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

This from Today’s Financial News:

If you want to make money in today’s market with its super-efficient flow of information, you need advanced insight. Remember, this is not your father’s buy-and-hold stock market.

Sure, crunching a few ratios and digging into a company’s balance sheet and income statement will give you a strong head start, but if you want to truly excel, you have to understand the psychological side of Wall Street.

For a perfect example, check out the headlines surrounding Pfizer (NYSE:PFE). The company went out of its way to tell reporters this morning that it is open to acquisitions of its rivals, big and small, if they will lead to revenue growth.

Well, duh. What company is not open to acquisitions if it will increase shareholder value?

There is much more to this story. The headlines are only an invitation to dig deeper.

No need for a crystal ball

Fortunately, you do not need an ultra-secret Wall Street decoder ring to figure out what is happening. All you need is an understanding of signaling theory.

The notion behind the influential theory is the idea of asymmetric information. There are unequal flows of knowledge in the investing world. In other words, a company’s executives and insiders know more about the company than even the most well-connected investor.

Signaling is a very important variable for dividend investors. A company’s willingness to expand or continues its dividend “signals” that the top brass has confidence in its future earnings potential.

But what is going on when a company’s CEO picks up the phone and tells the world it is willing to buy its rivals? Unfortunately, it is not a positive signal.

Pfizer’s performance over the past five years has been less than stellar. An investor that put $100,000 into the company in January of 2004 would have a position worth just $50,000 today (excluding dividends).

The company, and its Big Pharma kin, have had more than their share of troubles recently. Research and development costs are soaring, insurance companies are tightening the healthcare noose and generic competition is heating up. That means revenue growth is stagnant and margins are decreasing. It is not a recipe for shareholder profits.

Read between the lines

By telling the world his company needs a large acquisition, Pfizer’s CEO, Jeff Kindler, is signaling that 2009 will not look any different. The only way the mature company will grow is by purchasing the growth.

That means shareholders are going to take a hit and possibly a sizeable one, at least in the short-term. Smart investors will heed the warning of today’s signal and take appropriate action.

As I write, shares of Pfizer are closing in on the $19 mark, nearly 20% off their 10-year low reached in late November. The recent surge could be setting investors up for a drastic near-term reversal, especially if more merger news hits the press.

Basic investors should do their best to avoid a position in Pfizer. Investors with a bit more tolerance to speculation should take a look at a short position on the equity or some mid-term put options. As this story develops, Pfizer’s woes will only increase.

Keep an eye out for more news on the situation. Pfizer may be a bad choice, but the companies in its acquisition sights will be good investment targets.

I am positive we will have more “signals” in the very near future.

Source: Pfizer shouts its message to the world

This from The Rude Awakening:

For the first time in history, we are seeing a rapidly emerging medical technology with the power to dramatically extend life spans. As a result, no technology on Earth has greater potential for investors.

To quickly review, stem cells are unique in human biology. Unlike all other cells, they are immortal and can be programmed, or potentiated, to replace any aging or damaged cell. Whether you want new skin, a new heart, new knee cartilage or new eyes, all these things are theoretically possible using stem cells therapies.

There were, however, two serious barriers to this exciting technology. The most obvious was that the only source of stem cells was embryos. This not only raised ethical questions, but it raised the possibility that stem cell therapies would require immune system repression. Just a year ago, many scientists believed these barriers were insurmountable. Stem cell therapies were in the same class as jet packs and flying cars. As a result, Big Pharma shied away from the partnerships that new scientific fields usually enjoy.

Then, last year, the entire picture changed. In rapid succession, five groups of scientists proved that adult cells could be reprogrammed to become stem cells using four transformative genes. The mechanism for introducing these genes into the adult cells was viruses.

Let me explain.

Viruses can’t reproduce on their own. They invade host cells and hijack their genetic mechanisms. In effect, they inject their own genetic code into host cells to duplicate themselves. By attaching these four transformative genes to the viruses, scientist tricked them into genetically reprogramming adult cells into stem cells.

