Shire, BioMarin and the snowball effect of buyout rumors

Shire ($SHPG) is an acquisitive company with a focus on rare diseases. BioMarin ($BMRN) fits the same description. A blog post that, by its own admission, "might be codswallop," reported that the former is considering buying the latter. And those three facts combined to send the shares of BioMarin, far from a penny stock, up as much as 15% on Friday, illustrating how the biotech boom has changed Wall Street's perception of the drug industry.

Shire CEO Flemming Ornskov

It began with a Thursday evening post on the financial blog Betaville in which Ben Harrington wrote that "top sources (and I mean top)" told him Shire had approached BioMarin about a deal, retaining Morgan Stanley and Lazard as it considered bidding on the roughly $18 billion company. Then, Friday morning, Deutsche Bank analyst Robyn Karnauskas, among the sector's most bullish observers, held a conference call to discuss BioMarin's value and outlined a hyperoptimistic scenario in which the company could be worth nearly three times its current value in a year or so.

Both narratives seemed to take hold among investors hoping to get in on the next big buyout in an industry rife with consolidation, pushing BioMarin's value to an all-time high of around $132 per share.

The case for Shire acquiring BioMarin is fairly simple. Under the leadership of CEO Flemming Ornskov, Shire has established itself as a fast-growing player in rare diseases unafraid to pay big premiums, evidenced its by multibillion-dollar deals for NPS Pharma and ViroPharma. BioMarin, meanwhile, has 5 on-the-market treatments for rare ailments and a wide pipeline of new products--including what could become the first approved treatment for Duchenne muscular dystrophy--making it an on-paper fit with Shire's appetite for expansion.

But, as Citigroup pointed out in a note to investors, such a deal remains deeply unlikely, and unsourced blog posts are perhaps not the best places to get clues about impending megadeals.

Such market gossip comes and goes all the time in biotech, and more often than not it amounts to nothing, leaving would-be takeout targets to gradually give back the share value gains they amassed during the fervor. But rarely do those kind of rumors have such an effect on companies the size of BioMarin, and Friday's events will likely only fuel worries that biotech valuations are spiraling out of control, pointing to an industrywide bubble primed to burst.

- read the Betaville post

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