Big Pharma's biotech strategy: Buy it
A European deal stirs the search for biotechs with hot pipelines but weak finances.
By Aaron Smith, staff writer

NEW YORK ( -- Question: You are a big, behemoth drug company with a maturing set of products, little in the way of new research horizons, and generic competition nipping at your heals. What do you do?

Answer: Buy a biotech.


"Generally speaking, there's an increased trend in M&A in biotech," said Jason Kantor, analyst for RBC Capital Markets .The trend is driven by Big Pharma, which has "a lot of cash and an obvious need for new products," said Kantor.

German-based Merck KGaA announced plans to buy the Swiss biotech Serono for $13.3 billion on Wednesday, the same day that Pfizer (down $0.28 to $28.19, Charts) CEO Jeffrey Kindler announced plans to make his company the No. 1 biotech in the world. Pfizer is the biggest drug company in the world, but Kindler wants to improve its status as the eighth-biggest biotech.

Investors want drug makers to have robust pipelines, because it's the best way to ensure future sales. Large drug makers like Pfizer and Merck have traditionally developed their drugs in-house through R&D, but small biotechs with promising pipelines have become tempting targets. The smaller companies typically lack the marketing brawn of the industry leaders, and having a large, well-trained sales force is crucial to bringing in the revenue.

"It's a key strategy for Merck," said Janet Skidmore, spokesman for U.S.-based Merck (down $0.07 to $41.87, Charts), a separate company from the drug maker that bought Serono. "We are looking to complement the internal research at Merck with the great biomedical research that's taking place outside, all over the world."

(Merck is based in Whitehouse Station, N.J. and Merck KGaA is based in Darmstadt, Germany. They started as one drug maker, but the U.S. and German divisions split during World War I, and have remained separate ever since.)

Just this May, the U.S.-based Merck completed acquisitions of two biotechs, Abmaxis and GlycoFi. In 2004, Merck bought Aton Pharma for its experimental lymphoma treatment Zolinza. In 2001, Merck bought Rosetta Inpharmatics for its genetic profiling technology.

Earlier this year, before Kindler took the top job, Pfizer bought the biotech Rinat Neuroscience.

Be careful what you wish for

Some analysts believe that Bristol-Myers Squibb (down $0.25 to $24.64, Charts) could be the next take-over target in the U.S. Bristol-Myers is not a biotech, but it bought into biotech ImClone Systems in 2001, and that's a big part of the reason why the company is in such rough shape.

A possible acquisition of Bristol-Myers, America's fifth-largest U.S. drug maker, has been the subject of considerable speculation, mostly because the interim CEO, James Cornelius, was the interim leader of the medical device maker Guidant when it was sold to Boston Scientific (down $0.12 to $16.38, Charts) in 2005. Cornelius took Bristol's helm upon the Sept. 12 ouster of CEO Peter Dolan, who had led the company since 2001. Dolan made several major missteps during his turbulent career. His earliest blunder was buying a minority share, for $1.2 billion, in the now-notorious biotech ImClone (Charts).

ImClone is the most obvious potential take-over target in the U.S. market, even though technically it's not for sale. The biotech recently put itself on the auction block, but gave up on Aug. 10. Buyers weren't interested, and neither are investors, judging from the 36 percent decline in stock price over the last year. More recently, ImClone lost a patent battle over the cancer drug Erbitux. Meanwhile, former CEO Sam Waksal is doing time for insider trading.

Biggest biotechs not for sale

In the biotech realm, analysts don't see potential U.S. acquisitions that would rival the Merck KGaA-Serono merger in size. That situation was heavily dependent on Serono's financial weakness.

"Serono, on a price-to-sale basis, has always lagged large cap U.S. biotechs, so it's understandable if a pharma company wants to buy Serono and gain some products for its pipeline," said Shiv Kapoor, analyst for Montgomery & Co. "Companies are usually bought when they are trading at a large discount to what their intrinsic value is."

The two largest biotechs in the world -- Amgen (up $1.03 to $72.01, Charts) and Genentech (down $0.70 to $78.47, Charts), both based in California, do not fit that profile and are not viewed as takeover targets. Amgen, with a market capitalization of $85 billion, is probably too big to get bought. Amgen is a buyer, not a target, having taken over Immunex, Abgenix and Tularik in recent years. Genentech is also prohibitively large and its stock goes for a premium, but more importantly, a majority stake in the company has already been bought by the Swiss drug giant Roche.

For the next two potential mergers in the U.S., Kapoor said to keep a close eye on MedImmune (Charts), maker of experimental heart disease treatment Numax, and Biogen, maker of the FDA-approved multiple sclerosis treatment Tysabri. The financial future of these biotechs, and their attractiveness as take-over targets, is largely dependent on the sales potential for these drugs.

But know this: the merger buzz typically ramps up following a big merger like Merck-Serono, but that doesn't mean more mergers are quick to follow.

"People have a misconception about biotech M&A that once one company gets bought, it starts a wildfire of acquisition," said Michael King, analyst for Rodman & Renshaw. "But the pace of acquisition is more measured than investors would like to think it is. They like to see a flurry of takeovers, and it generally doesn't happen that way."

The analysts interviewed for this story do not own shares of stock in the companies mentioned here.

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