Thursday, December 4, 2008

Second guessing Cramer

Yesterday on CNBC's Fast Money show, it was noted that Big Pharma companies are sitting on piles of cash (read: billion$ and billion$) fueling speculation that M&A activity in the drug sector will probably happen and soon due to the depressed stock prices of many of the companies in the sector. Not only did Jim Cramer pick up this ball, but he ran with it in his show. He said that he was going to identify five companies that he feels are ripe for the picking. In a blatant attempt to boost his ratings, he only mentioned one candidate yesterday—Pfizer targeting Allergan—and will give his next two picks today and the other two tomorrow.

I decided that I would try to second guess Cramu (as he used to call himself in his newsletters years ago) and have come up with my own candidates. What I did was run a screen on the biotechs with EPS 5 year growth rate > 8%, average daily trading volume > 150,000, and market capitalization > $1B. Out of the top 25, I then hand-picked those that had positive cash flows and high sales per share. I whittled the list down to the seven listed in the chart below.

Of this seven, I looked at those that had robust drug pipelines as well as many drug collaborations. [Note: Genentech (DNA) is supposed to be in the process of being acquired by Roche but rumors are flying that Roche many not be able to come up with the money. If not, Genentech will be back on the block but with a market cap of $775B it's not going to be a cheap date.] I don't claim to be a specialist in the drug sector and can only make recommendations based on my short amount of research, but I do think the following are attractive take-over targets:

Biogen-Idec (BIIB): The company already has many drugs on the market and many in development, mostly in the areas of MS, non-Hodgkin's lymphoma, leukemia, and rheumatoid arthritis. It collaborates with many other biotech firms including PDL BioPharma, Elan, and Schering AG. Technically, the stock is down 50% from its all-time high put in a little over a year ago and is sitting on major support at $40.

Gilead Sciences (GILD): The company engages in the discovery, development, and commercialization of therapeutics for the treatment of life-threatening infectious diseases including hepatitis B, HIV, and the flu (you'll recognize Tamiflu). It has many research collaborations including Abbott and Novartis and commercial collaborations with GlaxoSmithKline and Bristol-Myers Squibb, to name a few. The stock price has survived better than others in this group, down only about 18% from recent highs so it might not be a
a great bargain especially considering its large market cap.

Genzyme (GENZ): The company develops and distributes treatments for renal, kidney, and thyroid diseases, osteoarthritis, and provides reproductive testing and genetic counseling among other services. The company has a collaboration agreement with PTC Therapeutics and a strategic alliance with Osiris Therapeutics. The stock has slumped 27% from recent highs and is threatening support at $60.

The rest of the companies in the above chart are not primarily involved in drug development (most of them make biotech supplies) and I must confess that I don't know enough about this space to make an educated guess as to who might want to acquire them.

Well, these are my candidates in the biotech area. Let's see if Cramu thinks so, too.

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