With so many biotech stocks making big moves and pharmaceutical merger activity moving faster than anything else right now, we turned to one of the smartest analysts in the lucrative biotech field to give us his take on what we should be doing…

When I was in my early 20s, I had one friend who was always on the prowl for Mrs. Right (or at least Mrs. Right Now) whenever we went out.

The evening would kick off with him boasting about how he would end up with the most beautiful girl in the bar. As the night wore on, though, he gradually lowered his standards. By the end of the evening, fueled by desperation (and perhaps a little alcohol), he was willing to leave with any woman who had a pulse.

The health care M&A picture right now reminds me of that situation – with one exception. Some Big Pharma companies have become even more desperate than my buddy. And that means big profits for biotech stock investors.

With patents expiring and pipelines empty, the biggest biotechs need to add some in-house research and development, stat. That’s why you’re seeing firms like Glaxo pay premiums of 80% to acquire their object of affection.

Even that sky-high amount wasn’t the highest. Last week, Intercell paid a whopping 126% premium to acquire Iomai. With small firms able to garner such high prices, it puts virtually every small-cap biotech in play.

Biotech Stocks Shrug Off the Market Woes

As top-quality biotech stocks plunged to bargain-basement levels for much of the first quarter of 2009, the biotech sector did little more than shrug.

It’s not that biotech stocks weren’t immune to the pain. But the biggest players had large piles of cash and consistent income coming in from drugs produced over the last decade.

Then the news broke that Pfizer would shell out $68 billion to buy Wyeth. It triggered a trio of big buyouts in the sector, and more importantly, it gave investors a clue to just how much money these pharmaceutical behemoths had. They had financing, and they were ready to spend.

Over the past couple of weeks, we’ve seen:

• Merck announce that it will acquire Schering-Plough for $48 billion.
• While Roche finally concluded protracted negotiations to buy the biotech superpower Genentech for $47 billion.

Total value of done deals: $163 billion. It goes to show you that in a market where access to capital has supposedly dried up, money is clearly available for the right deals.

• In order to finance its acquisition of Genentech, Roche issued nearly $33 billion in notes.
• Pfizer received over $22 billion in loan commitments from various banks to complete its transaction.
• And similarly, JP Morgan slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

And this has all happened during one of the most fear and panic-ridden periods in stock market history. My point is that it’s not necessarily all doom-and-gloom (as some would like you to believe). In fact, things are looking up in the biotech sector.

And those deals are just the start. I think more biotech acquisitions are imminent…

The Beginning of the Biotech Stock Boom

I think we are at the very beginning of a wave of consolidation and a biotech stock boom. That’s because small-cap biotech names are so cheap right now. It will be tough for Big Pharma to resist these low valuations and “cheap” product pipelines.

To bring a drug to market today takes years, and companies must keep a consistent pipeline of new drugs in developement. A company’s “pipeline” represents all of the products they have in various stages of testing and FDA approval.

A company may have literally hundreds of versions or compounds of a drug to find one that works well enough to be tested. Many drugs will fall short of their goals and be pulled from development. This process is time consuming and expensive. But it only takes one blockbuster drug to pay for the development of hundreds.

It’s also why it’s much easier to purchase a company with a credible pipeline. And that means consolidation is something that companies of every size do in the biotech field.

So while Pfizer, Merck and Roche have plugged some holes in their businesses and created massive biopharma companies with their acquisitions, there are just as many mid-sized pharmaceutical companies that desperately need to upgrade their product pipelines.

The Biggest Biotech Stocks & Merger Possibilities

The largest biotech company after Genentech is Amgen which boasts a market cap of $48 billion. Then we have Gilead Sciences, which just announced a $1.4 billion takeover of CV Therapeutics at $40 billion. But the field is packed with mid-sized biotechs, as well as merger possibilities.

Of the biotech companies remaining, only three companies have market caps over $10 billion. Then we have 11 other companies with market caps of $1 billion or more. That’s a lot of potential deals.

For example, Merck could buy Biogen and Genzyme for less than it cost the firm to buy Schering-Plough.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin or Medivation – and many others like them.

The point is: Even though the biotech sector has outperformed the S&P 500 during our current bear market, many biotech stocks are still incredibly cheap.

And we may see a rush by other big pharma firms, eager to fill their pipelines with products from inexpensive biotech companies. This could lead to rapid increases in prices, and a frenzy of activity as companies rush to grab anything they can.

There are a number of companies that have “targets” painted on them for their size, their relative ease of acquiring and promising pipelines. Stick with these traits when you look for your next 126% gain. It could be closer than you think.

Source: Biotech Stocks: The One Sector Outperforming The S&P 500