5 Potential Buyout Targets in Biotech - Barron's

Bristol-Myers Squibb (BMY) made a $4.5B bid for the shares of ImClone (IMCL) it doesn't already own. Roche Holdings (RHHBY.PK) made a $44B offer for the shares of Genetech (DNA) it doesn't own. Both targets want the bid prices raised. Barron's Lawrence Strauss says these are just the two latest examples of an increasingly common biotech strategy to use mergers, buyouts, and takeovers as a way to fatten product pipeline (and profit) by acquiring promising and pre-tested biotech drugs.

Big Pharma is feeling the need to find new products with blockbuster potential as several important drugs approach the expiration of their patent protection. This, of course, will open the market to cheaper, generic versions of the drug, cutting into Big Pharma profit. Leading the pack will be Pfizer's (PFE) cholesterol drug, Lipitor, which generated more than $12B in global sales last year. Other companies with expiring blockbuster patents include Wyeth (WYE), Merck (MRK), and Eli Lilly (LLY). Jay Markowitz, a T. Rowe Price health-care analyst, notes "a number of companies are facing a significant patent cliff, where billions in revenues are going to disappear."

Many large pharmaceuticals have lots of cash on their balance sheets, making acquisitions an affordable option. The weaker dollar has also made U.S. companies look more attractive to biotech and pharmaceutical firms abroad. Another major factor is the difficult process of receiving FDA approval. This lengthy and grueling process provides an additional incentive to buy companies that have already received FDA approval on their drugs, ensuring smooth pipeline production going forward.

Potential buyout targets to keep an eye on: Amylin Pharmaceuticals (AMLN), United Therapeutics (UTHR), Alexion Pharmaceuticals (ALXN), Onyx Pharmaceuticals (ONXX), Vertex Pharmaceuticals (VRTX).

Comments

[Prudent Man...:]

The patent expiration problems of large pharma are well know. This article would have added value if the specific reasons why the target companies were potential takeovers would have given substance to it.

In this day where primary research is virtually missing and everyone seems to be peddling their portfolio, it would be refreshing to get sound reasoning backed by substantive facts rather than mere opinions which are worth exactly what you pay for them.

2008 Aug 17 11:22 AM

[in4thelonghaul:]

I would add to that list BIIB...considering the absurd sh/pr hit which Biogen has taken on Tysabri and the fact that Carl Icahn is accumulating. ELN is of course caught up in the same recent events and is also a prime target for acquisition by either Wyeth (WYE) or Biogen Idec (BIIB).

Add Dendreon (DNDN) to the list if their interim analysis of Provenge (October estimate) for end-stage prostate cancer is sufficiently positive to allow for immediate trial cessation and refiling of BLA...I would give them roughly a 75% chance of sufficient success at the interim btw.

2008 Aug 17 02:13 PM

[nova:]

Unfortunately, American Big Pharma companies became more marketing organizations rather than new drug development companies.

It appears that, at the time when companies like ImClone are developing new super-drugs like Erbitux capable of savings thousands of lives, the Wall Street green-mailers, speculators, extortionists and biotech companies stock price manipulations greatly endanger new drugs development process doing great disservice to people all around world.

The above article is discussing how Big Pharma, with their zillion-dollars executives compensation packages, has failed in development of drugs and now is in a process of ripping off the most innovative and successful biotech companies and its shareholders.

These Big Pharma acquisition activities add nothing to new drug development but greatly endanger so many lives that could be saved by new drugs.

2008 Aug 17 05:35 PM

[SmallCapBio...:]

There are many small and microcap medical companies that many of these large pharmas could buy without sneezing. One is DCTH which could bring new life to drugs new and old.

2008 Aug 17 07:08 PM

[wdhalgren:]

Vertex is possible depending on how the competition with Bocepravir plays out. Still looks to have a first to market advantage, and follow on versions might have better dosing schedule.

UTHR is too expensive, unless bought out by another biotech like GILD using stock. PAH is becoming a very competitive space, and cost competition is coming. UTHR benefitted early on from a lack of choices, but their earnings growth rate is topping out now.

ALXN, too expensive for cash buyers, plus a political nightmare in the upcoming budget wars since Soliris may be the most expensive drug ever (nearly half a million dollars a year). What pharma wants that headache?

ONXX, once again expensive for a cash acquirer, and the industry pipeline is bulging with small molecule kinase inhibitors at practically every step in the tumor growth pathways. Patent life is irrelevant for Nexavar, better drugs are available now and more will be along soon.

AMLN, possible, but Byetta has been expensive to promote and slow to gain a significant foothold. Exenatide LAR will probably face the same challenges, making the ROI questionable for any bid that includes the substantial acquisition premium expected by the market these days.

2008 Aug 17 08:58 PM

[turd furgeson:]

NOVA, I couldn't have said it any better. Bravo!

2008 Aug 18 03:16 PM

[Anton Johnson:]

Years ago, I thought that I could divine the future of the biotech companies. Account damaging stock gaps from failed “sure thing” phase–three studies and unexpected drug side-effects required a reassessment of how to successfully invest in the sector. Fortunately, before long I realized that foretelling a novel compound’s efficacy and long term safety was beyond my prophetic ability.

Most industry group sub-sectors have a high price change correlation among component companies; however this is not the case with biotechnology. This characteristic suggests that a shotgun approach will be a logical path to success.

The biotech industry in aggregate creates many successful marketable compounds, with ensuing product profits much greater than the sum of cash burn, and long safety issues with resultant litigation expenses, etc. Thus, a more effective way to gain exposure is by using an eight stock or greater basket, or an ETF; select an ETF carefully though, as company weighting methodologies can vary greatly among ETF managers. For example, currently BBH has a huge 39.5% allocation to DNA, whereas XBI has a maximum of 6.1% in any one company. Also, as you would expect, with diversification we can expect a less-wild ride; using daily closing price, the sixty-day standard deviation of XBI is 25.7%, whereas the same for BIIB is 83%, and for ELN a gut-wrenching 209.2%.

2008 Aug 18 07:28 PM

[eli72:]

Everyone here is overlooking JAVELIN PHARMA (JAV). AT 2.75 and a market cap of 160 million dollars it can and will eventually be bought at a very healthy premium to current value. Company has commercialized AND has 3 Phase III products ( 3 - that's right). Still has close to 50 million cash on the books ans 2 NDA's to be filed in 2009. By the way IP property and patents alone worth 110 million.

2008 Sep 03 11:40 PM

[jarcom:]

Nova is right. Big Pharma is all about marketing. It began in the 70s when FDA approved patient package inserts and later went for direct to consumer advertising. Today, Pharmaceuticals ad budgets are the largest share of the advertising universe. The ethical drug industry died with the Vietnamese war and the most innovative companies are small biotechs. If they are bought by big pharma, they'll shrivel and die.

2008 Sep 04 11:47 AM