These revolutionary new cells are called induced pluripotent stem, or iPS, cells. They are identical to embryonic stem cells. Mouse skin cells were transformed to iPS cells. They were then allowed to continue developing into living mice. Still, however, skeptics doubted that the almost alchemical power of stem cells had finally been released. The reason was that the virus used for producing these iPS cells was a retrovirus.

Retroviruses are associated with cancers and remnants lingered in the iPS cells. Obviously, therefore, the FDA would not allow their use in human therapies.

At the time, I predicted that the problem was temporary and would be worked out in a few years. I was wrong: It took months. A few weeks ago, Harvard researchers announced they had transformed adult cells into iPS cells using the adenovirus. The virus used was referred to in the press as a cold virus because it produces symptoms similar to those of the common rhinovirus. After a few cell divisions, it is completely deactivated.

This is amazing, astonishing news. I don’t have room here to go over even a few of the implications of this momentous breakthrough. I will remind you, however, that stem cells can be programmed to replace any cells in your body with perfect, youthful versions. Think about what that means. The financial implications for investors are staggering.

Harvard’s stem cell biologist Konrad Hochedlinger said, “I have never seen a field move forward as fast as this one.” That’s an understatement. In practical terms, this breakthrough means that right now, we could take a little of your blood and clone you. At this very moment, scientists have the ability to rejuvenate your heart and vascular tree. Not only that, but the telomere length of these replacement cells will have a longer life span than your heart and arteries had on the day you were born.

Few people know this and, consequently, few understand the virtually unlimited potential for both our species, in general, and early investors in this space, in particular.

There is another reason to expect stem cell stocks to increase in value. The cold virus breakthrough prompted pharma giant Pfizer (NYSE:PFE) to announce a major new emphasis on stem cell science. Pfizer’s previous timidity was caused by ethical concerns that arose from using stem cells lines derived from human embryos. Now that this issue is moot, Pfizer has jumped into the field with both feet, fully clothed.

Pfizer’s executive director of global research and development John McNeish said, “These cells will be tremendous in drug discovery. They will help us understand personalized medicine, genetic variation, ethnic populations, what biomarkers to follow.” Later on, McNeish says, Pfizer will market stem cells to rejuvenate aging and damaged organs and tissue. Insiders consider this the tipping point the industry has been waiting for.

We can expect that, finally, the holders of important stem cell patents will form partnerships with big pharmaceuticals. This has always been the pattern with biotech.

Adding to the excitement, another remarkable event has just taken place that will benefit companies in the RNAi space, though the benefits are a few years out. That’s the price drop on a complete genetic blueprint I talked about above. The company, Complete Genomics, says it will map your DNA for $5,000 next year. Moreover, I expect the price tag will drop to $1,000 within another two years.

At this price, gene mapping makes sense for the individual, the industry and insurers. For individuals, gene mapping could enable preventative therapies for genetic diseases. Insurers will also see cost savings here and Pharma will accelerate genetic research as part of drug development. The more DNA maps there are, the faster researchers will be able to identify the genetic causes of both diseases and resistance.

Because RNAi gives us the ability to switch individual genes on or off, RNAi companies stand to benefit massively from an increased understanding of our genome. The more maps correlated to medical histories that exist, the more we will know – and, unbelievably, the faster progress will be made.

Investors looking to go “long life” might like to consider this the investment of a lifetime.

Source: Going “Long Life”

This from Money Morning:

With his landslide election victory Tuesday – coupled with Democratic gains in the House of Representatives and in the Senate – U.S. President-elect Barack H. Obama II will have the ability to pursue more or less any policy he wants.

