Takeover fever has swept the markets. Strong free cash-flows, burgeoning cash hoards, easy access to truly cheap capital via the public debt markets for those with strong balance sheets, and quite reasonable equity valuations thanks to the shell-shocked mass public's spurning of the stock market, has led many corporate managements to conclude that now is the time to buy.
Whether its BHP Billington's ( BHP ) gargantuan bid for Potash ( POT ) igniting the entire fertilizer space, Dell and Hewlett-Packard's maniacal bidding war for 3PAR ( PAR ) sending cloud players to the heavens, Intel's surprise diversification play for McAfee ( MFE ) unlocking security software, or any number of recent giant pharma deals for larger biotechs raining money on the chosen few who understand this sphere, now is perhaps the golden age for buyout players.
Of particular interest is Sanofi-Aventis' ( SNY ) hard-fought battle for Genzyme ( GENZ ) as neither side shows any signs of budging on price. Sanofi's board is adamant that $69 is fair and up $72 is the only concession necessary to acquire the rare-drugs portfolio of the stumbling Genzyme -- still an "A List" biotech but lately plagued with spotty manufacturing and missed marketing opportunities.
Sanofi is French and the more reserved corporate culture of The Continent's quasi-socialist systems does not favor maverick CEOs or wild bidding wars born in good part of pure ego. On the other hand, Genzyme's fierce entrepreneurial culture refuses to accept the current market valuation, believing that Sanofi is looking only to capitalize on temporary setbacks and steal a company rightfully worth somewhere in the 80s or 90s.
Could it be that neither side will budge and the current trading price of $72 and change is an easy sell considering the chances of collapse ? If so, where is Sanofi headed next ?
In the rare diseases space, perhaps only BioMarin ( BMRN ) has an "orphan" drug portfolio lucrative enough, a pipeline promising enough, and a track-record and cachet premier enough to attract Sanofi. Currently, BMRN valuation is still quite reasonable, with the shares around 25 still recovering from a multi-year depression that saw the shares plummet from 40 in early 2008 to 10 in early 2009 before staging a long recovery.
BioMarin's principal drugs, Aldurazyme and Naglazyme, are used in treatment of MPS, a disease which inhibits the body's normal pathway to metabolize carbohydrates. Orphan drugs treat extremely rare diseases, and because of the market realities of development these drugs receive improved patent protection, heavy subsidies, and enjoy phenomenal pricing typically in the multiple hundreds of thousands per patient per year ( Alexion ALXN's drug Soliris commands $500K ).
How to play BMRN ? Timing is tough because the limited number of suitors and the slow-moving nature of the regulatory-burdened pharma industry implies no real timetable. But long-dated options such as the Jan 2011 25 calls are cheap at mid-30s implied volatilities relative to other takeover plays.
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