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Five Biotech Takeout Targets


Analysts walk us through their 2010 M&A forecasts.

M&A activity in the biotech sector didn't prove as active as some had forecast in 2009, but this year there are research analysts predicting that activity will pick up, offering nimble investors potential money-making opportunities.

For help in sharp-shooting likely takeout targets, we reached out to Morningstar biotech analyst Lauren Migliore.

Last year, says Migliore, she figured there would have been a more active M&A environment given the financial vulnerability of many small-cap biotechs and the hefty cash balances at pharmaceutical companies.

Instead, says the analyst, Big Pharma concentrated its attention on mega-mergers with their peers, such as Roche shelling out $47 billion to buy the 44% of Genentech it didn't already own.

Now, in 2010, as pharmaceutical consolidation winds down, Migliore tells us, small- and mid-cap biotechs will look like tasty targets for Big Pharma.

Also, she thinks large-cap biotechs should be increasingly active on the acquiring side of M&A deals. (She notes, for instance, that Amgen (AMGN) emphasized in January that it's very active in assessing potential acquisitions).

To find the attractive targets, the Morningstar team employs a biotech takeout methodology based on four criteria. The analysts weigh each company's drug portfolio strength, collaborative fit with potential partners, profit-boosting power, and financial health.

Using the criteria, they recently came up with a takeout list for 2010.

Their top five candidates, based on their takeout target rankings, include Vertex Pharmaceuticals (VRTX), as the Massachusetts-based company is close to commercializing telaprevir, a potential blockbuster treatment for hepatitis C.

"The company is building a diversified portfolio," says Migliore. "The company has no drugs on the market, and it has never been profitable. But it has an $8 billion market cap because investors are so excited about its lead drug candidate."

The Morningstar team also likes Auxilium Pharma (AUXL). Its drug Xiaflex is nearing the market for two rare conditions, says Migliore, which would significantly boost the company's profit potential.

A third potential target for investors to keep their eyes on: Human Genome Sciences (HGSI), which moved up from number 32 on the 2009 list given the impressive data for lupus drug Benlysta.

A fourth: InterMune, (ITMN), whose lead product candidate, pirfenidone, could reach the market in 2010. (See also InterMune Still Has Lingering Questions)

The fifth candidate is Celgene (CELG), which is the leader in blood-related cancer treatments.

Some biotech companies fell in the ratings: Arena Pharmaceutical (ARNA) dropped from number 15 in 2009 to number 29 this year because of disappointing data in Phase 3 trials of its obesity candidate.

Investors have also been enthusiastically playing the biotech sector with exchange-traded funds, like the iShares Nasdaq Biotechnology (IBB), with holdings such as Teva Pharmaceutical Industries (TEVA), Gilead Sciences (GILD), Biogen (BIIB), Alexion Pharmaceuticals (ALXN), and Perrigo (PRGO).

The IBB is up 50% in the past 12 months; up 8.5% year-to-date.

However, some noted technicians are telling clients to steer clear of the IBB right now, eyeballing the charts and arguing that better entry points lie ahead for opportunistic investors.

So says Katie Stockton of MKM Partners, who recently wrote: "Short- and intermediate-term overbought conditions are supportive of a pullback, suggesting a better buying opportunity will present itself within the framework of the long-term uptrend."

Stockton says the uptrend line shows important support in the low $80s, where the technician said she would revisit the IBB. On Friday afternoon, the ETF was at $88.71.
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