Language from a major company used to describe a recent acquisition, suggests to Jim Cramer there could be many more deals coming in this sector.
Earlier this week, "I sat and listened in amazement as drug giant Roche described its $8.3 billion purchase InterMune, as a bolt-on acquisition."
The use of the words "bolt-on" really intrigued Cramer.
"Typically, on a conference call, management uses the term to signal the acquisition isn't expensive," Cramer explained.
The, however, is valued at $8.3 billion and gives Roche access to a drug called Pirfenidone, a pulmonary fibrosis treatment that could potentially save more than 100,000 American lives.
In the past, describing an acquisition of such magnitude as bolt-on, would seem modest at best. Cramer, however, doesn't think modesty is the issue. Instead, he believes the language reflects a subtle but important sentiment shift, and one which is potentially investable.
Here's his line of thinking:
1. Cramer believes the InterMune acquisition stems from a growing realization among management that Roche's labs weren't developing exciting new drugs at nearly the same rate as more nimble, biotech firms.
2. Taken a step further, Cramer thinks if Roche wants a more aggressive pipeline, then rivals do, too. Therefore, he thinks it's reasonable to conclude that there could be more deals like Intermune, in which big pharma attempts to grow through a strategic acquisition.
3. And, if about $10 billion has become a comfortable amount for big pharma to spend, hence the bolt-on description, then many more companies may be in play than Cramer or anyone else previously thought.
On top of that, Cramer also says because InterMune was not yet profitable and trading at a stretched valuation, companies that might not typically be viewed as targets in the past, may, in fact be in play, if they have a promising drug in the pipeline.
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All told, Cramer thinks developments present significant opportunity.
"I can tell you what I'm going to be doing. I'm going to try and find the next Intermune. I am taking Roche's newfound, outsized description of bolt-on acquisitions as a sign that smaller companies with soon-to-be-approved drugs may be so tempting, that big pharma simply has to buy."
Given the language and the dollar amount, I think there's only one conclusion. "It's bolt-on deals galore in the biotech patch," Cramer said.
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