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The Biotech Play Behind Three Takeovers Worth $83 Billion

0 | By Michael A. Robinson

Until Jan. 7, most investors had never heard of a small biopharmaceutical firm based out of Stamford, Ct.

But they certainly paid attention to Loxo Oncology Inc. (Nasdaq:LOXO) and its medicines for patients with genetically defined cancers after its stock jumped more than 66% that day.

Of course, within minutes, the average retail investor was locked out of the action.

That’s because shares of this once-obscure biotech leader leapt on news of an $8 billion buyout from Eli Lily & Co. (NYSE:LLY). See, the biopharma giant is shelling out the money to gain access to Loxo’s cutting-edge cancer treatment.

As important as the news is for life sciences investors, in all candor I probably wouldn’t be bringing it to your attention if this was just a one-off.

That’s because this was the third major biotech takeover in just a few weeks’ time.

And when I say major… the total price tag for all three deals… was a cool $83 billion.

Talk about a sector on fire with mergers and acquisitions.

Which leads me to the theme at hand…

Finding a good way to profit from of all of this M&A activity in the life sciences sector… without getting blindsided by these eye-popping deals, like we saw with the Loxo Oncology takeover.

So today, I’m going to let you in on how to profit from takeovers in the space, with an investment that has already rallied nearly 21% from its recent low…

Check it out…

Why Biotech Is Back “In”

I’ve been around the biotech space for more than 30 years. I first got involved in the mid-1980s, just as the sector was about to go mainstream.

Over the years, I’ve spoken with scientists, company leaders, even federal regulators. I’ve seen fortunes made seemingly overnight.

Unfortunately, I’ve also seen money thrown down a rat hole after a promising drug failed a key clinical trial.

Please don’t think I’m being negative. In fact, I remain a biotech bull.

Thing is, most investors don’t have the time or expertise to handicap drug clinical trials.

Ditto that for mergers.

But after a series of deals like we’ve seen lately, bulletin boards, blogs and even “reputable” websites are chock full of merger speculation.

So it can be difficult to parse what’s going on…


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Getting the Right Exposure

It’s one of the reasons I continue to recommend the iShares Nasdaq Biotechnology ETF (Nasdaq:IBB). This cost-effective exchange-traded fund (ETF) gives us broad exposure to this essential sector poised for a rebound based on mergers and great fundamentals.

Take those recent three deals worth $83 billion.

IBB owned all three of the biotech targets. Besides Loxo, those also include: Tesaro Inc. (Nasdaq:TSRO), bought by GlaxoSmithKline plc (NYSE:GSK) for $5 billion, and Celgene Corp. (Nasdaq:CELG), which Bristol Meyers Squibb Co. (NYSE:BMY) bought for $74 billion.

In the fight against cancer, Loxo, Tesaro and Celgene are all leading drug developers. And by 2021, Zion Market Research says this market will have a global value of $161 billion.

That’s a market we’d like to target. But since capital preservation is so important in a choppy market like we have right now, we’re also looking for stable investments.

If it sounds like I want to have my cake and it eat too, it’s because I do…

That’s one of the reasons I like this ETF so much. IBB allows investors to buy a stable piece of what is clearly a very promising – but at times, a high risk – industry.

Then again, the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) is composed of proven winners. Its main holdings make up a “Who ‘s Who” of the industry’s best performers, covering an astounding 224 stocks.

IBB invests nearly 58% of its funds in big-cap firms that have successful products on the market. These firms also have a solid track record of getting FDA approvals, a process that can take 10 years and cost $1 billion.

But they also have strong balance sheets.


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Just look at the top five holdings:

  1. Alexion Pharmaceuticals Inc. (NasdaqGS:ALXN). It specializes in rare and ultra-rare diseases, those that may affect only 20 in 1 million people. It has therapies for deadly blood and brain disorders. With a market cap of $24 billion, the company has operating margins of 36%, and free cash flow of $284 million. It recently grew quarterly earnings by 13%.
  2. Amgen Inc. (NasdaqGS:AMGN). It sells medicines to treats cancers, kidney disease, rheumatoid arthritis and bone disease. It also has products used to thwart anemia and inflammations. With a market cap of $127 billion, the firm has an operating margin of 45%, and produces $8.5 billion in free cash flow.
  3. Gilead Sciences Inc. (NasdaqGS:GILD). It has products that fight HIV/AIDS, as well as liver, heart and respiratory diseases. It also has products that fight parasitic infections and blindness. With a market cap of $88 billion, it has operating margins of 43%, with free cash flow of about $7.5 billion. Earnings were off roughly 8% in the most recent quarter.
  4. Regeneron Pharmaceuticals Inc. (NasdaqGS:REGN). It’s mainly known for EYLEA, a compound that combats age-related macular degeneration, a leading cause of blindness among older folks. It also has a drug used to treat advanced forms of colorectal cancer. With a $44 billion market cap, it has operating margins of 37%, with more than $1 billion in free cash flow. In the most recent quarter, earnings were up 47%.

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A Smart, Stable Play

These top four holdings alone give us a broad reach into the next generation of biotech breakthroughs. And they often collaborate with early stage companies and university researchers. They also fund a very wide range of new product clinical trials.

Just Amgen, for instance, is involved in roughly 100 collaborations that could lead to new compounds or manufacturing processes. For its part, Celgene had 300 clinical trials under way, a fact that no doubt added to its attractiveness as a buyout target for Bristol-Myers.

As you can see, IBB removes much of the risks that average investors have in targeting the biotech sector, where many stocks offer a lot of upside, but are also highly volatile.

Of course, you pay a bit of a premium for this unique combination of both stability and rapid price appreciation. IBB trades at roughly $180 share.

But as I like to remind tech investors, you can’t just look at the price tag. You have to focus on the profit potential.


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And that’s really what it’s all about when it comes to investing in this, and other technologies. Remember, the life sciences are a big part of tech, the greatest wealth machine ever invented.

And this is exactly the type of strategic play every tech investor should make.

See, it’s both the easiest and lowest-risk way I know of to put a big group of winners in your hands, today.

And over the years, you will see IBB steadily build your net worth.

Of course, another way to grow your nest egg is to take a look at what’s happening in the legal cannabis sector. And what lies ahead.

In the U.S. alone, the industry is worth more than $10 billion annually. But we’re still at the earliest stages of this economic boom. Right now, tomorrow’s industry giants are investing in everything from medical applications to recreational products, expanding operations, and buying out competitors.

This also happens to be the time with the most profit potential for cannabis stocks – when investments in the right firms can lead to tomorrow’s fortunes. But you have to know what you’re doing…

Get your start here.

See you back here soon.

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