For investors who have been trying to analyze the economic outlook for the New Year, the election of U.S. Sen. Obama (D-Ill.) provides a major piece of the forward-looking jigsaw puzzle that these analysts hope to assemble. That’s because the likely trends of the United States and other economies around the world – and the relative success of different sectors within those economies – depends crucially on who’s in the White House, what policies they have, and how effectively they can pursue those policies.

Only one thing keeps the triumph of the incoming Democratic president from being totally complete: The Republicans appear to have held onto 41 Senate seats, enough to prevent the Democrat majority from overriding a united filibuster. In practice, however, there are few issues on which the Republicans will be completely united. Thus, on only a few “litmus test” issues – such as the “Employee Free Choice Act,” which removes the secret ballot from union elections – is this filibuster threat likely to be effective.

Obamanomics: From the Environment to Health Care

A review of President-elect Obama’s economic policies – characterized by the term, Obamanomics – clearly offer profit opportunities. Let’s take a closer look at some key areas to consider in 2009.

In the economics area, Obama’s two signature policies are a promise to institute a “cap-and-trade” system of carbon emissions permits to combat global warming, and a substantial expansion in state healthcare provision, notably to include universal healthcare provision for minors.

On the energy front, the support of U.S. Sen. John McCain (R-Ariz.), for the “cap-and-trade” system will make it much easier for Obama to pass legislation quickly, probably in the first half of 2009. Under Obama’s proposed legislation, emission permits will be auctioned to utilities and other businesses with substantial carbon emissions. This has the advantage of being more of a free-market approach than McCain’s plan to give away the permits for free, which would have required the creation of a huge government bureaucracy to decide who would get those permits.

Even so, Obama’s approach has the disadvantage of imposing gigantic new costs on utilities and other carbon emitters. Indeed, Obama himself has said that new coal-fired power plants would become hopelessly uneconomic under his plan – chiefly because of the costs of the emissions permits they would need. That suggests that nuclear power plants (which he does not oppose) would account for the majority of new power-station construction during the Obama presidency – although solar, wind and other power-generating technologies that look pretty and can be made to work also will fare well.

The corollary of Obama’s emissions permit program, therefore, is that an investor should sell coal-producing companies and coal-fired electric utilities, and invest in nuclear power stations and uranium-mining companies. In principle, there should also be opportunities in the solar- and wind-power sectors, but the “new energy” fad of the last couple of years has already driven their valuations to uneconomic levels.

On the healthcare side, investment recommendations are more difficult to isolate. Generally, Democrats are skeptical of the patent protections enjoyed by pharmaceutical companies – as well as the high prices those protections create – so the major manufacturers of patented drugs should be avoided.

Conversely, the producers of generic drugs appear poised to benefit from the increased spending on healthcare – especially the manufacturers of pediatric healthcare products, including pharmaceuticals – should benefit from the Obama program’s emphasis on children’s healthcare.

Financial Crisis Redux

Of all the questions investors will have about the New Year – following Obama’s victory – is what the new administration will do about the current financial crisis.

A federal bailout package – consisting chiefly of spending increases – seems almost certain in the short term; that will cause the federal deficit to balloon even more than it has already, will make U.S. Treasury bond financing increasingly difficult, and will further stoke inflation. In those circumstances, avoid Treasury bonds, except the inflation-protected buying Treasury Inflation Protected Securities (TIPS), the principal and interest of which are linked to the Consumer Price Index (CPI). TIPS currently have an attractive yield around 3.0%.

It seems likely that an Obama administration will tend to impose costs on the financial-services sector in return for the bailouts it receives – perhaps, for example, banks will be required to funnel lending into low-income areas, or toward other chosen beneficiaries. Limits on financial-sector remuneration also may make it difficult for the major banks to do business, particularly in the trading area. The Democrats have a more aggressive attitude toward “predatory lending” than the Republicans, and will undoubtedly find innumerable examples of such lending in the mortgage and credit card area over the next few years, which they will wish to punish. Hence, financial sector investments should be generally avoided.

