Why Ariad Pharmaceuticals Stock Soared Today

By George Budwell Markets Fool.com

What happened

Continue Reading Below

The rare blood cancer specialist Ariad Pharmaceuticals (NASDAQ: ARIA) is reportedly going to be bought out by theJapanese drugmaker Takeda Pharmaceutical(NASDAQOTH: TKPHF) for $5.2 billion in an all-cash deal that's expected to close by the end of February. Ariad's shares spiked by as much as 75% Monday morning once the deal was announced.

So what

Image Source: Getty Images.

Over the last few years, Ariad has been attempting to sell itself to a larger biopharmaceutical peer, but a deal failed to go through in the past because of management's internal valuation of the company's clinical and commercial assets. However, Takeda's need to get ahead of the forthcoming patent expiration for its top-selling blood cancer drug Velcade, along with its desire to broaden its commercial footprint outside of Japan, were apparently reason enough for the drugmaker to meet Ariad's lofty asking price in order to get a deal done this time around.

Now what

Continue Reading Below

While it's not uncommon for cancer companies to fetch stately premiums, the fact that Ariad lacks a can't miss franchise-level drug but was still bought out for 13 times its high end 2018 revenue estimate speaks volumes about the state of biotech valuations at the moment.

Gilead Sciences (NASDAQ: GILD), for instance, has often cited the industry's stretched valuations as a primary reason for avoiding a major acquisition over the past couple years -- despite the biotech's clear need to add new growth products to its line up and its ample cash reserves to do so.

Ariad's sky-high buyout price, though, may force the fiscally conservative Gilead -- and perhaps others within its peer group -- to rethink its position on the matter.With President-elect Donald Trump's proposal to lower the tax barriers to repatriate foreign profits, pharma companies could soon find themselves absolutely flush with cash, and hence, more willing than ever to cut deals -- regardless of the price. In other words, biotech valuations may be primed to head even higher, fueled by a wave of mergers and acquisitions in the months ahead.

10 stocks we like better than Ariad Pharmaceuticals
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Ariad Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.