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Biotech buyout binge
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December 7, 2001: 4:51 p.m. ET
A wave of mergers in the biotech sector this week has investors wondering who’ll be next.
By Paul R. La Monica
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NEW YORK (CNN/Money) - Forget about mapping the genome, stem-cell research and cloning. If you really want to know where the action is in the biotech sector it's with good old-fashioned drugs.
Three biotech deals were announced this week and in each case the buyers agreed to acquire a mature biotech company with drugs that are either already on the market or should be soon.
On Monday, Medimmune agreed to buy Aviron, which makes FluMist, a nasal spray to treat influenza. On the same day, Cephalon purchased Lafon, a privately-held French company that markets Modiodal, a sleep disorder drug (sold in the U.S. under the name Provigil). Finally, Millennium Pharmaceuticals wrapped up the feeding frenzy by scooping up Cor Therapeutics, maker of Integrilin, an anticlotting drug for heart patients.
Is this the start of something big?
More deals in the pipeline?
Most biotechs are tiny research outfits, and it's tough for them to make the leap to drug king-pins. Amgen, Biogen and Genentech have done it -- but there are hundreds of others that toil in obscurity, never successfully bringing a drug from conception to blockbuster. And once a drug is developed, it's harder still to market it, having to compete with the vast sales forces employed by companies like Pfizer.
As for the big pharmaceutical companies, they covet promising new therapies as a way to boost their own earnings growth. According to a recently published study by the Tufts Center for the Study of Drug Development, the cost of drug development has skyrocketed, up to $802 million per drug from $231 million a decade ago. As research and development costs continue to escalate, it makes sense for larger pharmaceutical companies to acquire new therapies, rather than develop them themselves.
Hence, the urge to merge.
"There is a trend here. The most sought-after companies will be those that either have drugs on the market or those in late-stage testing with significant sales potential," says Eric Schmidt, an analyst with SG Cowen.
There's another trend here too: Two of the acquirers in this week's deals paid substantial premiums. (Since those deals are being paid for with the stock, the value of the acquisitions are constantly changing.)
Based on Friday's closing prices Medimmune (MEDI: up $0.11 to $44.90, Research, Estimates) is valuing Aviron (AVIR: up $0.24 to $47.67, Research, Estimates) at $48.15 a share, a 30 percent premium to its closing price on Nov. 30, the last trading day before the deal was announced. Millennium's (MLNM: up $0.81 to $29.22, Research, Estimates) stock swap values Cor (CORR: up $0.88 to $28.00, Research, Estimates) at a whopping 42 percent premium to its Dec. 5 closing price. "Companies are willing to pay a lot for novel products that have the potential for a strong franchise," says Linda Miller, manager of the John Hancock Biotechnology Fund.
A list of takeover targets
With that in mind, who might be the next biotech companies to be acquired? Mark Monane, an analyst with Needham & Co, says that Scios, is a possible target. The company's Natrecor drug for congestive heart failure was approved by the FDA in August and is currently being used in 600 hospitals. Scios expects sales of Natrecor to come in between $10 and $12 million for 2001 and between $50 and $55 million in 2002.
Investors should be aware, though, that Scios (SCIO: up $0.52 to $28.75, Research, Estimates) is not expected to be profitable until the fourth quarter of 2002 and the company has only $70.9 million in cash. But while this may make the stock a riskier bet, especially since the stock has already had a nice run as of late, rising 74.8 percent since September 21, it may actually make Scios more likely to look for a buyer.
Miller says that the companies most likely to sell out will be the ones that are pinning their hopes on one product and have enough cash to last for only a little while. "One product can get you on the map but it doesn't necessarily keep you on the map," she says.
CV Therapeutics
Schmidt says another biotech that fits this mold is CV Therapeutics, which has an anti-angina drug, Ranolazine, in late-stage clinical testing. CV Therapeutics recently reported positive trial results for the drug, which works by getting the heart to burn glucose instead of fat in order to reduce the amount of oxygen that needs to be metabolized in the body.
As a result, the stock has surged 49.4 percent since the positive test results were reported in November. CV Therapeutics (CVTX: up $1.46 to $58.80, Research, Estimates) is currently not profitable and it's not expected to earn money next year or in 2003 either. The company does have $353.5 million in cash, and it priced a $131 million stock offering this week so it appears to be in no danger of running out of cash soon. Nonetheless, the encouraging trial results for Ranolazine may have suitors come a-calling. "I wouldn't be shocked if someone was interested in acquiring them since there is real tangible value," Schmidt says.
Genta
One more biotech company that could be scooped up is Genta, according to Monane. Genta has developed an anti-cancer compound called Genasense that is now undergoing late-stage clinical testing. Analysts do expect the company to break even in the quarter ending March 2002 and post a small profit in the next quarter. Genta (GNTA: up $0.40 to $13.75, Research, Estimates) had only $34 million in cash as of the end of September but the company did raise $28.6 million through a private placement of stock last month.
Monane says the company is actively looking for a partner to help market Genasense. That could lead to an acquisition, or at the very least, an equity infusion from a larger biotech company or pharmaceutical firm -- and that wouldn't be a bad thing either.
Eli Lilly (LLY: down $0.67 to $81.65, Research, Estimates) agreed in August to purchase the rights to an anti-cancer drug developed by Isis Pharmaceuticals for $200 million. Isis's (ISIP: down $2.77 to $19.99, Research, Estimates) stock has soared 125.8 percent since that deal was forged. And Bristol Myers Squibb (BMY: up $0.18 to $54.00, Research, Estimates) announced in September that it would buy the rights to ImClone Systems' anti-cancer drug for $1 billion as well as purchase a 20 percent stake in ImClone for an additional $1 billion. ImClone's (IMCL: up $1.32 to $71.77, Research, Estimates) stock has shot up 40.9 percent since then. 
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TAKEOVER CANDIDATES
