NEW YORK (TheStreet) -- Amgen's (AMGN) recent acquisition of Onyx Pharmaceuticals (ONXX) sparked a lot of takeover speculation in the biotech sector. Which company would be the next M&A target? Naturally, the rumor mill was busy. Roche (RHHBY) was said to be interested in Alexion Pharmaceuticals (ALXN) and then BioMarin (BMRN) a few weeks later. Clovis Oncology (CLVS) shares jumped on an unconfirmed media report that the company was actively seeking a buyer. Soon after, Clovis shares fell when reports surfaced about a lack of interest from prospective suitors forced the company to call off the auction.
The problem with Clovis? Its drug pipeline was too immature and its valuation too rich, reportedly.
Assuming the media reports were accurate, Clovis' unsuccessful attempt to sell itself dovetails nicely into the ongoing debate investors are having about biotech stock valuations. With biotech stocks soaring to 52-week highs (all-time highs in many cases) plus the huge number of successful biotech IPOs, the "bubble" word is being thrown around a lot.
Are we currently experiencing a biotech stock bubble?I say no bubble. Are biotech stock valuations stretched and in need of a healthy dose of consolidation? Yes, but that's a different and less worrisome condition than a biotech stock bubble. A financial bubble occurs when the price of an asset rises significantly higher than its intrinsic value. The trouble with this definition is intrinsic value is not known, so bubbles are often only identified in retrospect. Bubbles do, however, generate identifiable behaviors: Greater fool theory, extrapolation of previous price action and increased risk taking. We're not seeing any of those behaviors exhibited by the strategic buyers of biotech assets during the recent spike in M&A activity -- real and rumored. When Amgen's $120 bid for Onyx was first reported, Onyx shares rose quickly above the offer price because investors expected other suitors with higher, competing offers to roll in. Amgen eventually raised its offer for Onyx to $125 per share but there was no bidding war for the company. Strategic buyers were quite cost conscious, in fact.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV