Biotech Takeover candidates

Consolidation among biotechs will become more common as Big Pharma tries to fatten its product pipeline. Five possible takeover candidates

THE OUTCOME OF Bristol-Myers Squibb's $4.5 billion bid for the portion of ImClone Systems that it doesn't already own remains uncertain. So is the conclusion of Roche Holding 's $44 billion offer for the shares of Genentech that it doesn't possess. Both targets want the bids raised.
But one thing is certain: Mergers, buyouts and takeovers involving biotech outfits will become more common as Big Pharma increasingly tries to fatten its product pipeline by acquiring proven, as well as promising, bioengineered drugs.
Table: In the Pipeline
For Bristol (ticker: BMY), the big prize is Erbitux, an ImClone (IMCL) cancer treatment. For Roche (RO.Switzerland), the lure is a raft of Genentech (DNA) products, ranging from Activase, a heart-attack treatment, to Avastin, a cancer drug, to Nutropin, a growth-hormone product.
DRIVING THE NEED FOR new products are the coming expirations of patents on several important drugs owned by Big Pharma. The end of patent protection, of course, opens the market to cheaper generic versions of the drugs.
In the not-very-distant future, the mother of all expirations will hit Lipitor, Pfizer 's (PFE) wildly successful cholesterol drug, which had more than $12 billion in annual global sales last year. Lipitor goes off-patent in 2011. Other blockbuster drugs that are losing their patent protection include Wyeth 's (WYE) Effexor (depression and anxiety), 2010; Merck 's (MRK) Singulair (allergies), 2012; and Eli Lilly 's (LLY) Zyprexa (schizophrenia), 2011.
Many of the large drug manufacturers "have three or four products accounting for the bulk of earnings," notes Christopher Schott, a pharmaceutical analyst at JPMorgan.
At the same time, these companies' costly research-and-development efforts have had mixed results. Despite Big Pharma's spending billions and billions, says Jay Markowitz, a T. Rowe Price health-care analyst, "a number of companies are facing a significant patent cliff, where billions in revenues are going to disappear."
Many large pharmaceutical outfits, however, have a lot of cash on their balance sheets to make acquisitions. Factor in the dollar's weakness, which makes U.S. companies look particularly enticing to foreigners, and the biotechnology/pharmaceuticals market looks particularly ripe for merger-and-acquisition deals.
"The natural synergy is for a company to acquire a company they already know well and have a partnership with on a key drug," says Steven Silver, an analyst at Standard & Poor's.
For example, Genentech, which last week rejected Roche's $89-a-share proposal as too low, has a long history of dealings with the Swiss pharmaceutical giant, which has about a 56% stake in the San Francisco biotech firm and markets some of its products.
"The larger pharma companies want to have total control over the drugs in the pipelines," says Frank Sustersic, a portfolio manager at Turner Investment Partners. In 2007, for example, Eli Lilly acquired Icos, with which it had a joint venture on Cialis, an erectile-dysfunction drug. It paid $2.3 billion for the acquisition.
"It looks as if pharma is going after the companies that have existing products," which by definition have obtained regulatory approval, says Vinay Thapar, a senior investment analyst at American Century Investments. (Larger companies will continue to do licensing agreements in which they pay a smaller company to help develop a drug, in exchange for a cut of future profits, says Thapar. In such cases, the larger entity doesn't typically acquire the smaller one.)
Thapar and other analysts point to Onyx Pharmaceuticals (ONXX) as a potential target of Bayer (BAY. Germany). Onyx has a joint venture with the German pharmaceutical giant for Nexavar, which is used to treat kidney and liver cancers.
"At some point, you could see Bayer wanting to control 100% of the assets," says Sustersic, who thinks that Bayer might pay as much as $65 per share. Nexavar is believed to have more upside, especially as it secures approval in other markets (it was recently given the green light by China as a liver-cancer treatment), and even more if it can be used for other cancers, including those of the breast, lungs and skin.
One argument for buying existing drugs -- rather than developing new ones -- is the grueling U.S. Food and Drug Administration testing that new products face.
"The FDA is perceived to have swung more to the safety side in the balance between safety and efficacy," says Markowitz. That means that getting drugs through the regulatory process is taking longer, although it's probably good for consumers. Adds Thapar: "The FDA is becoming increasingly difficult to handicap."
Big Pharma's hunger for new products could be good news for investors in some biotech firms, say Barron's Rich Rescigno and Lawrence Strauss. (Aug. 18)
NOT ALL OF THE FOCUS is on products already in the market, however. Vertex Pharmaceuticals (VRTX), another company that some investors view as an eventual takeover candidate, is developing Telaprevir, a substance that promises to reduce the time needed to treat hepatitis-C, a potentially fatal liver ailment. Telaprevir is currently in stage III testing, the last phase of the clinical- trial process. Vertex has worked with Johnson & Johnson (JNJ) in developing that drug.
Vertex's shares sold off recently after Schering-Plough (SGP) announced that it had good results with a possible competitor to Telaprevir. Still, some analysts think that the Vertex drug shouldn't be underestimated. "In my opinion, it will be the first direct antiviral drug for hepatitis-C to hit the market and meaningfully improve patient outcomes," says T. Rowe Price's Markowitz.
Another company that could spark an acquirer's interest is Amylin Pharmaceuticals (AMLN). It's working on a Type 2 diabetes drug that could be injected once a week instead of daily. Amylin has several development partners, including Eli Lilly, on the drug. It already markets two diabetes drugs, Symlin and Byetta. But some analysts say the product under development could boast major advantages. "A once-weekly drug that lowers glucose substantially, induces weight loss, isn't associated with hypoglycemia, and lacks a cardiovascular safety signal has multibillion-dollar potential," says Markowitz.
The Bottom Line:
With patents on some major products expiring over the next few years, large pharmaceutical companies will be on the prowl for biotech outfits with promising drugs.
Anyone scanning the biotech ranks for potential acquisition targets shouldn't overlook United Therapeutics (UTHR). It has one characteristic that lots of other small biotechs would envy: It's in the black. One of its most promising products is Remodulin, which is used to treat hypertension in the blood vessels of the lungs. Although there are other PAH drugs, Turner Investment Partners' Sustersic says that United Therapeutics is "one of the clear leaders, and they potentially could have a big blockbuster."
American Century's Thapar is similarly impressed by Alexion Pharmaceuticals (ALXN), which earned six cents a share in its most recent quarter, versus a loss of 75 cents a share a year earlier. Its drugs include Soliris, which treats a rare disorder called paroxysmal nocturnal hemoglobinuria, which destroys red blood cells.
At $389,000 a year per patient, Soliris is hugely expensive -- but it targets a clearly defined patient base.
The drug had net sales of nearly $60 million in the second quarter, up from $45.5 million in the first quarter and $9.8 million a year earlier. Regulators have approved its use in the U.S. and Europe, and it's expected to be introduced in Japan toward the end of next year. Alexion retains distribution rights in the U.S. and overseas, says Sustersic, who maintains that Soliris sales could reach at least $500 million a year.
Sounds like a decent prescription for a bigger company seeking a revenue boost.

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