Discounts in Biotech Keep Pharma M&A Rolling

Other big drug companies have seen the writing on the wall: King Pharmaceuticals (KG Quote) said it would buy Alpharma (ALO Quote) for about $1.6 billion, and Eli Lilly (LLY Quote) tendered about 95% of ImClone's shares for $6 billion.

"This is the first time that I can remember seeing a sustained level of M&A in the life-sciences space," says Meyers.

"The amount of dialogue that's going on has probably never been higher," says Brent Milner, head of health-care investment banking at Stanford Group. "For the first time in pharmaceutical history they can go shopping at a discount."

The life-sciences space is bifurcated between these large, overcapitalized companies with big balance sheets and little debt that are facing an upcoming earnings gap, and other companies that are burning outrageous amounts of cash, Deutsche Bank's Meyers says.

"Although the past two months have been ugly, with biotech's 'blue-chip' companies shedding 17% of their value, their fundamentals of strong sales and robust pipelines will see them recover, but it will take some time," said G. Steven Burrill, chief executive officer of Burrill & Co., a life sciences merchant bank. "It is the small-cap biotech companies that will face the greatest challenges." The Burrill Small-Cap Biotech Index dropped 13% in November and 34% since the end of September.

"The laws of math dictate that there are fewer ImClones and more micro-caps," says Stanford Group's Milner. Indeed, fifty-four percent of the 370 publicly listed biotechnology companies tracked by Burrill & Co.'s monthly biotechnology report, now have a market cap well below $100 million.