However, there is a belief that Roche, a rumored suitor, may be willing to pay a much larger premium for Alexion. Roche’s $46.8 billion acquisition of Genentech is often used as an example, but that comparison might not be corroborative. At the time of purchase, Genentech had substantial assets such as a stable of blockbuster cancer treatments including Avastin, Herceptin, and Rituxan. Considered a world leader in oncology, it also had sales of over $13 billion.
But why I might be wrong
As much as the evidence might suggest a lack of upside for Alexion shares, I realize that my conclusion might be totally off for two main reasons.
The first is the amazingly dynamic nature of biotechnology. Terrific drugs are frequently discovered. Alexion may come up with a blockbuster through its own research or an extremely wise acquisition, which would obviously increase the value of the company. A second, more compelling reason is that companies have been known to spend incredible amounts for purchases in hot sectors. Biotech is certainly in demand at the moment and orphan drug makers are especially in vogue, so the possibility of a large bid is very real.
I’ve been caught in such a scenario before. In early 2007, starting to prepare for a slowing economy and housing difficulties, I began shorting Hilton Hotels having noticed hotel stocks do not perform well in recessionary times. Not long after, in the heat of the property boom, Blackstone Group took out Hilton in a $26 billion deal, about a 40% premium. Though the economic downturn eventually vindicated my assessment, a seemingly imprudent takeover bid still put a hurt on my net worth.
Alexion’s shares have recently been quite explosive. Though some of the evidence might suggest that further meaningful upside is unlikely, there are also legitimate reasons why a large takeover bid could happen. An interesting situation, however it turns out, the stock is likely to remain extremely volatile.
Bob Chandler has a short position in Alexion Pharmaceuticals. The Motley Fool recommends Alnylam Pharmaceuticals.
The article Will This Orphan Drug Maker Find a New Home? originally appeared on Fool.com and is written by Bob Chandler.
Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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