Stock Picks: MEDX Up; SNDK Down

Shares of Medarex (MEDX) shot up more than 88% in Thursday morning trading after drug giant Bristol-Myers Squibb (BMY) agreed to buy the company for $16 a share in cash — a premium of more than 90% of Medarex's closing price of $8.40 Wednesday. The deal, which is valued at $2.1 billion, has been agreed to by both parties.

"We believe that this combination with Bristol-Myers Squibb, a global leader in oncology, provides an excellent opportunity to realize the full potential of Medarex's development portfolio and our UltiMAb(R) technology platform through a transaction which also provides an attractive valuation for our shareholders," said Howard Pien, chairman and chief executive officer of Medarex in a statement.

“The companies also share a collaboration on the development and potential commercialization of ipilimumab, an immunotherapy that is currently in Phase III trials for both metastatic melanoma and hormone-refractory prostate cancer," said Thomas Weisel Partners analyst Stephen Willey in a July 22 report. Willey said the acquisition will also give Bristol-Myers Medarex's antibody humanization (UltiMAb) and antibody-drug-conjugate platforms, as well as bring in royalties from Johnson & Johnson (JNJ) and Novartis (NVS) for the company's recently-approved antibodies.

“Although we think Bristol had to pay up for this acquisition, Medarex's technology should help Bristol boost its exposure to biologics,” said Morningstar analyst Lauren Migliore in a July 23 note.

For Medarex shareholders, this is the second wave of good news in just a few weeks. Last month, Medarex shares jumped 13% after the Mayo Clinic declared that three prostate cancer patients who received ipilimumab were cancer-free.

Bristol-Myers Squibb’s tender offer of $16 per Medarex share will last for around 30 days beginning on or about July 27, says Jeffrey Loo, a research analyst at Standard & Poor’s. (If it was a stock-for-stock deal Medarex shareholders would get Bristol-Myers shares once the acquisition was closed.)

Bottom line: Sell
Medarex’s stock has nearly doubled, now hovering close to Bristol-Myers' offer price. At this point , the stock probably won't go much higher than this.

Shares of flash memory maker SanDisk (SNDK) fell more than 12% in midday trading Thursday after the company said it remained cautious about the third quarter even though it recorded surprisingly strong results during the second quarter.

After the market closed Wednesday, SanDisk reported net income of $53 million, or 23 cents per share, compared to a loss of $74 million, or 33 cents per share, in the year-ago quarter. The company's earnings far surpassed analysts' expectations of a loss of 16 cents per share, according to Thomson Reuters.

Revenue during the quarter hit $731 million, an increase of 11% from the prior quarter, but down 10% on a year-over-year basis. In a statement, SanDisk chairman and CEO Eli Harari said that the company’s return to profitability was “driven by increased pricing, higher royalty revenue, and strong execution.”

But during a conference call following the report, Harari pointed out that second quarter profitability isn’t likely to return in the near term. “In the third quarter, we expect demand for our products to grow at a modest pace,” he said. He said the company’s inventory remains high and the company may have to embark on cutbacks late in the year or early next year if a pickup in holiday sales fails to materialize. SanDisk projected that total revenue for the third quarter would be between $725 million and $775 million; analysts, on average, were forecasting revenue of $776 million.

“The key to returning to sustainable profitability is for the industry supply to closely track industry demand,” Harari said. SanDisk has been hurt by oversupply of NAND flash-memory chips (which store data, songs and videos) found in cameras, cell phones and music players due in part to declining consumer demand. Harari said that large-scale investments in new NAND wafer capacity require forward visibility of strong demand from new markets and sustainable profitability, both of which “may be several quarters away.”

In May, Samsung renewed its NAND flash memory chip license with SanDisk for seven years but at a lower royalty rate. The Samsung license agreement goes in to effect mid-August, and it will start contributing to revenue in the fourth quarter.

Analyst recommendations remain mixed. “We believe SanDisk’s product transition into multi-level cell (MLC) X3 and X4 NAND flash memory technology and 32nm process technology will enable the firm to lower costs and offset price declines," Gabelli & Company analyst Hendi Susanto wrote in a July 23 report. "Furthermore, secular growth of smartphones, mobile devices and netbooks can provide upsides to the demand of NAND flash memory cards in Q3. Overall, we still see more upsides than downside risks.” Susanto has a Buy recommendation rating on the shares.

Daniel Berenbaum of Auriga USA , who has a Sell rating on the shares, disagreed. “SNDK has made meaningful progress improving its gross margin, but we find it tough to find a reason to get more positive on a consumer-focused story in the middle of a credit-driven recession," he wrote in a July 23 report.

Bottom line: Hold
Although near-term expectations remain mediocre, the company is likely to see profits grow once the recession ends and consumer demand for electronics returns.