As Valuations Shift, Biotechs Could Consume Drug Giants
By RALPH T. KING JR.
Staff Reporter of THE WALL STREET JOURNAL
In this topsy-turvy stock market, some established names in corporate America seem to have moved from the predator to the prey.
Take the drug business. Some biotechnology investors are asking why can't a young biotech company such as Amgen -- bulked up with a sky-high stock price -- swallow an old-line drug company such as, say, Bristol-Myers Squibb.
"You look at the numbers," says Buzz Burlock, a managing director at Soros Fund Management, "and it's definitely plausible."
Plausible because, after years of neglect, biotech stocks are suddenly acting like Internet stocks. That gives Amgen and a few other players a currency they could use to snatch some of the old-line pharmaceutical giants that until recently had threatened to gobble them up. And, while the logic of such a deal is arguable, the simple fact that the young can eat the old means one or more biotech empire builders could be tempted to try, some money managers say.
There isn't loud buzz about a specific deal on the horizon, and any move would face substantial obstacles, not the least of which is vastly different corporate cultures. But this much is certain: A titanic shift in stock-market valuations has occurred with startling speed. The biotech industry's market capitalization, at $600 billion, is 50% higher than it was just two months ago and is up threefold since the end of 1998, according to OrbiMed Advisors LLC, a New York fund-management firm.
Meanwhile, the market cap of the major U.S. drug makers, including Bristol-Myers, has slumped to $900 billion, from $1.1 trillion at year-end 1998. Individually, biotech firms such as Amgen have seen their values explode to more than $60 billion, putting their market value in the same league as Schering-Plough, Eli Lilly and American Home Products.
"It's the tail wagging the dog," says Samuel Isaly, a health-care-fund manager at OrbiMed. "With a little leverage, the biotechs could gang up and buy all of pharma."
That's a far cry from the mid-1990s, when the valuation of the entire biotech universe was roughly equal to that of a single drug company like Merck, notes Stelios Papadopoulos, an SG Cowen investment banker. "It's a milestone in the continuing maturation of the biotech industry. It's clear there's going to be a crossover in valuations, and then the gap will widen."
Some analysts believe the biotech run-up is nothing but rampant speculation, powered by investors who have Internet winnings to burn, which will burst by the end of this year. They say indiscriminate buying of companies with poor prospects will only hasten that day. Previous biotech bubbles were followed by long bear markets in the sector despite bullishness overall. Indeed, certain biotech stocks have given up some gains lately, with Genentech, for instance, taking a beating last week.
If and when biotechs lose their luster, they once again will find themselves dependent on drug companies as partners to develop and market the drugs they discover. Or drug makers will buy the companies outright, as Warner-Lambert recently did with Agouron, maker of a popular AIDS drug, to cherry-pick their promising products.
But others predict that the value shift could be permanent. They say investors are beginning to see that in the drug business, the most innovative researchers deserve higher valuations than huge marketing organizations that aren't terribly innovative. Asserts Mr. Papadopoulos: "The future lies with the science-intensive companies."
Mr. Isaly calls the recent movement "a sea change -- and a very major one."
He and others believe that the most valuable biotech companies would be wise to seize the opportunity to get something they have never had and that is costly to build: global distribution. Frederick Frank, an investment banker at Lehman Brothers, notes that some big biotech firms have a substantial U.S. marketing and sales presence.
"But they don't have a critical mass world-wide," Mr. Frank says. "If you buy Schering-Plough, you get that overnight."
One logical fit would be Amgen -- which is set to launch an improved version of its top-selling cancer and dialysis drug, Epogen -- and Bristol-Myers, with its crack sales force in cancer, Soros Fund's Mr. Burlock says. Another might be an offer from Seattle-based Immunex to buy the company that holds 54% of its stock, American Home Products.
Currently, it isn't clear whether any biotech company is seriously considering such a move. Most of their acquisitions so far have been of other, smaller biotech firms. And the sprawling operations of a pharmaceutical company would pose a huge distraction from their focus on research.
David Kaye, Amgen's spokesman, declined to comment on specific acquisition targets but noted: "We do have a group of people who look at all types of mergers and acquisitions full time." A Genentech spokeswoman said company executives were unavailable to comment. Immunex spokesman Tim Warner said: "At this point, we are not in a position to publicly speculate about any specific matters." Officials at Bristol-Myers couldn't be reached for comment.
Still, investment bankers clearly are itching to give the idea a whirl, though they say they haven't proposed any such combinations or heard any top executives muse about it, at least out loud.
One big obstacle, of course, would be on the pharmaceutical-company side. Analysts say the companies are unlikely to entertain the proposal of an entrepreneurial upstart the way Time Warner recently did with America Online. And while consolidation is sweeping the drug industry, hostile takeovers remain rare. Pfizer's long but ultimately successful conquest of Warner-Lambert shows how difficult it can be.
"A lot of proud people will die before they let that happen," Mr. Papadopoulos says. "These are the guys who have disdained biotech for years. They are going to believe forever that their way of doing business is better."
Mr. Frank says he doesn't believe the likelihood of success is high, at least not immediately. Still, he says many biotech chief executives are "audacious enough to think in those terms. I'd love to try. It would be great sport."
Jim |
