Are we about to see a biotech takeover binge?

Kite Pharma (KITE) was a Brush Up on Stocks stock suggestion singled out in early May, 2017 because it came up very strong in my system for selecting biotech names.

Gilead Sciences (GILD) liked it too. It announced plans to buy the company for cash in late August . My subscribers are now up 150% or more on May purchases of Kite Pharma. I first suggested KITE in July 2016 at around $48. It is up 270% since then, as Gilead is offering $180 per share.

I am pretty deep into biotech in my stock letter because my system of selecting stocks works well there.

For example, the Brush Biotech 5, a select group of my favorite biotech stocks highlighted as buys on August 14, 2017, were up 17.2% by September 6, compared to 8.5% for the IBB biotech ETF.

I think I have at least another half dozen potential buy out candidates. Will they get taken over for nice premiums?

Who knows. But the conditions are there for more buyouts in the space.

Big biopharma companies like Gilead, Pfizer (PFE), Merck (MRK), Bristol-Myers Squibb (BMY), and GlaxoSmithKline (GSK) have a need to fill out their pipelines as patents roll off. They have lots of cash. The biotech space has been weak of late, on concerns about “drug pricing” action in Washington, D.C. So the potential targets look cheaper.

One thing missing is tax reform. If politicians ever get around to tax reform that makes it easier for U.S. companies to bring home the huge stash of cash they have parked abroad, that will stimulate a biotech takeover binge. It would increase the firepower of large biopharma companies considerably, since they have lots of money abroad.

To get this done, politicians need to stop their bickering and get down to work. Will they? We can only hope. Time will tell.

Meanwhile some companies, like Gilead, won’t wait. So I expect a few more takeovers even without tax reform. Picking buyout targets is tough, and it should never be the sole reason to own a stock. Fortunately, the biotech companies I have been suggesting in my stock letter also have rich product pipeline potential, and proprietary technology which can spawn many products. So they should do well sooner or later regardless.

Whatever Washington, D.C. does, and whatever takeovers happen will only be an extra sweetener. But if the sweetener bring 150%-270% gains in a matter of months or even years as with Kite Pharma, I’ll take it.

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