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