Genetech has formed a special committee of independent directors to evaluate the $89-a-share acquisition offer from Roche, which already owns 56 percent of the US biotech firm.

If the deal does go through it may be bad news for Roche and Genentech shareholders, according to Phase 1 Investor editor Rob Fannon in The Growth Stock Wire. But it would be good news for the biotech industry as a whole…

While I believe the bid is a bad move for Roche – and not a great proposal for Genentech shareholders – this mega-deal is actually good for the entire biotech industry… and its investors.

With Genentech gone, the top of the biotech food chain is empty. Many investors will be searching for new spots to park their biotech cash. And sector valuations are on the rise. Both major biotech indexes – the Nasdaq Biotech Index and AMEX Biotech Index – are up more than 7% in just a few weeks.

Small-cap biotechs are cheap right now. So I’d be willing to bet the sector could jump 25% or more in the coming months. And big-cap names like Biogen (NASDAQ:BIIB), Genzyme (NASDAQ:GENZ), and Elan (NYSE:ELN) have jumped to the top of Big Pharma’s short list of buyout candidates.

If you’re thinking of dabbling in the biotech sector, Roche’s bid for Genentech just may be the buy signal you’re waiting for.

Source: The Buy Signal You’ve Waited For

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