Careful what you wish for
By Steven Syre, Globe Columnist | September 28, 2006
The message on the cover of yesterday's Globe business section was clear: Be careful what you wish for.
On the top of the page, there was coverage of the aggressive deal struck by Millennium Pharmaceuticals Inc. of Cambridge to buy Anormed Inc. for $515 million, leapfrogging a hostile offer with less money attached from Genzyme Corp., also of Cambridge. Some investors see the fight going a few more rounds.
Lower on the same page, there was a story about the continued fallout from Boston Scientific Corp.'s victory in the intense bidding war for Guidant Corp. Boston Scientific, which eventually outbid Johnson & Johnson with a $27.5 billion offer, has bought nothing but headaches so far. The latest: a lawsuit by J&J seeking $5.5 billion in damages, alleging that Boston Scientific didn't fight fair in the takeover battle.
There are many differences between the two situations. Chief among them: Boston Scientific and Millennium play in entirely different leagues when it comes to business scale and money.
But other dynamics remain constant in all corporate takeover fights. Two key questions to ask in any case: How badly does the buyer need the company in play, and what degree of risk is it accepting to make the deal work?
Boston Scientific needed Guidant because its existing stent business wasn't going to generate sufficient earnings growth to keep driving its stock price higher. The company had tried buying many smaller businesses, but that wasn't working fast enough. Guidant was the big-bang alternative.
There were all kinds of risks associated with Guidant's business, but Boston Scientific had a good record of making acquisitions work profitably. So far, the risks are overwhelming Boston Scientific's ability to manage them.
Millennium is another company that needs a deal, and Anormed seems like a reasonable target. But the risk is significant, and it's mostly about price.
Millennium is a company known mostly for its failure to deliver on brilliant promise. It was a drug-discovery company that didn't discover drugs, or at least develop many commercially successful products. Millennium used money it raised in the stock market to buy other companies and products instead. But that hasn't worked out too well, either.
Today, Millennium is a company with one approved drug, Velcade, which is used to treat patients with blood cancer. The company's most advanced new commercial opportunities don't involve other drugs, but expanding uses for Velcade to treat more kinds of medical problems.
Anormed's new drug Mozobil, which is in advanced human testing, aids bone-marrow transplant patients and treats blood cancers. It's a good fit for Millennium and Velcade.
The risk is all about how big a market Mozobil, a niche drug, will develop. Rob Junkin, manager of the John Hancock Health Sciences Fund, owns Anormed shares and has spent time working on exactly that problem. He thinks the market will grow to be $100 million to $300 million a year.
So what would that make Mozobil worth? My very unscientific model values niche drugs at about five times their peak sales, or $500 million to $1.5 billion in this case. But Mozobil might not hit its sales peak before 2010, so the drug's present value must be discounted to a lower price.
With $100 million in peak sales, Millennium will have gambled and lost. Sales of $150 million turn Mozobil into a so-so purchase, and $200 million starts to make it look like a winner. If sales really do reach $300 million, Millennium will have hit a home run with Anormed and Mozobil.
Millennium's risks really don't compare with the huge problems facing Boston Scientific. But a small company that needs a boost is making a big bet when it puts $515 million on the line.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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