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 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”

Over the last year, I’ve been railing at readers to keep as far away from Pfizer as possible, and Growth Stock Wire subscribers have certainly gotten an earful of my Pfizer bashing. (If, by some chance, you missed my rants, here’s one of my favorites. It offers investors three ways to cash in on the drugmaker’s demise.)

By no means do I get ‘em all right. But as you can see from the following chart, my Pfizer call has been spot-on. The stock’s taken a 32% nosedive over the last year, 10% in the last month alone.

Pfizer stock is now selling for around 10 times free cash flow – outrageously cheap. Even more tantalizing is its 7% dividend yield. But don’t let the fat dividend tempt you…

At 7%, Pfizer’s dividend is the drug industry’s highest, more than double the industry average (3.3%), and three times larger than the S&P 500 average (2.2%). Right now, the stock’s high yield is the one thing protecting Pfizer’s shareholders from utter catastrophe…———- Advertisement ———-
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But Pfizer’s dividend will disappear in less than two years.

The company has close to $30 billion in the bank, so you might think I’m crazy to question its hefty payout. And the company’s CEO and CFO claim the dividend is not only safe, but should grow 10% this year (barring any “significant events”). I don’t buy it…

To take advantage of lower foreign tax rates, Pfizer holds a majority of its cash, as much as 75%, outside of the U.S. But American corporate dividends must be paid from U.S.-based funds. Uncle Sam would wallop Pfizer with a staggering tax bill if the company brought foreign cash back home. So rather than pay the taxes, the company borrowed money this year to fund its dividend, upping its short-term debt by 50%.

Next year, to maintain its dividend without adding to debt, the company needs to bring in $8 billion in cash. To increase it 10%, as management suggests, the figure is closer to $9 billion. That’s possible, if difficult, with the company’s current free cash flow around $10 billion per year. But Pfizer is set to lose its top-selling cholesterol drug, Lipitor, to generic competition within two years. Lipitor brings in $13 billion a year and accounts for roughly 65% of the company’s annual free cash flow.

To make up for the loss, the company has cut costs, dumping 10,000 employees (including the chemist that developed Lipitor) and halting its share repurchase program (even with the stock bouncing off multiyear lows). But now that the easy cost-cutting measures are through, Pfizer’s management must be eyeing the annual dividend payment.

I don’t see how the company can keep up its high yield, let alone increase it, without taking on even more debt. When you’re borrowing to expand, that’s one thing. When you’re borrowing to throw the money out the door, that’s another.

So it’s a matter of “when,” not “if,” the Pfizer dividend yield falls at least back to levels in line with its peers. When this happens, you don’t want to be a shareholder. I’d expect another 40% drop from today’s depressed trading levels.

The dividend cut could come a lot sooner than expected, too. I had a good chuckle at management’s “significant events” disclaimer. I waited for the obvious question that nobody asked – Does the loss of a $13 billion annual drug franchise count as a “significant event”?

Good investing,

Rob Fannon

P.S. I’ll be in San Diego all next week at BIO 2008, the year’s largest biotech conference. In next Friday’s Growth Stock Wire, look for my report on the best ideas I find.

Source: Don’t Be Suckered in by This Big Dividend

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

Right now, it’s trading at a single-digit forward price-to-earnings ratio… Pfizer has been almost as cheap three times in history… and it always led to triple-digit gains.

Pfizer was almost this cheap at its bottom in 1979, and then it nearly doubled in two years. It was almost this cheap in 1984 as well… And once again, it nearly doubled in two years.

Last time, the stock got fairly cheap in 1989 (though not as quite cheap as ‘79 and ‘84) and it rose over tenfold during the 1990s. As the decade of the 1990s shows, when drug companies catch the public’s interest, they can go absolutely nuts.

I look for three things in an investment. I’d like the opportunity to be:

In the case of Pfizer, it is particularly cheap, based on any traditional measures of value. It is hated (or ignored)… the share price is down nearly 50% from 10 years ago.

But I don’t have the third leg of the stool… There’s no sign of an uptrend yet. Still, with the apparent value here and the poor performance over a decade, which has taken it off everyone’s radar screens, I thought it might be worth checking out. So I made a phone call to our medicine man…

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“Rob, as you know, I’m a medical nincompoop,” I started.

