There's No Doubt About Biotech Buyouts

Anyone who's interested in trying his hand at risk arbitrage should get plenty of practice if he focuses on the biotech sector in 2007.

With a profusion of companies of all sizes and at varying stages of product development occupying the landscape, the sector is ripe for significant mergers and acquisitions activity, many industry observers believe.

In particular, Big Pharma names, especially those with weak pipelines, will likely move to snap up smaller firms whose drugs are already approved, thereby quickly gaining a new revenue stream.

Michael Weiss, the CEO of Keryx Biopharmaceuticals (KERX Quote), says the large drug companies will go after small outfits "and pay a pretty good premium, almost what you'd expect to pay for a nearly perfect sales strategy."

He calls this kind of deal "relatively low risk because Big Pharma puts it into their portfolio, and they know they probably won't have a major product failure."

Jeff Matthews of Ram Partners agrees. He believes companies with approved products, especially in the fields of cancer and diabetes, will prove the most attractive to potential buyers.

In my opinion, companies that fit the bill include Amylin Pharmaceuticals (AMLN Quote), Millennium Pharmaceuticals (MLNM Quote), and some of the larger companies. Smaller players could include names such as Bioenvision (BIVN Quote).

While I've been a proponent of investing in the large-cap, profitable companies, I'll acknowledge that some investors want the thrill and upside potential of the next great cure for cancer or any number of debilitating diseases. Those investors usually focus on the small-caps.