Gilead Sciences (GILD - Analyst Report) and Pharmasset (VRUS) announced today that the companies have signed a definitive agreement under which Gilead will acquire Pharmasset for $137 per share in cash.
The deal, which values Pharmasset at approximately $11 billion, vaulted shares of the unprofitable maker of hepatitis C drugs over $60 from Friday's close near $73 to a high thus far today of $135 .
Pharmasset currently has three clinical-stage product candidates for the treatment of chronic hepatitis C virus (HCV) advancing in trials in various populations. Gilead's research and development portfolio includes seven unique molecules in various stages of clinical development for the treatment of HCV.
"The acquisition of Pharmasset represents an important and exciting opportunity to accelerate Gilead's effort to change the treatment paradigm for HCV-infected patients by developing all-oral regimens for the treatment of the disease regardless of viral genotype," said John C. Martin, PhD, Chairman and Chief Executive Officer of Gilead.
Biotech Profit Rockets: How Do You Know?
If you had looked strictly at Pharmasset's earnings outlook, you may not have seen the opportunity here. With last year's loss around $1.25 and this year and next projected to be minus $1.56 and minus $1.80 respectively, the earnings momentum trend did not appear to be reversing its downward trajectory anytime soon.
But, this is the nature of biotech R&D. We never know who will make it through the years of cash-drain and the FDA gauntlet with the next successful drug.
Or, who will buy the next struggling drug maker with as yet unproven science. The past three years have seen record amounts of M&A, with $51.6 billion in the first half of 2011 already closing in fast on 2010's $67 billion. Today's deal and a couple of others now put this year ahead of last.
The lesson for investors is multi-fold:
1) At the minimum, maintain conservative exposure to the industry -- and thus to the future of medicine -- through a basket like the Nasdaq Biotechnology ETF (IBB - ETF report). I have owned and traded the IBB since 2009 when I first bought it for $65. Earlier this year, it reached as high as $110 and now trades back in the mid-$90s.
2) Study the companies and their science. While it's true that trying to sift through the drug R&D reports without a life sciences education could be considered futile, you never know what you'll learn that could inspire you to find out more and even cause you to specialize in an area, like specific cancer treatments or hepatitis drugs for instance.
So understand that you risk your time as well as your money in biotech investing, and that even though a good degree of luck may be involved in finding winners, you can't go wrong if you enjoy the pursuit.
3) Try to put the odds in your favor with a combination of edges, both technical and fundamental. For Pharmasset, your fundamental analysis was based purely on the company's science and the chatter about it being a potential acquisition target. But the chart here was always in good shape, indicating that the stock was under steady accumulation.
4) Be willing to accept a low success rate. If you invest in biotech companies, you are likely to have a lot more InterMune (ITMN - Snapshot Report) and Dendreon (DNDN - Analyst Report) stories than Pharmasset ones.
Know this going in and also know how bad the blow-ups can be when an FDA trial is flunked and destroys the hopeful's dreams. Often, even a stop loss can't protect you from a 75% destruction in a biotech's stock price overnight.
Biotech Lottery Tickets: Discovering Science and Decent Odds
Here's an example of a small-cap biotech that I learned about and have traded a few times in the past three years, always waiting for it to be discovered and always being mildly disappointed, but never losing money.
Raptor Pharmaceutical (RPTP - Snapshot Report) is a $5 stock with a $235 million market-cap. The firm is engaged in preclinical programs for the development of bioengineered novel drug candidates and drug-targeting platforms derived from the human receptor-associated protein (RAP) and related proteins that are designed to target cancer, neurodegenerative disorders and infectious diseases.
The way I understand the science of their R&D goals is that RAP-based drugs and platforms will enhance how other drugs enter and leave cells through the bloodstream. This sounded like revolutionary science to me at the time three years ago when I first plunked down $1,500 for 500 shares.
On the earnings front, Raptor lost 85 cents per share last year and is projected to go from a loss of $1.15 this year, to a loss of only 45 cents next year. With eight analysts covering the company, I am seeing some stability in the estimates, with the high/low range for next year being minus $0.24 cents EPS to -$0.79.
I am not recommending Raptor today, although I do like the chart right here, especially with the recent string of up days on good volume, including today. I just wanted to use it as an example of how to play the biotech investing game with more reward than risk. Even if I had lost money on my trades, I would still feel like I gained something valuable from the simultaneous pursuit of knowledge and wealth.
Disclosure: I own RPTP
Kevin Cook is a Senior Stock Strategist with Zacks.com