“But I’ve been running a lot of numbers this week, and it looks like the big drug companies – from pharma giant Pfizer to biotech giant Amgen – are the cheapest they’ve been in recorded history… They’re priced to basically never grow again, ever.”

Rob Fannon is half of our in-house medical investing team. Along with Dr. George Huang, Rob Fannon writes the S&A FDA Report and Phase 1 Investor.

This is how I typically work… I find an idea that might be appealing. And then I go out to my network of people and talk to someone who knows just about everything there is to know about that idea.

Since these drug stocks are so cheap, I hurled questions at Rob…

“Doesn’t Pfizer have some sort of legitimate moat? Doesn’t it have some advantages with distribution just due to its sheer size? And can’t it just sit back cherry-picking smaller companies that innovate and create new drugs? Ultimately, can it really NOT grow? Because that’s the way the shares are priced.”

Rob connected on every pitch…

“By law, Pfizer won’t be selling the same drugs 20 years from now – its patents will expire. So it must constantly ‘feed’ its drug pipeline. The problem is, its pipeline now is barren…

“And sure, it can buy smaller companies for their new drugs or technology… In fact, that’s the only way Pfizer has grown this decade… by acquisition. But the thing is, many other companies, including Amgen like you mentioned, are going after those same smaller companies.

“So can it NOT grow? Absolutely. Steve, Pfizer may appear cheap based on traditional measures as you say. But I wouldn’t buy the stock.“

Rob recommended taking the other side of the trade… looking for the smaller biotech companies that the Pfizers and Amgens will likely buy.

The new issue of my monthly newsletter, True Wealth, comes out later today. In it, Rob will share the best way to get exposure to the portion of the biotech sector he likes right now, in just one stock. Unlike Pfizer and Amgen, the uptrend is already underway… Time to buy!

Good investing,

Steve

Source: Big Drug Stocks: Cheaper Than They’ve Ever Been

Earnings from Merrill Lynch, Motorola and Pfizer all point to poor results and the markets are heading lower in the United States and Europe. No surprise for this bear…

Stocks can still muster a significant bear-market rally. The S&P 500 Index and the MSCI World Index have logged almost six consecutive monthly losses. In previous bear markets, including the 2000 to 2002 period, equities did manage to post some big rallies. Of course, these intermediate or short-term advances were just opportunities to sell stocks as markets eventually broke down to newer lows.

What’s amazing about the last bear market is that stocks continued to plunge even as the Federal Reserve aggressively cut lending rates. Turn the calendar ahead six years and we’re pretty much in the same pickle.

The bulls point to the Fed as our stock-market savior. I’m not so sure. Yes, it’s hard or even futile to “Fight the Fed” when the central bank is printing like mad and desperately trying to reflate the money-supply. But investors tend to forget that despite the Fed’s best efforts starting in January 2001, Greenspan and his boys unsuccessfully halted a massive slide in stock values. From January 2001 until December 2002, the Fed cut rates from 5.50% to 1.25%, yet the S&P 500 Index still plunged a cumulative 36%.

Since the Bernanke Fed began cutting rates last September, the S&P 500 Index has declined a cumulative 10% – not exactly a successful rescue.

I still think this market will form a bottom sometime in the fourth quarter – not before. But even then, I don’t expect a bull market to return because the contraction of credit has fractured the economy, corporate earnings and the consumer. It’s hard to be bullish on the market for an extended period especially when oil is trading north of US$100 per barrel.

Last summer, I predicted stocks would still finish higher 12 months later. I was too optimistic. The depth of this crisis is enormous and although we’re probably two-thirds of the way through the worst of this debacle, its implications for the economy will linger for many years.

Bank stocks will ultimately lead the next rally because they represent about 35% of total global stock-market capitalization. It’s pretty likely that as stocks form a bottom later this year the market will enjoy a blistering 12-month gain.

Don’t mistake a rally for a new bull market. No matter what happens in the short-term, most stocks will be poor investments over the next several years as inflation, deflation and a long-term contraction in bank credit slow the world’s largest economy to pre-1995 levels.

ERIC ROSEMAN, Investment Director

P.S. In the upcoming May edition of The Sovereign Individual, I’ll give you an entire “anti-crisis portfolio” packed with seven different ways to protect your holdings from the Fed’s latest “rescue.” Click here to sign up for a risk-free subscription so you don’t miss out.

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.