Another interesting read is in this morning's Wall Street Journal.
<<October 23, 1998<Picture>
Heard on the Street
Investors Bet on Consolidation
To Help Ailing Biotech Sector
By LESLIE SCISM
Staff Reporter of THE WALL STREET JOURNAL
Consolidation may finally be coming to the biotechnology sector, but it's unclear whether it will be a potent enough pain reliever for the ailing sector.
A few investors are betting that consolidation will be the remedy, including Larry Feinberg, a principal with Oracle Partners, whose hedge funds specializing in health care have a stellar long-term record but have been hurting of late. The funds, which are investment pools for wealthy individuals and institutions, are off 10% to 15% for the year. Weighed down by a heavy complement of biotech stocks, they were off 15% to 25% only a few weeks ago, but have regained ground as the stock market, particularly shares of smaller companies, rallied.
In plowing 40% of his investors' money into biotech, Mr. Feinberg has been betting for much of this year that consolidation would boost the fortunes of numerous biotech stocks. Stocks Oracle holds that he thinks could benefit include Agouron Pharmaceuticals, Alkermes, Aviron, IDEC Pharmaceuticals, Incyte Pharmaceuticals, MedImmune, PathoGenesis, and Texas Biotechnology, all of which have or soon will have products on the market.
He sees a measure of vindication in the news earlier this month that Alza, a licenser of skin patches and other drug-delivery technology, is buying biotech company Sequus Pharmaceuticals, a big Oracle holding. The $580 million deal, representing a 56% premium over Sequus's price prior to the deal, is aimed at helping Alza build a portfolio of novel cancer drugs.
Mr. Feinberg also points to the huge initial public offering earlier this week for DuPont's oil subsidiary Conoco. The IPO raised $4.4 billion to help finance DuPont's expansion in life sciences, including likely biotech investments.
Mr. Feinberg also points to the huge initial public offering earlier this week for DuPont's oil subsidiary Conoco. The IPO raised $4.4 billion to help finance DuPont's expansion in life sciences, including likely biotech investments.
"I'm early," Mr. Feinberg says. "That's my problem." No kidding. Between mid-March and late August, the closely watched American Stock Exchange biotech index fell 43%. But the Oracle manager isn't giving any ground. "We're going to see the big pharmaceutical companies and the larger biotechs stepping up to the plate and consolidating the industry, and once the ball starts rolling, it could really snowball into a major trend," he says. Aided, hopefully, by a continued, long-overdue rally in small-capitalization stocks, Mr. Feinberg anticipates "the biggest biotech rally" ever by year end or early 1999, with "a new valuation paradigm" emerging as "investors realize that the value of these companies is what other larger biotech or pharmaceutical companies will pay for them, not simple earnings per share."
Indeed, a number of biotech analysts and investors now agree that consolidation -- which has been about to happen in the biotech sector for five years or so by one account or another -- really will happen. However, many of these industry experts aren't so certain that a lot of deals will deliver big stock-market premiums; nor will the stepped-up merger-and-acquisition activity cause a sectorwide rally. Given biotech's history of disappointments, it has been one of the hardest hit by investors" flight this year to big-cap stocks.
"You can't have an industry with hundreds upon hundreds of companies, most of them with a pretty narrow technology base," says Meirav Chovav, a top-ranked Salomon Smith Barney biotech analyst. But there have been two persistent obstacles to biotech consolidation: Many entrepreneurs don't want to sell their babies, and they've always managed to find financing to keep them going.
But Ms. Chovav says the current tough capital markets might force a "cash-crunch consolidation." And "one big difference between now and five years ago is that there are several big biotech companies out there saying they want to be buyers," namely Amgen, Biogen, Genentech and Chiron. This privileged subset of the biotech world -- companies with one or more commercially successful products, their own manufacturing and sales capability and stock-market values above $2.5 billion -- "has been one of the best-performing industry groups since Sept. 1," according to Ms. Chovav. Besides stocks to use as an acquisition currency, these biotech companies also have cash hoards, Ms. Chovav says.
Another plus Ms. Chovav sees for biotech companies is that pharmaceutical giants that in recent years have preferred to strike marketing pacts for promising biotech products are "paying richer and richer prices for their partnerships" because big biotech companies are now competing for these pacts.
Given that the market values of the underlying biotechs have shrunk, the drug giants and big biotechs "will crunch the numbers and see what makes more sense," a partnership or an acquisition, she says. But because the big companies easily could opt again for partnerships, she doesn't see biotechs, in general, rising steeply on takeover speculation.
Douglas Lind, a Morgan Stanley Dean Witter biotech analyst, also argues that while the "big fish are out there looking," they want to avoid deals that will hurt their earnings, and "there are very few" acquisitions that would add to earnings within a year or two. He also notes that existing partnerships limit deal possibilities.
But Oracle's Mr. Feinberg remains undaunted. He contends the major pharmaceuticals "need to supplant their product pipelines" because many of their drugs lose patent protection by 2000. Two companies he sees as the likeliest, most immediate acquisition targets: Agouron, maker of a leading AIDS drug, and PathoGenesis, developer of drugs to treat chronic infectious diseases.
Two other Feinberg favorites are MedImmune, whose new Synagis treats children's respiratory viruses, and Centocor, which has a cardiovascular drug and one for Crohn's disease. He says the companies could be buyers or sellers.>> |
