With M&A activity finally going strong within the pharma/biotech markets, we were interested in speaking to Zacks senior pharma & biotech analyst Jason Napodano, CFA about how he sees this latest round of mergers taking shape within the overall drug industry in general.
Jason, thanks for joining us today.
No problem, my pleasure.
So the big news of late in pharma and biotech is all the M&A activity. First off, give us a rundown of some of the deals we’ve seen.
Well there certainly has been a lot of activity over the past few months. In our coverage universe alone there has been six proposed deals in July 2008. Eli Lilly (NYSE:LLY) agreed to acquire SGX Pharma (SGXP) for $64 million, ViroPharma (VPHM) has agreed to acquire Lev Pharma for $443 million, Teva Pharmaceuticals (NYSE:TEVA) will seek to acquire Barr Pharmaceuticals (BRL) for $7.5 billion, Sanofi-Aventis (NYSE:SNY) will acquire Acambis for $550 million, and just today [Thursday] Bristol-Myers (NYSE:BMY) made a $4.5 billion bid for ImClone Systems (IMCL).
And of course, the grand-daddy of all deals, Roche (OTCQX:RHHBY) is looking to acquire the 45% of Genentech (DNA) that is does not already own for $44 billion. The last deal puts Genentech’s total market value at just shy of $100 billion dollars. That’s larger than Abbott Labs (NYSE:ABT), Amgen (NASDAQ:AMGN), AstraZeneca (NYSE:AZN), Bristol-Myers, Eli Lilly, Merck (NYSE:MRK), Schering-Plough (SGP), Wyeth (WYE) and Sanofi-Aventis. Truly astonishing!
Wow! I don’t think most investors realize just how big Genentech is.
Yeah, in terms of market value, they are up there with Pfizer (NYSE:PFE) and Glaxo (NYSE:GSK). Amazing to think you can merge Merck with Schering-Plough or Bristol-Myers with Eli Lilly and it still wouldn’t be as big as Genentech thanks to this unsolicited bid by Roche.
So what are your thoughts on some of these transactions?
Well, we are pretty excited about the Genentech deal because only a few days before the announcement we published a Buy research report on the stock…
…Never shy about plugging a good call!
Never! Just don’t tell anyone I had a Sell on Barr Pharmaceuticals the day Teva announced its intentions. Anyway, so Genentech’s stock is up about 20% on the news. Ultimately, we think that Roche will even raise its bid. The deal was at $89 per share and Genentech is trading at nearly $96 right now, so if Roche really wants Genentech it will probably have to raise that bid to around $100. From an analyst point of view it is difficult to imagine a biotech world without Genentech, but Roche is a very well run company, with a long-standing relationship with Genentech, and shareholders will probably benefit even more than they have by continuing to hold onto their shares.
But it is interesting; some of the above deals are being made from positions of strength, and some out of weakness. Roche and Genentech both have pretty solid businesses. The combination clearly is being made from a strong strategic point of view. We feel that ViroPharma’s acquisition of Lev, and Sanofi’s acquisition of Acambis are both good move strategically, and are being made from a strong fundamental position.
However, as we unfortunately noted above, we had a Sell rating on Barr Pharmaceuticals when Teva announced it would seek to acquire the company for $7.5 billion. We saw Barr business as deteriorating. Unfortunately, for our call, the fundamentals got so weak that it drove the stock down to a level cheap enough where Teva could scoop the company up at a bargain. That happens often in biotech.
Bristol-Myers, a company we have a Buy rating on, nevertheless needs drugs for its pipeline. The Plavix patent expiration in 2012 is looming large and dropping in a blockbuster drug like Erbitux really helps counter the potential slow-down in 2012. ImClone also has a nice oncology pipeline and solid manufacturing assets. Plus, Bristol and ImClone already have a co-promotion relationship with Erbitux, so the deal makes excellent strategic sense.
We’ve been expecting this from Bristol for a while now. The company acquired Kosan in May 2008 as well. Bristol has been selling off under-performing assets and raising a significant amount of cash over the past few quarters specifically so it can build out its pipeline. Management is really doing an excellent job in transforming the business, and this deal fits well into the company’s “next-generation biopharma” strategy. We still really like Bristol-Myers from a long-term point of view. Smart proactive managements often lead to strong shareholder returns.
So will this M&A activity continue? Who’s next?
Well, M&A activity usually breeds more M&A activity. I liken large-cap pharmaceutical companies to a herd of cattle – they seem to just follow each other around. Sometimes they are like lemmings and follow each other off the cliff, but to answer your question, yes, I think we will continue to see a high level of M&A for the remainder of 2008. Big pharma is well-capitalized and in desperate need of drugs to fill its pipeline.
As far as who’s next, it could be anyone. The Roche bid for Genentech shows us that no one is too big to be acquired. Other large biotech firms like Biogen Idec (NASDAQ:BIIB), Gilead (NASDAQ:GILD) and Celgene (NASDAQ:CELG) could all be targets of big pharma names like Pfizer, Merck, Novartis (NYSE:NVS) or Glaxo.
However, more likely the deals will be small and strategic. The Bristol-ImClone deal opens the door to more “existing relationship” deals – meaning companies that are already working together or co-promoting drugs. That could mean OSI Pharmaceuticals (OSIP) could get a bid from Roche or Genentech, Onyx Pharmaceuticals (NASDAQ:ONXX) could get a bid from Bayer,
Amylin Pharmaceuticals (AMLN) could get a bid from Eli Lilly, or Vertex Pharmaceuticals (NASDAQ:VRTX) could get a bid from Johnson & Johnson (NYSE:JNJ). Those are just some off the top of my head. It will be interesting to watch because I think you will see a lot of activity here in the second half of the year.
Jason Napodano, CFA is a senior analyst covering the pharmaceutical and biotechnology industries for Zacks Equity Research.