Potential Profit Plays

On the other hand, both Obama and the Democrats seem more likely to propose bailouts for states and municipalities that find themselves in budgetary hot water because of the recession that’s sure to come (if it’s not here, already). Thus, municipal bonds, which carry a considerable credit risk under a tight-fisted Republican administration, may be thought of as less vulnerable to default under an open-handed Democrat administration with sympathy for the issuer’s problems, particularly if that municipality represents a core urban Democratic constituency.

When New York City got in trouble, U.S. President Gerald Ford – the Republican who succeeded the disgraced Richard M. Nixon – took an unsympathetic attitude and The New York Daily News captured his perceived attitude with the headline: “Ford to City: Drop Dead!” No such episode will occur under the urban-oriented, free-spending Obama!

And that makes munis a “Buy.”

Also in the “Buy” category are automobile and auto-parts companies. No matter which candidate ended up winning Tuesday, the victor would almost certainly decide to bail out U.S. carmakers, as well as the suppliers that rely on them. After General Motors Corp. (GM) was rebuffed in its bid for aid by the Bush Administration, the bailout of U.S. carmakers is now being billed as a top priority for the incoming President Obama.

Automakers such as GM and Ford Motor Co. (F) benefit from being the headliners in an iconic U.S. industry – especially because it’s one that employs lots of potential Democrat voters in industrial states and suffer from international competition that increasingly riles the more protectionist Democrats. A bailout is thus inevitable, probably without involving the automobile companies in a Chapter 11 bankruptcy. And that makes their shares worth a “flutter.”

President-elect Obama’s supporters celebrated ecstatically Tuesday night. Investors should be more skeptical. But looked at carefully, an Obama administration – and Obamanomics – would still seem to offer opportunities for profit in the New Year.

Source: Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year

That $900 million prize pool might sound like a lot. But as a whole, ticket buyers are basically trading in dollar bills to get $0.60 back. That doesn’t sound like a good trade to me. And when you throw in the odds of any particular individual winning – from 1 in 9 on the best scratch-offs to 1 in 175 million on the Mega Millions – the prospect looks even worse.

To consistently make money, the key is to risk capital only when the odds and payouts properly compensate you for the risk you take. The risk of losing your money on the lottery is so great, even huge jackpots don’t adequately compensate you.

Don’t think just because you don’t play the lottery you aren’t taking on those odds… Right now, buying into one industry is like putting your retirement on the Mega Millions…

As my colleague Rob Fannon has mentioned, the world’s largest drugmakers are about to lose billions in sales as their big-name drugs go off patent. So now, instead of streamlining their own research operations and rebuilding their pipelines, Big Pharma is buying up “lottery tickets,” hoping for a quick fix.

Let me show you what I mean…

Last week, Lundbeck, a large Danish drug company specializing in brain diseases, bought a $100 million lottery ticket from U.S. biotech Myriad Genetics. The name on that ticket is Flurizan, Myriad’s Alzheimer’s drug.

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Lundbeck agreed to pay Myriad $100 million upfront, $250 million in milestone payments, and 20%-30% royalties for the European rights to sell Flurizan. That’s nearly twice what any other pharmaceutical company has paid for worldwide rights on a similar drug.

Flurizan isn’t even approved for commercial sale. In fact, so far the drug has practically failed its clinical trials…

In a Phase II trial of approximately 200 Alzheimer’s patients, Flurizan was marginally better than the sugar pills used as a control. But Myriad sliced and diced the data and found in mild Alzheimer’s patients, Flurizan outperformed the placebo. Scientifically speaking, this interpretation is hogwash.

But it was enough to prompt Myriad to go straight into two large Phase III trials. The data from one of those trials is due.

Essentially, Lundbeck gave Myriad $100 million on the off chance the Phase III trials turn out to be positive next month.

Lundbeck’s shareholders should be outraged. My calculations show the Flurizan trial has less than a 30% chance of success… 50% if you want to be very generous. On top of that, for the bet to pay off for Lundbeck (after subtracting expenses and more payments to Myriad), Flurizan needs to generate more than $1 billion in sales. That’s unlikely considering the marginal benefits Flurizan has showed so far.

Judging from those odds, Lundbeck is likely out its $100 million.

Lundbeck isn’t alone. As Rob explained, just about every Big Pharma company is willing to throw millions around, buying rights to drugs with slim chances for success and hoping to hit the billion-dollar jackpot. But if you’ve ever bought a lottery ticket, you know how this story ends…

Some of these biotech “lottery tickets” will turn out to be winners, but most of them will turn out to be foolish bets by desperate players. If you’re investing in Pfizer, GlaxoSmithKline, Merck, AstraZeneca, or their peers, you should know they’re playing the lottery with your money, taking on way too much risk for the potential reward.

But there is an upside… Maryland lottery retailers, remember, made $110 million taking on absolutely no risk. Even when Flurizan fails, Myriad Genetics has a healthy diagnostics business it can fall back on… plus Lundbeck’s $100 million in the bank.

So my advice is to buy the lottery ticket retailers – biotech companies with drugs in late-stage trials. They make money no matter the odds on the tickets… And judging by the Myriad deal, ticket prices just went up.

Good investing,

George Huang

P.S. Myriad shareholders have made about 40% from the stock’s lows this year, so it’s too late for us to profit on Lundbeck’s spendthrift ways.

But I just told readers of my S&A FDA Report about one tiny company holding two $50 million “lottery tickets.” I expect a buyer the next 12 months. Click here to read more.

Source: The $100 Million Lottery Ticket

Approved by the FDA in early 2006, Sutent is the first drug to be simultaneously cleared for use in two different types of cancer – kidney and stomach. Sales leapt to $600 million last year and may cross the $1 billion mark this year… giving it “blockbuster” status.

Those revenues would make the average biotech stock explode. Onyx Pharmaceuticals, for example, enjoyed a similar launch with kidney-cancer drug Nexavar in 2005. Shareholders saw 300% gains in two years.

So who made a killing on Sutent? No one. That’s because Sutent accounts for less than 5% of its maker’s sales. And despite Pfizer’s success with the drug, its revenues are essentially flat. Shareholders are down 30% since the launch.

Compare that decline with Genentech, the world’s biggest biotech and the cancer market’s biggest player. Its stock is up roughly 60% since its top-selling cancer drug, Avastin, was approved in 2004.

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Good cancer drugs command huge price tags, some as much as $65,000 per year. And cancer causes more deaths than any other disease. The cancer-drug market is forecasted to double in the next five years to $85 billion per year.

So Sutent was Pfizer’s first salvo in the battle for Genentech’s market. The company has boosted its cancer research spending to roughly $2 billion per year, about 20% of its massive research and development budget. And it has 18 new cancer drugs in its pipeline.

Yet, as long-time Growth Stock Wire readers know, I believe Pfizer’s efforts are too little, too late… The drugmaker has already lost $6 billion in annual sales in the last two years as blood-pressure drug Norvasc and allergy drug Zyrtec have lost patent protection. And Sutent can’t compare to Pfizer’s biggest winner, Lipitor, which loses patent in 2011.

Pfizer would need a dozen or more drugs just like Sutent to replace the $12 billion in lost sales from its Lipitor franchise. The company would be enormously lucky to turn one or two of its 18 other candidates into a blockbuster product, let alone 10 or more.

Pfizer’s efforts in the cancer field are admirable. And, yes, Sutent is a fantastic drug. But the company’s hard work and big spending won’t save its shareholders. Pfizer will be dead money for years to come.

The same is true for the rest of Big Pharma. Sales worth $100 billion are set to go off patent by 2012. The big drugmakers won’t be able to innovate their way out of that.

