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After Genzyme Deal, Fast Money Moves On

Sunday, 27 Feb 2011 02:37 PM

The ink has barely dried on Sanofi-Aventis SA's $20.1 billion deal for Genzyme Corp and investors are already placing their bets on the next wave of companies with potentially high returns.

OrbiMed Advisors, a healthcare investment firm that held some two million shares of Genzyme, is spreading its Genzyme money across a wide variety of healthcare sectors.

"We've been using Genzyme funds whenever we have another interesting buying opportunity. It has been going anywhere and everywhere inside healthcare," OrbiMed portfolio manager Sven Borho told Reuters.

"It went into specialty pharma, it went into some emerging markets healthcare names, HMOs, small biotechs," Borho said, declining to name specific companies as some purchases are still in the works.

Companies viewed as strong takeover targets and mid-size biotechs are likely to be among the prime beneficiaries as Genzyme funds are reallocated into other investments, fund managers and industry experts said.

While Sanofi itself and the handful of remaining large biotechnology companies will inevitably see some of that money, smaller companies with new products or promising drugs in later stage development look to be a better bet for investors.

"Companies like Human Genome Sciences or Dendreon or Vertex Pharmaceuticals that are on the verge of cashing in on all the R&D spending they've been doing," Morningstar biotech analyst Karen Andersen cited as examples.

"These are companies that qualify as midcap even though I consider them more emerging biotech stars."

Those companies are also high on most lists of potential buyout targets because they have drugs with multibillion-dollar sales potential either awaiting approval or recently launched. Larger companies have shown a willingness to pay a high premium to acquire new drugs as their research departments disappoint and key products face competition from cheap generics.

Perceived takeout targets may already be seeing some of that Genzyme money.

"A large part of the Genzyme dedicated money is possibly already out of it because arbitrage players have been very heavily in the stock and they are looking for the next arbitrage play," Borho said.

"Where a lot of the money has been flowing is into the midcap momentum names like Regeneron, Alexion and United Therapeutics."

Mark Schoenebaum, an analyst at ISI Group, said arbitragers are also seeking takeout targets beyond healthcare.

NOT TOO BIG, BUT NOT TOO SMALL

A recent study would suggest that for investors looking to stick with biotechs, the biggest players are unlikely to yield the biggest payoff, despite their large revenue streams.

"The companies with the $2 billion to $10 billion market cap are the sweet spot to look at based on history," said Michael Becker, chief executive of MD Becker Partners, a biotechnology advisory firm.

MD Becker studied the performance of large, midcap and smaller biotechs after Roche Holding AG's $47 billion deal for Genentech in 2009 to see who most benefited from new inflows.

All three groups had their winners and losers, but more than half of those in the middle group outperformed the Nasdaq Biotech Index .NBI between the March 2009 close of the Roche/Genentech deal and the middle of this month.

Among the highest flyers were Warner Chilcott Plc (up 241 percent), Alexion Pharmaceuticals, Shire Plc (up 142 percent) and Illumina Inc (up 98 percent).

"The money has to find a new home," Becker said.

While some will flow into the largest companies or out of healthcare, "selectively companies in that $2 billion to $10 billion market cap range will benefit and a key example of that would be a company like Biomarin," he added.

Biomarin Pharmaceutical Inc has a market value near $3 billion and focuses on drugs to treat rare diseases. Some see it as a future Genzyme.

Back in 2009, OrbiMed put most of its Genentech money back into other biotech companies. In addition to spreading its money around several sectors this time, OrbiMed is also sticking with Genzyme in its new home.

"We bought some Sanofi shares because we think the prospects of the new Sanofi are quite interesting. We don't think that Sanofi overpaid (for Genzyme)," Borho said.

As part of the Genzyme deal, the companies agreed on a contingent value right (CVR) that would pay Genzyme shareholders up to $14 more per share based on experimental multiple sclerosis drug Lemtrada hitting certain commercial milestones. Those CVRs will trade independently.

"The CVRs are actually interesting as well. I think they are quite undervalued," Borho said.

Michael Obuchowski, chief investment officer at First Empire Asset Management, which holds just under $1 million worth of Genzyme shares, is eyeing companies outside of healthcare.

"One of the companies I do not own and have followed for a while is Oracle. It is certainly attractive, highly profitable and they have been executing pretty well," he said.

Among the largest biotechs, Obuchowski favors Celgene Corp and Gilead Sciences Inc. "If I want to find a (large cap) company that can grow solid double digits, that has attractive valuation, and is a pharma or biotech company, that's about it," Obuchowski said.

But OrbiMed's Borho said the remaining largest biotechs, including Biogen Idec Inc and Amgen Inc, are out of favor and unlikely to see much Genzyme money.

Morningstar's Andersen recalls a meeting with Roche at which management expressed disappointment that more Genentech money had not found its way back to the Swiss drugmaker.

But she believes Roche, now one of the biggest players in biotech, could benefit this time around.

"If you're someone whose invested in Genzyme because you thought they had these nice stable cash flows from their rare disease business, then you might be interested in Roche," she said.

© 2017 Thomson/Reuters. All rights reserved.

 
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The ink has barely dried on Sanofi-Aventis SA's $20.1 billion deal for Genzyme Corp and investors are already placing their bets on the next wave of companies with potentially high returns. OrbiMed Advisors, a healthcare investment firm that held some two million shares of...
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Sunday, 27 Feb 2011 02:37 PM
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