Buyout Rumors Add Buzz to Three Biotechs I'm Holding
These biopharma names are gaining interest as reports land of potential acquisitions or sweetened deals.
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Volatility hit the market on Tuesday, as tensions around Greenland increased markedly as did investors’ concerns for new potential tariffs. The Nasdaq fell 2.4% and the S&P 500 dropped by 2.1%. The Dow had its worst daily performance since October. The volatility index also moved up to the 20 level for the first time in two months. Given how much dry powder I have collected thanks to covered-call positions expiring in the money in December and January, I would love to see another sharp tariff related pullback like the one that occurred in early April of last year. That doesn’t seem likely, and it feels we might get a 5% hiccup, if that. The buy any dip mentality just feels strong, despite the historically stretched valuations of the overall market.
Interestingly in the broad-based risk-off selloff Tuesday, the State Street SPDR S&P Biotech ETF (XBI) rose .9% and was one of only sectors bucking the downward tilt in the market yesterday. This exchange-traded fund consists of small and mid-cap biotech concerns and is up nearly 80% from its lows in early April. The sector is overdue for a breather. In addition, the JP Morgan Healthcare conference concluded last week, and the confab is the biggest such event of the year. The absence of news flow could result in some profit taking in the near-term.
There would be one exception to that outlook, and that would be if merger and acquisition deal volume remains highly elevated as it has been since mid-September. Several of my biopharma positions have been bolstered by buyout speculation over the past week.
Let's take a look:
Ardelyx, Inc. (ARDX) jumped 15% in trading yesterday on a report from a CNBC affiliate that it might be in talks to be purchased by Zydus Lifesciences. Neither company would comment on this speculation.
The stock had already been on a good run since late October. The trigger for the start of the rally was third quarter earnings that easily beat top- and bottom-line expectations as Ardelyx is moving to profitability faster than was the consensus view. Performance is being driven by impressive sales growth by Ibsrela, that is used to treat irritable bowel syndrome with constipation or IBS-C. Management also boosted full year guidance. If buyout rumors prove to be more smoke than fire triggering a give back of Tuesday’s rally, I will probably pick up some additional shares.
Ocular Therapeutix (OCUL) shot up briefly by 20% last Thursday on speculation that French drug maker Sanofi (SNY) was in the process of preparing an improved takeover offer to acquire this eye therapy developer. The rally, however, had the half-life of a mouse fart and the stock ended flat by the end of the day. Another good example of why I rarely, if ever, chase buyout rumors. Most fall flat. That said, Sanofi had previously approached Ocular with an offer of $16 a share late last summer. The stock currently trades around $11.50.
Finally, the shares of Organon & Co. (OGN) have been moving up smartly this week on a report that India-headquartered Sun Pharmaceutical has made a non-binding offer to acquire the company. I hope these rumors come to fruition, as this is one of the few losing covered-call holdings I have had in the sector during the huge rally in this area of the market over the past three quarters.
At the time of publication, Jensen was long ARDX, OCUL, OGN and XBI
