Takeover speculation can be wonderfully curative for a languishing stock price.
Take a look at Biogen (BIIB) - Get Biogen Inc. Report , which was underperforming (on a year-to-date basis) every large-cap biotech stock at the end of June, with the exception of Alexion (ALXN) - Get Alexion Pharmaceuticals, Inc. Report . At Tuesday's close, Biogen was the group's top-performing stock, slightly ahead of Amgen (AMGN) - Get Amgen Inc. Report .
Speculation about Biogen being a possible acquisition candidate has been biotech water cooler chatter for a while now, but the talk escalated when CEO George Scangos stepped down on July 21. On Tuesday, The Wall Street Journal reported Allergan (AGN) - Get Allergan plc Report and Merck (MRK) - Get Merck & Co., Inc. Report had reached out to Biogen separately about a possible takeover. (Subsequently, CNBC said Allergan is not interested.) Allergan is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio.
So, in just over month's time, fueled by takeover talk and rumors, the value of Biogen's stock rose by $100 per share, or 47%, to $330 per share. In that same time period, Biogen added roughly $24 billion to the company's market cap, which now stands at $75 billion.
The big bounce in Biogen's valuation over the past month would likely bake in a good chunk of the upside premium that could come from any takeover offer. That hasn't stopped some sell-side analysts from fantasizing about acquisition prices of $400 or more in a bevy of research notes.
Chris Raymond at Raymond James told clients Tuesday night that Biogen could be sold for $500 per share or more! (I want some of whatever Chris is drinking.)
Biogen could be packaging itself for a sale. The signs are there -- the recent executive departures (CEO included), the planned spin-out of the hemophilia business, and overall corporate cost cutting.
But is the company an attractive takeover target at its present valuation? That's a tough call.
Biogen has a market-leading multiple sclerosis drug franchise pulling in $8.5 billion in annual revenue, but growth has slowed to single digits, helped a lot by regular price increases. The intellectual property securing the company's crown jewel, Tecfidera, is under legal attack by Kyle Bass and Forward Pharma (FWP) - Get Forward Pharma A/S Report . If Tecfidera's patents are overturned, Biogen's multiple sclerosis business becomes a lot less valuable.
Any Biogen suitor would be making a big-time and risky bet on Alzheimer's. The beta amyloid-lowering drug aducanumab sits atop Biogen's pipeline chart, and is currently in a pivotal phase III study. A successful, disease-modifying Alzheimer's drug could deliver $10 billion or more in annual sales, but historically, the probability of success for Alzheimer's drugs has been close to zero.
The aducanumab study results aren't expected until 2017 or 2018, but Eli Lilly's (LLY) - Get Eli Lilly and Company Report solanezumab, another beta amyloid antibody, is currently in its own phase III study with results expected in December. The outcome of the solanezumab study will either boost or shatter the confidence and potential value of Biogen's aducanumab.
How would a Biogen buyer possibly deal with the extreme Alzheimer's risk? Through the use of contingent value rights, or CVR -- basically a call option on the Alzheimer's drug issued by the buyer of Biogen to the sellers. Simply explained, Biogen's buyer would carve out the potential value of the Alzheimer's drug into a separate deal. If the drug eventually worked, the sellers would get more money. If the drug failed, they'd get less.
A CVR makes negotiations for an acquisition more complicated. Given the high stakes and uncertainty around an Alzheimer's drug, a CVR tied to a Biogen takeout would be especially challenging to figure out.
Biogen is a credible takeover target but the risks are significant.
Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.