For years, large biotech companies could go about their business, safe in the knowledge that drug industry heavyweights would look to snap up smaller biotech players to plug the holes in their product pipelines. No longer. Roche (RO.DE) changed the game with its unsolicited bid for Genentech (DNA); on Jan. 30 the pharma giant offered to pay $86.50 a share for the 44% of the biotech it didn't already own. That announcement came on the heels of the Jan. 26 deal by Pfizer (PFE) to buy Wyeth (WYE)—the most biotech-savvy of the big pharmaceutical companies—for $68 billion. And more deals may be on the way.
So why the change of heart?
For starters, many big pharmaceutical companies are facing the loss of patents on some very profitable drugs. The patents on Pfizer's Lipitor, Eli Lilly's (LLY) anti-psychotic drug Zyprexa, and Bristol-Myers Squibb's (BMY) Plavix, a blood thinner, expire in 2011. Novartis' (NVS) Diovan is going off patent in 2012. The loss of those drugs creates some very large shortfalls in drug giants' revenue streams, totaling in the billions of dollars. "The larger, mega-cap pharma companies are running out of time and they're running out of growth," says Les Satlow, portfolio manager at Cabot Money Management.
Appetite for Big Biotech Acquisitions
What they do have is money. In the past, the drug firms would have used their financial resources to snap up a small biotech company or two to goose growth as key products went off patent. Now, however, pharmaceutical companies are looking to big biotech companies to plug the much larger holes. With its purchase of Wyeth, Pfizer gets its hands on Prevnar, a vaccine that did $2.7 billion in sales in 2008, as well as the arthritis drug Enbrel. Roche, which said it could have no growth in 2009, could solve that problem with the successful acquisition of Genentech.
Big drug firms could make a play for big biotech companies like Biogen Idec (BIIB), Amgen (AMGN), and Gilead Sciences (GILD), according to industry observers. Large pharmaceutical companies have an appetite for large biotechs, says Bill Tanner, analyst with Leerink Swann, a health-care-focused investment bank.
That's bad news for small biotech companies, who are already facing a spate of problems. A recent study estimated that 50% of the roughly 380 publicly traded biotechs have less than one year of cash remaining. In the past, they would have raised new capital by selling shares, merging, or partnering with a larger outfit. But for publicly traded companies, equity deals are out—none has been brought to market in the last year, and few are expected to see the light of day in 2009. And even if a deal could be brought to market, with the smallest 10% of stocks in the Nasdaq Biotechnology Index trading down 84% from their 52-week high, vs. 21% for the largest 10%, an equity deal wouldn't make financial sense for many companies.
"The companies already on the public markets have been separated into survivors and nonsurvivors," says Sherrill Neff, partner at venture capital firm Quaker BioVentures.
Selective Small Purchases
That leaves a partnership or takeover by a bigger player as final lifelines for the small fry. Deals will get made, but with so many companies needing cash, large pharmaceuticals can afford to be selective. They'll scoop up companies with drugs nearing the end of Phase III trials—the last step before FDA approval—and help bring them to market. Big drug outfits will also be interested in purchasing companies in very early stages, where their expertise in running trials could help guide a promising drug through the process. Companies in the middle might just be out of luck, no matter the price.
"There's a perception that companies are cheap," says Mark Monane, managing director in equity research at Needham & Co. "But just because they're cheap doesn't mean they're desirable."