not easy to do, but the most successful investors aren’t price chasers. Rather, they’re a step ahead of the crowd, looking for buyout candidates, not companies that have already been bought out.

The Bottom Line

I ended this analysis with some tough talk because I don’t want you to end up losing money by chasing Momenta Pharmaceuticals stock. The Johnson & Johnson deal is huge, but now the Momenta share price is high and the best vantage point is currently from the sidelines.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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