Dintaurran (< 20)

After the FACT. Why I didn’t buy Facet biotech and why I should have…maybe.

March 13, 2010 – Comments (0) | RELATED TICKERS: FACT.DL , ABT , BIIB

About a week before Facet Biotech (FACT) was acquired by Abbot Labs (ABT) for a 70% premium, I stumbled across the company and considered buying shares.  I saw that they had almost $300 million in cash and a market cap of only about 414 million.  However, I then made the “mistake” of looking at their earnings and saw -$5.92/share.  Immediately, I quit researching the company reasoning even $13/share in cash doesn’t last very long when you’re losing almost half that in a year.

Fast forward a week and I am quite annoyed I missed out on the quick 70% gain.  I wondered, what did I miss and what if anything can I learn from this?  After doing a little more basic research, I discovered FACT had a recent buyout offer of $17.50/share from Biogen (BIIB) that they turned down.  This effectively put a floor under the stock price and made future substantial declines unlikely, at least in the short term.

FACT also had significant institutional ownership and was 14% owned by Seth Klarman’s Baupost group who supported the rejection of the Biogen offer¹.  Additionally, there had been recent insider buying at around $15.50/share.

So, FACT had at least four strong circumstantial positive indicators going for it:

-70% of its market cap in cash

-A recent buyout offer higher then the stock was trading at the time

-Institutional support for rejecting the buyout offer

-Insider buying within 10% of share price at the time

Still, you had to believe FACT’s drugs in development were worth more then $120 million or so.  Here, I run into a brick wall of ignorance.  How do you value drugs in development?  This is one reason I avoid investing in biotechs.  Predicting whether drugs will be approved and whether those drugs will find a market is not my forte.

I can read that, “Facet’s main drugs/assets are: “daclizumab”  a “Phase II investigational biologic” for multiple sclerosis” that’s headed toward Phase III trials, while Facet’s cancer treatments — or “oncology compounds” — are in “early to mid-stage development.²” and not have any idea whether that is worth more then $120 million.

Therefore, I conclude based on my own personal risk profile and preference for positive earnings, I should not have invested in FACT with real money.  However, it would have been a good CAPS pick based on the strong circumstantial indicators.  Also, when evaluating biotechs it sometimes pays to look past even large negative earnings and research the big picture regardless.

1.)    http://www.forbes.com/2010/02/24/enzon-facet-nws-markets-intelligent-investing-seth-klarman_2.html

2.)    http://blogs.barrons.com/stockstowatchtoday/2010/03/10/abbot-bids-66-premium-for-facets-drugs/?mod=barrons_msnhttp://online.barrons.com/article/BL-SWB-10812.html?