Stock-rich biotechs hit the takeover trail
Oct 20, 2000 07:32 AM ET
By Jeff Shuttleworth, LocalBusiness.com
NEWS ANALYSIS SAN FRANCISCO, Oct. 20 (LocalBusiness.com) -- After years of watching the pharmaceutical giants play the lead role of rich suitor in scooping up small firms with promising products, burgeoning biotech companies now are vying for the part too.
Using their hot stocks and deep pockets, large biotech companies are finding the fastest way to add new products is to buy smaller firms.
The limelight shed on genomic research has pushed some biotech stock prices into the stratosphere. Research shows three years ago there were only nine biotech companies with market caps above $1 billion. Now there are at least 60. And some smaller companies are more than willing to exchange their independence for a piece of equity in the new breed of big players.
Industry watchers say the biotech takeover trend is just beginning.
"We'll see more consolidation," said Steven Burrill, chief executive officer of San Francisco-based Burrill & Co., a private merchant bank that runs several biotech investment funds.
Sign of maturity
Scott Greer, the CEO of Abgenix Inc. in Fremont, Calif., has seen the stock for his company rise more than 4,500 percent over two years. He said the consolidation trend shows that the maturing biotech industry is no longer a backwater dominated by scientists doing difficult-to-understand research.
"Historically, there haven't been a lot of mergers and acquisitions in the biotech world, but as the industry is becoming more of a business, there will be," Greer said.
His company's XenoMouse technology enables drug makers to grow mice with human antibodies. These antibodies can be used on humans, without being attacked as a foreign substance.
Greer said acquisitions help biotech firms develop a more complete package of products.
"There are lot of small toolbox companies (firms that decipher data useful in developing drugs) that have one piece of the overall picture and would make a good fit with someone else," Greer said.
An example is Abgenix's Sept. 26 all-stock acquisition of ImmGenics Inc., a privately held company based in Vancouver, British Columbia, which developed a proprietary technology to increase the effectiveness and speed of antibody product discovery efforts.
"They have a technology that works well with wild mice, but they're missing a key part of the business because they need human antibodies," Greer said.
Biotech deals have dotted the country in recent months. Amgen Inc. (Nasdaq: AMGN) of Thousand Oaks, Calif., announced on Oct. 16 a $170 million all-stock deal to purchase Kinetix Pharmaceuticals Inc., a privately held biotechnology company in Medford, Mass., that is developing drugs using cell communication proteins called kinases. Amgen had the first $1 billion biotechnology drug, Epogen, for the treatment of anemia.
On the same day, Seattle-based Corixa Corp. (Nasdaq: CRXA) bought South San Francisco, Calif.-based Coulter Pharmaceutical Inc. (Nasdaq: CLTR) for $900 million. On Oct. 12, Alliance Pharmaceutical Corp. (Nasdaq: ALLP) acquired Molecular Biosystems Inc. (OTC: MBIO) for $12 million. Alliance and Molecular are both based in San Diego, Calif. Both deals were all-stock transactions.
On Sept. 11, Cambridge, Mass.-based Genzyme General Corp. (Nasdaq: GENZ) said it would buy gastrointestinal drug maker GelTex Pharmaceuticals Inc. (Nasdaq: GELX) of Waltham, Mass., for $1 billion in cash and stock. The transaction is expected to close in December, pending regulatory and GelTex shareholder approval.
The match game
Michael Becker, biotech analyst for Chicago-based Wayne Hummer Investments, said biotech firms looking for marketable products must find companies with products nearly ready for market, rather than those still early in the research process.
"It's actually not difficult to find merger candidates," Becker said. "There are a record number of products in clinical human trials today. You can almost go to the U.S. Food and Drug Administration Website and look for companies with products in late-stage trails."
For a merger to be productive, however, the two companies must share a common focus. A cancer treatment company would not be interested in a new kidney dialysis treatment process, for example.
"If an emerging company has a product but no sales force or market presence, they'll want to partner or merge with a larger company that already has a sales force in place," Becker said. "It's typically a rewarding relationship for both; it expedites a product to market and builds on shareholder value through new product sales."
The rise of biotech buying
Only last year, big pharmaceutical companies were the major acquirers of biotech companies. But U.S. Bancorp Piper Jaffray analyst Peter Ginsberg said in a report that biotech companies were the buyers in all 13 deals valued at $100 million or more this year. Of 16 deals of the same size last year, eight acquirers were biotechs and eight were large drug makers, he said.
Biotech companies are in better position now because their stocks have significantly outperformed the broader market, Ginsberg said. The AMEX Biotech Index soared 306 percent between June 1, 1999, and Aug. 25, 2000, while the S&P 500 only rose 23 percent and the AMEX Pharmaceutical Index inched up by 2 percent in the same period.
Big biotech companies now have the upper hand in competing with pharmaceutical companies to acquire smaller biotechs, Burrill said.
"The stock of big biotech companies is a currency that's attractive to smaller companies because there's more upside with that than the stock of pharmaceutical companies," he said. Also, there's more "cultural similarity" when biotech companies merge than when a stodgy pharmaceutical company takes over an innovative biotech outfit. Typically the cost of assimilation is less too, Burrill said.
Greer said there are several types of biotech-biotech acquisitions. Some companies buy companies to customize drug-discovery tools. Others snap up companies with technology "of sufficient strategic importance that you want to own it and control it."
Alliance CEO Duane Roth has a different view. "I wouldn't say this is a trend," Roth said. "It has been happening over the years where you'll see mergers between companies resulting in the shareholder getting more value, or a larger platform."
The question is whether a merger will make the acquiring company stronger, he said. "In our case, acquiring a smaller company like Molecular Biosystems was good for us because we'll be picking up product, and it gives us a chance to get a second product on the market."
But Greer believes the industry is different now because of the completion of the mapping of the human genome. Previously pharmaceutical targets were scarce, and many companies were working around the same targets. Now the problem is reversed: There are too many targets because of the explosion of new information.
"This is a time when the biotech industry is changing fundamentally and the rules are very different than a year ago," Greer said.
LocalBusiness.com reporters Donna Balancia, James Heckman and Lori Valigra contributed to this story.
Jeff Shuttleworth is a staff writer for LocalBusiness.com's San Francisco site. E-mail him with story ideas or comments. |
