NEW YORK -(Dow Jones)- Takeda Pharmaceutical Co.'s (Tokyo:4502) (4502.TO) $8.8 billion purchase of Millennium Pharmaceuticals Inc. (NASDAQ-NMS:MLNM) (MLNM) is raising hopes - and stock prices - that more biotech deals are on the horizon.
The Amex Biotech index is up 5.2% Thursday, compared to the S&P 500's rise of 0.6%, as the market digests the deal's 53% premium and jumps into other biotech stocks that might be considered takeover targets, namely mid-cap stocks and those with overseas partners who could leverage the weak dollar.
"This deal says that...industry buyers are willing to step up and take advantage of temporary capital market dislocations to secure assets," said Sanford Bernstein analyst Geoffrey Porges. He expects more deals comes later in the year with premiums remaining in the 60% to 70% range.
However, Wall Street has been expecting a flood of biotech deals for more than a year, and has been disappointed amid a weaker economy, high pricetags, and lack of action from large pharmaceutical companies.
But some already see a trend of health-care deals, noting deals from earlier this week - Novartis AG's (NYSE:NVS) (NVS) buy of Alcon Inc. from Nestle SA (NSRGY) and Kinetic Concepts Inc.'s (NYSE:KCI) (KCI) acquisition of LifeCell Corp. (NASDAQ-NMS:LIFC) (LIFC) - as a sign that deal flow could pick up sooner rather than later.
"It doesn't necessarily make a trend, but it is suggestive of one," said Les Funtleyder, analyst with Miller Tabak.
Until the recent deals, Funtleyder was expecting a pickup later in the year as valuations dropped and the inability to raise money led to a "more open-minded attitude toward acquisitions."
"It appears that may be coming a little faster than we thought," he said, because companies may not want to wait until they have their back against the wall and are forced to make a deal.
If deals do begin to pick up, analysts expect them to benefit mid-sized companies, and they also expect an increase of foreign suitors, which can use the strength of their currency to buy relatively cheap U.S. companies.
Chris Raymond, an analyst with Robert Baird & Co., is guiding investors toward companies that have partnerships or a good strategic fit with Japanese or European pharmaceutical companies.
Particularly he recommends Human Genome Sciences Inc. (NASDAQ-NMS:HGSI) (HGSI), which has a number of products already partnered with GlaxoSmithKline Plc (NYSE:GSK) . (GSK), and Biomarin Pharmaceutical Inc. (NASDAQ-NMS:BMRN) (BMRN), which has a partnership with a unit of Merck KGaA (XETRA:MRK) (MRK.XE).
The prediction of more deals has happened before - notably after AstraZeneca PLC's (NYSE:AZN) (AZN) $15.6 billion purchase of MedImmune Inc. last spring - but that activity hasn't yet materialized despite the large amount of cash and dribbling pipelines at the major pharmaceutical companies.
Raymond said a lot of industry observers are "scratching their heads" over the lack of deals from Big Pharma, but that it may not be due to lack of interest from potential buyers.
"The sellers have price points that are way higher than U.S. companies are willing to pay," said Raymond.
He said that companies with attractive products or pipelines can negotiate from a position of power and thus demand a big payoff from suitors. Raymond notes that stock market valuations of these companies have generally supported this situation.
"It is only when you see a big premium that you see companies pulling the trigger [to sell]," Raymond said.
-By Thomas Gryta, Dow Jones Newswires; 201-938-2053; thomas.gryta@dowjones.com
(END) Dow Jones Newswires 04-10-08 1559 Copyright (c) 2008 Dow Jones & Company, Inc.
