Pharmasset Buyout Brings To Mind M&A Upside for Biotech Stocks: ETF’s and Funds Lead the Way

Gilead (GILD $35) stepped up with a huge buyout of Pharmasset (VRUS $134.21) driving the stock up 89% over Fridays’ close and 519% YTD! Pharmasset has no revenues but has a three potential hepatitis-C treatments in clinical trials that could become a preferred treatment as oral drugs. Gilead (GILD) is a leader in HIV treatment with its combo drugs Atripla and Truvada and Q3 revenues were $2.12B and earnings of $741.1M. Gilead shares were down 12% to $35.18. Vertex Pharmaceuticals hepatitis (HCV) drug  Incivek was approved last spring and had revenues of $420M in Q3. Vertex (VRTX $27.43) stock is down 2.51% . Vertex stock was at the $55 level in May 2011. According to Decision Resources the market for HCV drugs is expected to grow from $1.7B in 2010 to $16B in 2015.

Option activity in VRUS  picked up last week with good volume in December strike prices from $70 to $105. ETF’s with sizable positions in Pharmasset were strong : the IBB ($96.35) with a ~6.5% position in VRUS is up 4.35%, and the XBI ($61) with a ~3% position in VRUS is up 2.35%. Fidelity Select Biotech Fund also had a ~4% position. (See our article last week on Biotech ETF’s and Mutual Funds). Many of the major biotech funds had large positions in Pharmasset (VRUS): Fidelity, Vanguard, T.Rowe Price, Capital World, Baker Bros. and Blackrock.

On a nasty day in the market with major indices down over 2%, biotech stocks were mixed with the prospect that M&A deals lie ahead before year end. Our mid-cap index was up 0.5% and the Rayno Life Science Biopharma Portfolio is up 0.75%. Dendreon (DNDN $8.69) was added on Friday and is up 4.2% today on heavy volume. Regeneron (REGN $56.95) also captured investors’ interest with a 14% move. The market cap is $5.27B, about half that of VRUS.


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