What they will do is try to buy their way out, cherry-picking the best drugs in development from the biotech sector by buying entire companies. Of course, there’s a limited number of attractive biotechs… and a dozen or so big drug companies on the prowl. Pfizer and its peers will have to pay biotech shareholders hefty premiums to win the bidding process. In the end, Big Pharma investors lose, biotech investors win.

It’s likely Pfizer – or some other big drug stock – is hiding out in your retirement portfolio. If so, the position is down 30% or more over the last four years. Do yourself a favor: Dump your shares immediately and consider taking a look at the biotech sector.

Pfizer and the rest of Big Pharma may not fall very much from here, but even the biggest blockbusters won’t give these stocks the boost they need.

Good investing,

Rob
Source: Do Yourself a Favor and Dump These Stocks Immediately

Steve called these bargain-hunting foreigners “the new saviors of America,” because they were propping up prices in U.S. malls.

A similar spending spree is taking place in the U.S. pharmaceutical industry… and I think it’s going to mean big profits for biotech investors. Let me explain…

Early last week, British drugmaker GlaxoSmithKline gobbled up Sirtris Pharmaceuticals, a tiny Massachusetts-based biotech, at a whopping 84% premium. The deal was all cash.

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The really crazy thing is that Sirtris has no chance of selling any products for at least five years. Heck, Sirtris only has one compound in clinical trials… and that’s in the earliest Phase I safety testing stage. Most of its “drug candidates” are still being tinkered with in the lab.

So, why was GSK willing to shell out $22.50 per share for a company that went public just 11 months earlier at $10? GSK will tell you – “great science.” But as you know, the real answer is the cheap dollar.

No American drug company – Merck, Pfizer, or Bristol Myers – could have afforded to pay so much for so little. But like the holiday shoppers Steve described, GSK can pony up such a premium because, by paying in pounds sterling, it essentially got Sirtris half-off.

GSK’s fellow British drugmaker, AstraZeneca, made a similar deal last spring. It bought Maryland-based MedImmune for a staggering 12 times sales – a 60% premium.

As the dollar continues to sag against world currencies, the British aren’t the only ones eying U.S. biotech assets… Japanese drugmaker Takeda Pharmaceuticals coughed up a 53% premium to buy Boston-based Millennium Pharmaceuticals. Its peer Eisai scooped up U.S.-based MGI Pharma for 10 times sales.

This year, U.S. health care firms have seen $80 billion in merger and acquisition deals… 60% came from foreign buyers. This is not a trend I expect to let up anytime soon.

As I’ve written before, the world’s largest drugmakers are in trouble. Expiring patents, generic competition, and anemic pipelines all point to a bleak future for Big Pharma. At this point, buying up biotechs is the only choice they have. And they’re going to have to pay huge “knock out” premiums to outbid their competition.

Now, with lots of extra dollars in the bank, foreign companies are flooding U.S. biotechs with rich cash offers, even if it means paying shareholders astronomical premiums. The entire industry is going in one direction – up. It may be a bad time to own dollars, but it’s a great time to be in biotech.

Good investing,

Rob Fannon

The Takeda-Millennium deal comes on the heels of another Japanese biotech buyout at the end of last year. Japan’s fourth-largest drug company – Eisai – picked up U.S.-based MGI Pharma for 10 times sales. Apparently, MGI had multiple suitors. It’s safe to assume that Eisai was willing to cough up enough cash to win out.

Both the Millennium and MGI Pharma buyouts highlight the point my colleague Rob Fannon and I have been making repeatedly: Biotech investors are right where they want to be because large drug companies are desperate to acquire biotech assets.

These companies face no other choice with expiring patents, empty pipelines, and tons of cash. The massive premiums on these two Japanese deals prove that certain companies are willing to pay any price to get their hands on biotech drugs.

