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The Biotech Bull Market Is Just Getting Started. Here's Why...By Larsen Kusick, analyst, Phase 1 InvestorMonday, February 13, 2012 Shareholders made 46% overnight.
On January 25, pharmaceutical giant Roche made a $5.8 billion bid to buy Illumina, the "best in class" maker of gene sequencing machines. Shares skyrocketed... and are now trading 20% above the offer price.
While the Illumina bid grabbed all the headlines, two other biotech deals have popped up this year...
In early January, Bristol-Myers offered $2.5 billion for Inhibitex, which is working on a hepatitis C drug. Shares of Inhibitex rocketed 140% after the deal was announced. And on January 26, Amgen offered to spend $1.2 billion on Micromet, a small biotech firm that has a leukemia drug in phase II trials. The offer was still 100% above Micromet's average price over the previous 12 months.
These deals are part of a larger trend that's propelling the whole biotech sector to new highs. And it's just getting started...
Big Pharma companies have tons of cash. Take a look...
The thing is, these companies aren't growing. The average sales growth this year for the companies above is negative 0.6%. They're losing billions of dollars in revenue as blockbuster drugs, like Lipitor, go off patent and have to compete with cheaper generic versions.
Big Pharma executives realize the only way to boost revenue growth, while earning a reasonable return on their investment, is to buy biotech assets at distressed prices.
Ten years ago, the Nasdaq Biotech Index traded above 15 times sales. Today, it's trading at 4.7 times sales... near the bottom of its 10-year range. To put this in perspective, Amgen is willing to buy Micromet for more than 50 times sales. Roche's offer for Illumina (considered to be a low-ball bid) amounts to 5.5 times sales.
I expect the sector to jump off these low valuation levels once drug companies start opening their wallets.
A growing buyout bonanza would put a solid bid beneath biotech stock prices. The sector is already rocketing off its 2011 lows. Take a look...
 This is a chart of the S&P Biotech Fund (NYSE: XBI), which holds both large- and small-cap biotech names. It's up more than 17% so far this year.
You'll find a similar chart for the PowerShares Dynamic Biotech & Genome Portfolio (NYSE: PBE), which includes life-science equipment, service, and consumable players, as well as household biotech names. And the same goes for the widely owned Biotech iShares (NASDAQ: IBB), which tracks the Nasdaq Biotech Index with minimal expenses.
But if Big Pharma puts more of its cash to work this year, the uptrends here are just the beginning.
Good investing,
Larsen
Further Reading:
In 2010, Illumina announced it was cutting the price of its consumer gene-sequencing product from about $50,000 to $9,500. The share price soared on the news. And if you had gotten in when Larsen recommended, you'd have ridden the stock to 70% gains in one year. Read more here: A Giant Company You've Never Heard of Is Breaking Out.
Last summer, biotech looked poised to launch into a powerful bull market. It turned out to be a false alarm. But as this must-see chart shows, when the next big bull market does break out, huge gains will follow. Read more here: It's Time for Quadruple-Digit Gains, AGAIN... in Biotech Stocks.
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Fear index "VIX" surges 20% last week... the S&P 500 looks ready to take a break after a 24% surge off its October lows.
Oil services stocks are up 12% in 2012... even though oil prices are down slightly.
Dollar General is up 35% over the past six months... Warren Buffett "loaded up" on shares last summer.
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