BioMarin Pharmaceutical Inc. (BMRN)

[fearfrost]

Five Firms Big Pharma Should Buy Next
Wednesday April 25, 7:00 am ET
By Karen Andersen

Pharmaceutical companies still see riches in biotechnology. AstraZeneca's (NYSE:AZN - News) $15.6 billion deal to acquire MedImmune (NasdaqGS:MEDI - News) is only the latest example of their continuing willingness to pay high premiums (in this case, a 53% premium to where MedImmune was trading before it put itself up for sale) for future growth.

At Morningstar, we've seen various themes to these drug stock take-outs over the past year. In some cases, the larger firm in a collaboration takes out the smaller partner, in an effort to claim full rights to future profits; Amgen's (NasdaqGS:AMGN - News) acquisition of antibody expert Abgenix and Lilly's (NYSE:LLY - News) acquisition of Cialis-driven ICOS are both good examples of this behavior. Sometimes a firm looks to expand into new therapeutic areas, such as when HIV expert Gilead (NasdaqGS:GILD - News) bought cardiopulmonary firm Myogen, Merck (NYSE:MRK - News) bought Sirna Therapeutics for its innovative new RNA interference technology, or when Abbott (NYSE:ABT - News) bought Kos Pharmaceuticals for its cholesterol drug pipeline. In other cases, firms attempt to ward off slowing growth by injecting new products into established businesses, like Genzyme's (NasdaqGS:GENZ - News) purchase of AnorMED to supplement a sluggish transplant segment, or Shire's (Other OTC:SHPGF.PK - News) purchase of New River to fend off generic competition to its attention deficit franchise.

Given the current interest in scooping up biotechs at healthy prices, we've decided to use clues from past acquisitions to provide a list of firms that represent potential future targets. To start, we've created a screen that filters out any biotechs with market capitalizations of less than $250 million (firms that tend to be extremely volatile and speculative) and greater than $15 billion (firms that are difficult for even large pharmaceutical companies to afford). We've also screened for biotechs that we don't think are overvalued by the market--that is, firms that have received a Morningstar Rating of at least 3 stars. We were left with 26 firms, which we've qualitatively culled into a list of what we see as the five most likely future targets, as shown in the table below.

To see the related table, click here:

http://news.morningstar.com/article/article.asp?id=190410

As we discussed in our most recent quarterly review of the health-care sector, we don't typically factor acquisition speculation into our fair value estimates, but instead focus on what we think the firm's products and pipeline are really worth in the long run. Below, we've highlighted why we think these five firms could create value for prospective buyers, including excerpts from company reports.
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BioMarin Pharmaceutical (NasdaqGM:BMRN - News)
BioMarin's rare disease expertise has earned it a narrow economic moat, and strong prospects for current products and its late-stage pipeline could make it a desirable target for partner Genzyme or other firms looking to gain exposure to this niche. While share prices fell in February due to poor hypertension data for lead pipeline candidate Phenoptin, we still think the drug has excellent prospects to treat the rare disease phenylketonuria, and it could be on the market by the end of the year. As I mention in my analysis, "BioMarin should enjoy steady sales growth from its innovative, life-saving treatments, and we expect it is just a matter of time before this biotech turns a profit."