Back in early April 2012, in a special report for Private Briefing readers called "The Biotech Buyout Binge," I explained that we would start seeing a slew of takeovers - engineered by cash-rich biopharmaceutical firms desperate to replace blockbusters that were losing patent protection.
We were right about the so-called "patent cliff." Here's how to play one of our biggest biotech winners now.
A Big Deal
And that's not all we were right about: One of the stocks we identified in that special report -Pharmacyclics Inc. (Nasdaq: PCYC) - ended up being a buyout target, just as we predicted.
And Pharmacyclics is also the biggest winner we've brought you in Private Briefing's three-and-half-year history - 818%.
Here's what happened.
On March 4, AbbVie Inc. (NYSE: ABBV) - another Private Briefing recommendation - stunned investors by announcing it was buying Pharmacyclics for $21 billion.
But here's the part that matters to you: AbbVie is offering cash and stock worth $261.25 a share - a full 818% more than our original recommendation price of $28.47.
Before we sit back to savor the huge windfall, let's take a look at the actual deal.
Shares of Pharmacyclics - already up more than 500% - have skyrocketed even more in recent weeks on speculation that the blood-cancer drug-producing company had hit the auction block.
But the potential suitors were reported to be Novartis AG (ADR) (NYSE: NVS) or Johnson & Johnson (NYSE: JNJ), whose Janssen Biotech Inc. unit is actually partners on the Pharmacyclics blood-cancer drug Imbruvica. That partnership deal gives Pharmacyclics both milestone payments and 50% revenue sharing, but only assesses the company 40% of the costs.
But AbbVie, a Private Briefing winner whose shares have zoomed 74% since we recommended it as part of a "spin-off" combo play with Abbott Laboratories (NYSE: ABT), was the suitor that emerged to snap up Pharmacyclics as a biotech prize.
The boards of directors of both companies have signed off on the deal, which is expected to close later this year.
AbbVie made this deal because it needs to lessen its reliance on Humira, its crown jewel anti-inflammatory drug and a true "blockbuster" with $12.5 billion of sales in 2014.
The company loses patent protection for Humira next year. And while AbbVie CEO Richard Gonzalez says there's an updated version of the drug - with clear advantages over the original - that should help beat back looming, cheaper "biosimilar" knockoffs, there's no guarantee the patent protection won't be lost.
Gonzalez maintains the $21 billion Pharmacyclics deal isn't just about diversifying away from Humira and finding future growth for his firm; Imbruvica also will provide a "patent cliff" buffer.
Imbruvica is already a blockbuster. It generated $548 million in revenue in the fourth quarter and is expected to go to at least to $5 billion a year at its peak - and maybe more. Indeed, the drug has received four indications in less than 15 months - the latest being for Waldenstrom's macroglobulinemia (WM), a rare form of cancer that's also known aslymphoplasmacytic lymphoma.
We've reported on all these U.S. Food and Drug Administration (FDA) approvals, including the last one, which we told Private Briefing readers about in early February.
The great thing about this stock is that you didn't even have to act on our initial "buy" recommendation to have really cashed in - we re-recommended Pharmacyclics a number of times after we first told you about it.
On May 16, 2012, just six weeks after our initial April 2 recommendation - with the stock still only trading at $29.31 a share - we recommended it again.
And we also re-recommended Pharmacyclics at $87 a share in the Feb. 15, 2013, report "This Biotech Is Gaining Groupies at a Stunning Rate."
We also re-recommended it in a Private Briefing report back in early December - when the stock was trading at about $139. And we brought it back to you one last time - in our Jan. 15 report "This Drug Just Gained 'Blockbuster' Status - and There's Still Time to Hitch a Ride," when the stock was still at only $143.25.
Finally, we actually brought it back before you one last time - on Monday - when the stock was still at only $221 a share.
That's not boasting: In all honesty, it's the great feeling that we made our readers some real money. In fact, following our initial recommendation, as the stock doubled for the first time, and continued its run, I heard from lots of you who'd hitched the ride and were cashing in.
That brings us to the deal itself - and what we think you should do.
Take This Next Step on AbbVie
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AbbVie will pay $261.25 per share in cash and stock, a 13% premium to Pharmacyclics' closing price on Wednesday. The deal is structured as 58% cash and 42% AbbVie common stock. Pharmacyclics stockholders can elect cash, AbbVie stock or a combination - although that is subject to "proration," AbbVie said in a statement.
Our advice: With the stock trading at about $254 a share as I write this, it's not worth hanging around for the last few dollars. AbbVie is paying top dollar for Pharmacyclics, and there's always the chance the deal could fall apart - which is just what happened for AbbVie's proposed buyout of Shire Plc. (Nasdaq ADR: SHPG) last year.
Profits in hand are worth more than slightly greater profits in the future. Plus, you can take this cash and redeploy it into another profit opportunity - like those we bring you here each week.
This is the 12th "deal stock" we've brought you since launching Private Briefing. Indeed, we've brought you two this week. In addition to the Pharmacyclics buyout, you also profited from the early week deal that has NXP Semiconductors NV (Nasdaq: NXPI) spending $11.8 billion to buy out Freescale Semiconductor Ltd. (NYSE: FSL).
Other buyout stocks have included LSI Corp. (Nasdaq: LSI), Berry Petroleum Co. LLC (NYSE: BRY), Crosstex Energy Inc. (Nasdaq: XTXI), Pentair Plc. (NYSE: PNR), Nexen Energy ULC (NYSE: NXY), CNH Global, Aurizon Mines Ltd., Trius Therapeutics Inc., Astex Pharmaceuticals Inc., and Smithfield Foods Inc.
We love hearing from both our Private Briefing and Money Morning readers. If you've profited from any of the above we'd love to hear from you at [email protected].
[Editor's Note: Unless otherwise directed, as we've done today, we recommend investors employ a 25% "trailing stop" on all holdings.]
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.