Heck, there’s even consolidation within the biopharma space. New Jersey-based Celgene, a leading cancer biotech company, acquired fellow biotech Pharmion last November for $3 billion, a 46% premium.So what does it mean for investors? The pool of midsized to large biotech companies with real revenues is rapidly shrinking. With so many mid-cap biotech companies being bought out, even the Wall Street Journal speculates this particular biotech segment may be a lucrative oasis during volatile times.

Here’s how you can get in ahead of the windfall: Search for biotechs with existing or near-term product revenue, a rich pipeline, and an experienced management team. I prefer companies with revenue of at least $200 million or companies with potential blockbusters (sales of $1 billion or more) in Phase III testing. The pipeline should hold at least two drugs in early stage clinical trials. Lastly, management should have experience developing and selling drugs, with emphasis on their track record in dealings with the FDA.

Right now, many biotech companies with market caps between $1 billion and $5 billion fit the description. Start your search there.

Good investing,

George Huang

P.S. I’ve developed a proprietary trading strategy to identify the best biotech acquisition targets with limited to no downside risk. We’ll get to participate in this latest wave of merger mania no matter where the money is coming from.

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In the case of Neurocrine’s insomnia drug, Indiplon, the FDA wanted additional animal studies, plus two more clinical trials, which would have cost the company as much as $50 million. To be honest, the new requests were preposterous. But this isn’t the first time the FDA has moved back the goalposts on a drugmaker…

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Back in May 2006, Neurocrine received its first approvable letter for Indiplon, prompting its Big Pharma partner, Pfizer, to cut ties. The stock dropped from $50 per share down to $20. News of the second approvable letter this past December once again sent shareholders running…

In December, I said the FDA would never approve Indiplon. Still, Neurocrine was not worthless. The company had about $4.50 in cash per share, more than 92% of its market cap.

In addition, Neurocrine had a pipeline full of innovative compounds. Its drug for endometriosis (a disease of the uterus) was in Phase IIb clinical trials. And GlaxoSmithKline was collaborating on drugs for anxiety and irritable bowel syndrome, both in Phase IIa testing.

But before I was willing to jump into the stock, two things needed to happen:

1. Neurocrine management had to show some resolve, take Indiplon behind the woodshed, and kill it.

2. The stock needed to get a bit cheaper to provide investors a larger margin of safety.

Both things happened in a hurry…

Long-time CEO Gary Lyons resigned in January – less than a month after sending pink slips to half of the company’s employees. Chief Operating Officer Kevin Gorman took the post and immediately won me over on his first conference call:

“There are no expenditures in our budget for Indiplon going forward…” Indiplon is no longer a threat to the company’s coffers.

The stock popped up in the news, then traded back down to around $4.50 per share – our fair-value estimate – making Neurocrine a true bargain.

One San Francisco-based biotech hedge fund I admire – the Biotech Value Fund – jumped in. The firm scooped up more than 2 million Neurocrine shares during February and March at an average cost of $5 per share.

If you bought in February, when Neurocrine qualified as a “no-brainer” trade, you’re already up about 15%. And I firmly believe that Neurocrine will trade above $8 per share within the next 12 months, a return of roughly 50% on the year.

The Neurocrine story exactly fits the bill for trades I will be featuring in my newsletter, the S&A FDA Report.

Based on our eight-year study, buying the best stocks after they’ve been hit with an FDA setback returns an average of 75% in a year. I’m confident Neurocrine will follow suit.

Good trading,

George Huang, PhD

P.S. If you’d like to learn more about how to find these profitable situations, months before the market reacts, click here.

JL: So, let’s talk about the rally action in stocks. Last week the Dow gained more than 3%, the S&P was up more than 4%, and the Nasdaq picked up almost 5%. And all that came in the context of weak economic news, the worst employment number in years, and a newly slumping dollar. I’ve got my own take on this, but I know you see the world a little differently. Thoughts?

