Thursday, December 20, 2007

Has Big Pharma Acquisition of Big Biotech Peaked?

In the last two weeks Biogen-Idec (BIIB) and Genzyme (two of the largest independent Biotechnology Companies in the World) had their respective CEO's announce that they will stay independent, albeit for different reasons. Could this mark the watershed moment that suggests that Big Pharmaceutical Companies will indeed NOT pay any price to buy up companies with attractive pipelines and productsIs it equally possible that these two transactions are anomalies with special circumstances surrounding them?
It may be a bit presumptuous to reach the conclusion that acquisitions may have peaked with AstraZeneca paying $15.6 billion for MedImmune in April and Schering-Plough's acquisition of Organon Biosciences BV for $14.4 billion a month earlier (especially noteworthy since Schering's CEO Fred Hassan had publicly stated that acquisition pricing had become "breathtaking"). One could further point to numerous sub or near billion dollar acquisition of smaller biotech companies and technologies (e.g. RNAi) by bigger players such as Pfizer, Merck, J&J among others.
My thesis is that senior pharmaceutical executives recognize that they may not be able to buy their way to more success in their business. There is a lot of "low hanging fruit" they need to continue to address including bureaucratic, inefficient R&D; bloated sales and marketing forces having less and less impact on their target constituencies; and excess manufacturing capacity resulting from past tax incentives and mergers. There is clear cut evidence that the mega mergers of the past have done little to enhance shareholder value and that many of the smaller biotechnology acquisitions and/or licensing deals have not produced the promised results.
Thus, is there is reduced incentive to buy companies such as Biogen-Idec or Genzyme. The noted investor Carl Icahn bought 1% of BIIB stock earlier this year, increased his stake to 3% quickly, announced that the company was vastly undervalued, driving the stock price up by 50% and forcing management to shop the company. Rumors abounded about interest by Pfizer and Schering Plough among several others, but in the end NO ONE bid for the company and the shares fell over 25%. While Mr. Icahn benefited handsomely form this deal, one could imagine that BIIB's management were greatly distracted and taken away from their duties resulting in lost opportunities for no valued result. The major lesson learned from the acquisition side is that Pharmaceutical Business Development executives will not (and should not) pay any price asked for a deal.
In the case of Genzyme, Henry Termeer the CEO is faced with similar circumstances from the same billionaire investor, Carl Icahn. He will likely apply the same pressure tactics to sell the company. Termeer has seemingly intentionally made a strong case that his company's value is too rich (nearly $20 billion market cap), that he doesn't need a partner since he is in a highly specialized area with good vertical integration and finally that his product set of highly specialized, expensive near-orphan like drugs don't lend themselves to the culture of a big pharmaceutical company. Time will tell whether Temeer's strategy will be viable.
In the meanwhile we are in for some interesting times!

Contributed by Lawrence Rothman, PhD

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