Position Biotech Investments To Take Advantage Of Big Pharma's Mess

Two items of news over the last week from Big Pharma groups has underscored my feelings on the sector. If you haven’t got any biotech exposure yet, you should be asking yourself why…

On Friday, Pfizer issued its first-quarter figures. They were particularly dire. Profits in the three-month period to 31 March fell 17.5%, as the figure was hit by charges resulting from its restructuring plans. It’s costing this company a lot to try and turn itself around.

Despite total revenues rising 6%, the company was hit by drugs that have recently lost their US patents. These included Norvasc (down $115m), Zoloft (down $615m) and Zithromax (down $112m).

The second piece of news came this morning from AstraZeneca. The company said that it had won the bidding for US biotech group MedImmune, which put itself up for sale a few weeks ago.

Astra will pay $58 a share for the group, which valued the company at $15.6bn. This is 54% higher than the share price when the company indicated it had first received an approached.

The price paid by Astra look very expensive to me.

In the current year, MedImmune was expected to post earnings per share of 90 cents, according to a Reuters’ consensus view. At $58 a share, this is effectively a current-year forward price-earnings multiple of 64 times. The biotech sector typically trades at around 30 times earnings.

But what does this all mean to you..?

Well it’s quite simple really. Big Pharma is in a mess and they will have to pay over the odds for prize assets over the next few years. Shareholders in MedImmune will be delighted with their stonking premium - and you should take time to position yourself in other such companies over the next few years.

But you do have to be careful, because biotech can be a hit and miss business. Indeed, the failure rate for new products can be quite staggering. Around 80% of products that go to clinical trial never make it because of the tight regulatory hurdles.

A recent report from Ernst & Young indicated that the global biotech industry showed robust growth in almost every performance indicator in 2006. It said that alliances involving US groups hit an all-time high, while the premiums paid drove the value of mergers and acquisitions was the second-highest level in the industry’s history.

The report also stated that innovation was being rewarded with record revenues and unprecedented premiums in M&A transactions.

Ernst & Young calculated that the average premium in M&A transactions with values over $500m increased to 60% in 2006, more than twice the average M&A premium from 2003 to 2005.

I believe that these trends will continue for some years to come. Big Pharma groups have no choice. They are going to keep having to pay that premium to get the products they need to survive.

Try and make sure the premium goes to you…

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