Merck Paying $1B for Sirna, More Deals Likely

Pharmaceutical giant Merck (MRK) is clearly looking for ways to boost growth. It’s no secret that big pharma companies face increasing competition from generic drugs and pressure to keep rising healthcare costs in check. Small to mid size acquisitions of biotechnology companies are a solid way for companies like Merck, Pfizer (PFE), and Glaxo SmithKline (GSK) to strengthen their product pipelines.

On Monday we learned that Merck is paying more than $1 billion for Sirna Therapeutics (RNAI). It’s is quite possible that they overpaid. After all, MRK is paying $13 per share in cash, a premium of more than 100 percent over Monday’s closing price. However, overpaying by a couple hundred million dollars isn’t a big deal for a company the size of Merck if several of Sirna’s products eventually reach the market.

There is no doubt that deals like this one will continue. I am generally leery of trying to predict which firms will get taken out next. So, I would suggest that biotech investors pick stocks that have solid fundamentals, not just those that some speculate could get a bid from big pharma.

As for the pharma companies themselves, I like Pfizer at current levels ($27 per share). It trades at a discount to most of the other pharmaceutical companies and yields well over 3 percent. Pfizer has done mid size deals before and likely will do so in the future. In fact, I made a ton on a company called Esperion Therapeutics when it was bought out by Pfizer for $1.3 billion.

With a hefty yield and a below-market multiple, conservative, defensive, income-oriented investors should take a look at PFE. A recent analyst downgrade has knocked the stock down a buck.

Full Disclosure: I own shares of Pfizer personally, as do some of my clients.


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2 Thoughts on “Merck Paying $1B for Sirna, More Deals Likely

  1. David Hopkins on November 1, 2006 at 1:50 PM said:

    If you were going to invest in that space with the anticipation of another buyout a la Merck, what companies would you target?

  2. Chad Brand on November 1, 2006 at 1:59 PM said:


    Honestly, I have not done much work on small-cap and mid-cap biotechs in a long time, so I don’t have any names in mind (and don’t own any either). Sorry, just not something I’ve been focused on lately (mainly because valuing them isn’t easy), despite the fact that I believe the trend will continue.

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