Why 2011 Could Be a Big Year for Pharmaceutical M&A

by: VFC's Stock House

Just a couple of weeks after Gilead Sciences (NASDAQ:GILD) announced that it would be raising the prices of its leading HIV drugs, the company issued first quarter earnings numbers that were significantly below analyst expectations. The two events are most likely largely unrelated, however, as Gilead has in the past been known to raise the prices of some of its leading drugs, after they've been on the market for a while.

That said, since the earnings came out as an analyst miss just a short time after the price increase was announced, it might be safe to assume that Gilead is looking to make up some ground on lost revenue. During the first quarter, the lost revenue is being largely attributed to the sharp global decline in sales of Tamiflu, from which Gilead receives a royalty.

Generally, the threat of a worldwide flu pandemic would be viewed as an entirely negative event, but sometimes humanity and money conflict, as investors of Gilead now know. Since this flu season brought the threat of a pandemic, governments had no reason to buy Tamiflu in bulk, and Gilead's share price suffered in turn with a 4% drop after the first quarter earnings were announced.

That said, the signs were not entirely negative for Gilead during the most recent earnings period. Product sales, although down from the fourth quarter of 2010, were up on a year-over-year basis. Total revenue, however, was still down.

Analyst predictions had Gilead realizing revenue of just over two billion dollars for the quarter. The earnings miss, and the rise in prices of the company's HIV product portfolio, just emphasizes the current mood of M&A in the pharmaceutical and biotech sector right now, in my opinion. The fact that the sharp decline in sales of one product, in this case Tamiflu, can throw damage to the tune of a 4% one-day share price decline for a company with a market cap of over thirty billion dollars is telling. The vulnerability is there, even for the big dogs.

To take it a step further, in order to attempt to make up for those lost earnings, the company is raising prices on other popular products, like HIV medications. It's now the patients (who may or may not be able to afford it) and insurance companies who will offset the big pharma losses by paying more for their drugs. That's after they've been 'hooked', so to speak, in order to make sure that big pharma can take care of the shareholders and alleviate a sharp decline in share prices.

Make sense? No longer is medicine solely about taking care of the sick, it's more and more becoming about taking care of investors and shareholders. Let's be honest, not a shareholder of GILD was not hoping for another flu pandemic this year to keep those tamiflu sales up, even though the flu pandemics lead to unnecessary deaths and suffering.

Granted, there's more to the Gilead story than a simple drop in Tamiflu sales, but the point has been made: Even the big dogs are vulnerable. That's why, in my opinion, there's such a push right now for the big dogs to scoop up small pharmaceutical or biotech companies that can provide an instant, late stage boost to their pipelines. Doing so naturally dilutes the risk of a company relying too heavily on one product.

Amarin Corporation (NASDAQ:AMRN), for instance, has significant big pharma interest after announcing the positive results of two Phase III trials for its lead product AMR101 over the last few months. Given the fact that AMR101 will, if approved, enter a multi-billion dollar market, the long term sales potential of the product could instantly provide a boost to big pharma. Especially since many popular brand-named drugs will be coming off patent over the next five years. With a cash reserve worth billions right now, could Amarin be a fit for Gilead? Could be.

Another large pharmaceutical company that has recently mentioned the intent to look for good deals in the M&A market is Novartis (NYSE:NVS). That company may not have to look too far as it already has its hands in the dealings of two small companies that are primed for a buyout.

Novartis is the commercial partner of Vanda Pharmaceuticals (NASDAQ:VNDA), whose schizophrenia drug Fanapt just posted an 80% sales increase on a quarter-over-quarter basis. Since Novartis shares Fanapt revenues with both Vanda and Titan Pharmaceuticals (NASDAQ:TTNP), there might be interest to just all-out purchase the entire revenue stream.

Vanda is essentially a 'what you see is what you get' company, but Titan has Probuphine in late stage trials and a plethora of potential with the ProNeura drug delivery technology. Apricus Biosciences (NASDAQ:APRI) and Spectrum Pharmaceuticals (NASDAQ:SPPI) are also both late-stage companies with products, revenue and pipelines available to immediately boost the value of an acquiring company.

Even the little guys are getting in on the M&A craze.

RXi Pharmaceuticals (NASDAQ:RXII) recently purchased Apthera, Inc. for its developmental stage cancer product and Clinical Data was recently gobbled up by Forest Labs.

It's possible that Gilead will rebound next quarter, as the CEO reiterated its estimate for total sales this year of right around $8 billion in the quarterly conference call. But the damage, although possibly just temporary, is already done. Even large pharmaceutical companies can be vulnerable to a reliance on one big seller over the short term, which boosts the immediate need for M&A to take care of business over the long term.

Biotech could be a booming business for 2011, and a large reason for that is that big pharma is on the prowl. Keep an eye out for the M&A.

Disclosure: I am long APRI, TTNP.