CASH: My friend, we both know that bear markets can be notorious for mauling investors. We also know that some of the strongest and sharpest rallies take place in bear markets, as you and I have both pointed out. So the way I see it, there’s nothing wrong with trading these rallies as long as you keep a clear head. You just have to be careful not to get juked out and to remember the primary trend.

JL: Right. As the bard once sang, “You don’t need a weatherman to know which way the wind blows.” Though it helps to be paying attention. Speaking of getting “juked,” how’s that fancy footwork holding up? Has it been a good week in the trenches for Cash Mcdash?

CASH: Well I must say, despite my modest nature –

JL: <COUGH> Ahem! <COUGH>

CASH: Need a lozenge there, pal? Maybe a bottle of water?

JL: Nah, I’m good.

CASH: Oh good. As I was saying… have to tell you that last week was my best so far this year. LongTop Financial (one of our recommended names) hit a new recovery high, and GFA (another one) was up 10%, finishing Friday on a great note with two times normal volume. The solar stocks we tipped for a comeback, JA Solar (JASO) and LDK Solar (LDK), were up 21% and 25%. And don’t forget my buddies over at Blackstone (BX). That one crossed $17 and finished the week 21% higher.

JL: Man, that’s not a bad week. Not too bad at all.

CASH: No kidding. In fact, you can call me butter ‘cause I’m on a ROLL!

JL: Alrighty then. Calm down there, Butter…

CASH: Hardy har har. You know I’m just messin’ around. But I do get pretty passionate about this. There’s nothing more satisfying than working hard, getting the trades on, and then seeing that hard work pay off. It just feels good to win.

JL: Oh, no doubt. I’m with you all the way there. But tell me, do you think we’re going to see continued strength? Are you hanging onto your positions?

CASH: Actually, I think the easy money for the time being –

JL: Hold on, hold on, hold on. You think those gains were easy? In this market?

CASH: Sure! When you’ve got the patience to wait until the mood is incredibly sour, and you couple that with the discipline to buy quality names that have been beaten down, and then mix in the fortitude to hold them through a rally few believed would happen… then the game really does feel easy!

JL: And playing golf like Tiger Woods is easy, too, I take it. You just line up your club the right way, take a nice swing, hit the ball 400 yards…

CASH: Ha ha, point taken. Yes, I was oversimplifying things a bit there. Every trader has ups and downs. (The great Tiger Woods has ups and downs, too.) But markets have patterns. These newly issued names have highly measurable tendencies. And don’t forget, I’ve been doing this day in and day for out for many years. A longtime student of the market can gain a meaningful edge just by watching, understanding and absorbing the patterns. A wise man once said, “It’s amazing how much you can learn just by paying attention.”

JL: That wasn’t me was it?

CASH: I said a wise man, not a wise guy.

JL: True. Okay then, so what’s next? Are you going to be closing these positions? Getting liquid? Going short?

CASH: No, I still have a bullish bent to my trading; it’s just not as screaming obvious as it was a few weeks ago. I used Friday’s exceptional strength in the solar names to lighten up positions a bit, while still holding partial positions. I’m still constantly trolling for good long-term names that will give us months of good returns, while scaling out of short-term names that offered some nice quick pops.

JL: Sounds good, Butter.

CASH: Are you going to keep calling me that?

JL: Hey, it was your personal request! Are you saying that’s no longer your preferred name? You’re abandoning it already? I can’t believe it’s not butter.

CASH: Ouch! You should be fined for that one. In fact, you may need clinical help. Which reminds me…

JL: You’re reminded you need to go to the clinic?

CASH: No, wise guy. I want to tell you about the latest name on “the calendar.” Remember, the syndicate calendar we talked about last week?

JL: Ah, gotcha. A clinical IPO.

CASH: It’s actually a secondary offering. The name is Wuxi Pharmatech (WX on the NYSE).

JL: Wuxi Pharmatech, huh? That name just rolls right off the tongue.

CASH: And the company continues to roll out new services! Have you heard of contract research organizations, or CROs for short?