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You Have to Love a Lucrative 'Drug Deal'

Marc Courtenay | TheStreet.com Contributor
Thursday, 28 Feb 2013 | 1:25 PM ET
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When it comes to investments, I love to be a sleuth and uncover deals that everyone and their mother-in-law doesn't already know about. If I find a gem in a sector that's in an uptrend, all the better!

The pharmaceutical and biopharmaceutical sectors have been marching steadily higher. My personal favorite bellwether for the sector is Pfizer, which is often referred to these days as a "biopharmaceutical company." Heck, why not, and look at how the stock has been doing price-wise over the past year.

We can't help but notice Pfizer's year-over-year diluted quarterly earnings per share growth, which is stellar. No wonder it can pay a great dividend with the prospects of raising that dividend year after year. This company is on fire.

Focusing on what makes a drug company (whoops, I mean a biopharmaceutical company) great, is what Pfizer does so well: One can plainly see on its brilliant Web site its greatness defined through diversity.

Its website says: "To maximize new opportunities in biomedical research, and bring more innovative medicines to more patients more quickly, Pfizer has created two distinct research organizations. The PharmaTherapeutics Research & Development Group focuses on the discovery of small molecules and related modalities; and The BioTherapeutics Research & Development Group focuses on large-molecule research, including vaccines."

Pfizer is setting the industry standard in another important way. It has developed an enhanced commercial operating structure. Pfizer has nine diverse health care businesses: Primary care, specialty care, oncology, emerging markets, established products, consumer health care, nutrition, animal health and capsugel.

Next up is Elan, one that deserves a look after its recent brush with privately held pharmaceutical investor Royalty Pharma. Since its inception in 1996, U.S.-based Royalty Pharma has been buying pharmaceutical intellectual property.

It owns royalty interests in products such as Gilead Science's HIV drugs and Abbott Laboratories' arthritis drug Humira.

According to The Wall Street Journal's Feb. 26 article by Jessica Hodgson, Royalty Pharma disclosed that it made a $6.55 billion takeover offer for the Irish drug company Elan.

Royalty, the article reported, approached Elan on Feb. 18 with an offer of $11 a share. Elan hasn't formally responded yet, and it wouldn't surprise this analyst if the company and its shareholders turn the deal down cold.

Elan is devising its own investment plans after the sale of its stake in the multiple-sclerosis drug Tysabri, which was Elan's most successful contemporary drug. "Elan sold its 50 percent share in Tysabri to its long-term partner Biogen Idec for $3.25 billion in a deal announced February 7, retaining a royalty of 12 percent of Tysabri's global net sales for the first 12 months after the deal is completed," according to the Journal article.

Last Friday Elan announced its plans to return a wallet-pleasing $1 billion to its shareholders. Then it outlined plans to restructure approximately $600 billion in debt and focus on making acquisitions of its own from the money it gets from the sale of Tysabri.

If you're interested in an unusual drug company, Elan may be just the one for you. The leadership of the Dublin, Ireland firm recently had the following to say as part of its response to Royalty's offer, "As previously announced, in anticipation of executing and closing the recently announced Tysabri transaction, the Company's Board of Directors, Executive Management and advisers have been working for over a year on a number of strategic transactions that, should they be consummated, would be to the benefit of our public shareholders.

"Returning capital through share repurchases, diversifying business and asset risk/reward through non-traditional business structures while simultaneously capturing the long-term high margin royalty income from Tysabri will offer a compelling investment thesis for our current shareholders."

Let's look at Elan's 1-year price chart, which also shows its trailing 12-month free cash flow. You're about to see an anomaly that is partly explained by the $600 million in debt I told you about.

Royalty asked Elan shareholders in its statement on February 25 to decide if they want to remain invested in a company that will consist of cash and the Tysabri Royalty, "... while Elan's management pursues its announced strategy." They encouraged shareholders to sell their shares to Royalty for a cash amount that Royalty Pharma believes reflects the full value of Elan today. It won't be an easy decision either way.

The whole drama here reflects what an enormous prize the intellectual property and patents of the biopharmaceutical companies are worth. Right now shareholders and potential shareholders know that what they own (mainly the Tysabri Royalties) is valued for at least $11-a-share.

Now if we continue our sleuthing and find the next undervalued and overlooked biopharmaceutical company with products and patents worth a small fortune, we may be able to experience what Elan shareholders are enjoying. Might that be a company like Amarin? Stay tuned.

By TheStreet.com Contributor Marc Courtenay

Additional News: Alkermes CEO Talks Biotech

Additional Views: Cramer Smells Opportunity in Biopharma

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Disclosures:

At the time of publication, Marc Courtenay had positions the stocks mentioned.

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Disclaimer

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