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TheStreet Open House

Biotech Stock Bubble Talk Deflated By Cost-Conscious Buyers

Stock quotes in this article: AMGN, ONXX, CLVS, BMRN, ALXN

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.

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