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Our "Biotech Buyout Binge" report has made our subscribers a lot of money.
And we continue to believe there's a lot more money to be made.
Let's take an updated look at the three oncology stocks that we recommended in that April 2, 2012 report.
Then I'll tell you why we believe one of the three is poised for a big run.
In that report, we featured:
- Pharmacyclics Inc. (Nasdaq: PCYC): This blood-cancer specialist has been the top performer of the three recommendations: Shares of the Sunnyvale, Calif.-based Pharmacyclics have risen as much as 153%, and are still up by nearly 140% as I write this. It's no surprise to us that Wall Street now loves the stock and has slapped an $80 consensus target on the shares (one analyst says the stock will hit $110 a share). We don't get too caught up in the whole "target-price jamboree" game, but will use them to provide a bit of context on a stock that we already like. For subscribers who invested when we recommended Pharmacyclics at $28.47 (and we've heard from a lot of you), that would represent overall gains of 182% to 286% from where we initially recommended the stock. We should note that we saw some concentrated insider selling at the end of 2012 – not unusual with a young company that's experienced such a torrid surge.
- Celldex Therapeutics Inc. (Nasdaq: CLDX): Shares of the Needham, Mass.-based Celldex have surged as much as 48% – hitting their peak earlier this month – and are still 38% above our "Buy" price of $5.19. This biotech has a whole pipeline of drug candidates being developed for cancer and other tough-to-treat diseases, and its weapon of choice is an antibody-focused "Precision Targeted Immunotherapy Platform," or PTIP. This approach uses a complementary portfolio of monoclonal antibodies, antibody-targeted vaccines and so-called "immunomodulators" in optimized combinations to create new drugs that go after specifically targeted diseases. In fact, one researcher – clearly taken with Celldex's technological approach – referred to the venture as "the first antibody-based combination immunotherapy company." When we recommended the stock, Wall Street's one-year target price on the stock was $8.83. Now it's $11.40, and Roth Capital analysts last week reaffirmed their own "Buy" rating – as well as their $16 target price. The $11.40 target would represent a 120% total gain, while Roth's aggressive $16 target would be 208% higher than where we recommended it.
- Vical Inc. (Nasdaq: VICL): After zooming as much as 40% following our recommendation, Vical shares sold off and are essentially back where they started. But if you're looking at sheer upside potential, this may be the most promising stock of the three right now. And even the "smart money" seems to think so. Since the start of the year, Vical insiders – including CEO Vijay B. Samant – have snapped up 133,750 shares. The purchases were made soon after the company announced that its Nasdaq listing had been upgraded to the Nasdaq Global Select Market. That's the highest listing of the three available and means the company is mature enough to adhere to a tougher set of financial requirements. And James R. Singer, already a 10% beneficial owner, added to his stake by spending $1.7 million to purchase an additional 464,300 shares at prices ranging from $3.51 to $3.99 (the purchases were made in July, August and September, but were disclosed on Jan. 15, according to the Securities and Exchange Commission filing that we linked to above). Insider selling is often inconclusive. But on a stock that's been beaten down from its highs, there's nothing that gets me more excited than insider buying. And Vical seems to have a hefty upside. The stock is currently trading at about $3.36. The consensus target is $6 a share, though the target prices go as high as $7. Those predictions are 68% to 107% above where we recommended Vical shares.
With each of these biotechs – as well as with others that we've recommended in recent months (and still like a lot) – there's one other factor to consider.
The odds of a windfall profit from a biotech buyout are about as good as you're ever going to find. As we told you in our Jan. 9 Private Briefing report, we're expecting biotech and pharmaceutical dealmaking to soar this year – even more than it did in 2012.
And we're suddenly seeing quite a few research reports that make the same case.
There have been 676 takeovers of biotechnology and pharmaceutical companies in the past three years, and the average buyout premium has been 38%, Bloomberg News reports.
But that impact could be even bigger this year.
The five largest Big-Pharma players – including Bristol-Myers Squibb Co. (NYSE: BMY), Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK) – were holding more than $70 billion in cash and cash equivalents at the close of the third quarter. Having spent the last couple of years streamlining operations and incorporating earlier buyouts, you're going to see these behemoths embark on unprecedented shopping sprees – and can expect to see deals as big as $20 billion.
"With sales declining for the first time in 2012, it is only a matter of time before shareholder returns follow suit – unless [Big Pharma] can find new sources of growth," accounting-and-consulting firm Ernst & Young said in a report released at the start of the New Year. "With few options for organic growth, Pharma needs transactions … [and] the pool of potential suitors that could pay up to $20 billion has swelled."
It's the so-called "patent cliff" that's sparking the biggest fears. Right now, some of the biggest drugmakers have some of their most-lucrative blockbuster drugs coming "off patent" – meaning these companies face the loss of $170 billion in aggregate annual sales.
Remember the lessons that I learned as a business journalist that I've shared with you. During the three-plus years I spent covering biotech right near the end of my newspaper career, I learned it can take 10 years to 12 years and $1 billion or more to develop a new drug. For every 1,000 "compounds" (drug candidates) that enter laboratory testing, only one will ever make it to human testing.
Indeed, once a company develops a drug, it's usually looking at about three-and-a-half years of testing in the lab before it can even apply to the U.S. Food and Drug Administration (FDA) for approval to begin testing in humans. Of all the drug candidates that enter Phase I trials – the first of three phases that mark the path to FDA approval – only one in five ever makes it to market.
A lot of companies would rather pay a bit more for a drug that's near approval than to take the much-bigger risk of starting from scratch. And they can't really afford to take all that time.
Given their market caps, none of the three biotechs I've talked about today would be too big to buy. At $4.75 billion, Pharmacyclics would be the biggest. But Celldex ($443 million) and Vical ($292 million) would represent fairly small deals – even with that 38% average deal premium that Bloomberg calculated. (Indeed, the average disclosed deal size was $328.7 million.)
One final point – about Vical alone.
We've all been watching the headlines about this year's flu virus, and have seen the regional shortages of flu vaccine. My wife and my six-year-old son got their vaccines late last year. I usually get mine in the late fall/early winter timeframe, too.
That didn't happen this time around. I've been putting even more time than usual into Private Briefing even as I've been trying to spend as much time as possible with my wife and son, and with my Dad.
Everything else got squeezed out – including the flu vaccine.
I knew I needed one, so a couple Saturdays ago I spent part of the day going to all local drugstore outlets whose billboard-sized window displays proclaimed that "we have flu shots."
The signs lied.
I finally got a vaccine by stopping at the Rite Aid store near my house – every single morning for a week. I finally lucked out and stopped in just after they'd received a new shipment.
I recounted that saga to resident tech guru Michael A. Robinson during a chat about Vical, a biotech he also likes a lot.
His response: "Hey, Bill, did you know that Vical is working on a synthetic flu vaccine, too?"
I do now, and I mention this conversation to you for one reason. The market for vaccines of all types is worth about $30 billion a year. And "synthetics" are the next big stop – representing the first paradigm shift away from technologies that have essentially been in use since the 1950s. When you add in some of the company's existing products – two vaccines for animals, and the cancer therapies it has under development – this shows me that Vical is not a "one-trick pony" … it has some muscle, as well as some staying power.
So whether it's via a buyout in the near-term or through drug development over the long haul, we believe that Vical is a stock that will make you money.
The company's insiders apparently feel the same way.
See you tomorrow.
[Editor's Note: We recommend investors employ a 25% "trailing stop" on all holdings.]