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Chasing Biotech Buyouts? Beware!

Olivier Brandicourt, Sanofi CEO (L) speaks with Serge Weinberg, Sanofi Chairman of the Board (R). (Photo by Vincent Isore/IP3/Getty Images)

Fans of biotech stocks have certainly gotten a boost from the string of big-dollar deals by big drug makers.

Earlier today, Sanofi announced the $4.8 billion purchase of Belgian biotech Ablynx, marking the French pharmaceutical giant’s second deal this month, following its $11 billion acquisition of the hemophilia drug maker Bioverativ. Although it is a far smaller deal, it has added to the belief that 2018 will be a big year for deal making as large, cash-rich companies look to juice their pipelines and offset sales pressure on older medications.

The list of rumored takeout targets is long, ranging from Clovis Oncology and Bluebird Bio to big names like Bristol-Myers Squibb.

Be warned that chasing these names is a bad idea. Because for every Kite Pharma and Juno Therapeutics that bolster returns for investors with big takeout premiums, there’s a Dendreon that sits as a grim cautionary tale.

“A takeout is always a possibility for a high-quality biotech company with a promising drug candidate, but it is not something you can rely on with certainty,” says Marshall Gordon, senior health-care analyst at ClearBridge Investments.

Granted, M&A frenzy has added plenty of value to the biotech sector. Up almost 1% today, the SPDR S&P Biotech ETF, which is heavily weighed towards small- and mid-cap names, has jumped more than 50% over the past 12 months thanks in part to big acquisitions by Gilead Sciences, Johnson & Johnson and Celgene. Many big players have yet to enter the fray, which suggests that more deals are on the horizon.

But when it comes to picking stocks, a takeout should be icing on the cake, not the meal itself. Speculation does not guarantee that a deal will ever get done. Ultimately, what moves a drug maker’s stock price higher and keeps it there is the company’s ability to move a steady flow of products through its pipeline that become commercial successes. Smart investors bet on companies that are good bets whether they get taken out or stand alone.

Granted, savvy deal makers use these same criteria when hunting for acquisitions. Still, predicting which names get bought and when is uncertain. Price pays a big part in these decisions. Some stocks already have a good deal of takeout talk baked into their valuations, which could chase off a likely suitor or leave them waiting on the sidelines until prices retreat. That leaves investors chasing those stocks, even the good names, open to big downside risk.

Also, the rapid pace of innovation in the drug industry and concerns about pricing and uncertainty about insurance reimbursement means that today’s hot technology could end up on the garbage heap down the road.

Investing in biotech stocks means taking risks. Some risks come at too steep a price.

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