2001 Review: Biotechs Talk Turkey

In the days after biotech giant AmgenAMGN announced its $16 billion takeover of ImmunexIMNX, there was a rush to proclaim that a new wave of merger and acquisition activity was about to roil the biotech sector.

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After all, the Amgen-Immunex deal was preceded by two other big transactions in December -- Millennium Pharmaceuticals' $2 billion purchase of Cor TherapeuticsCORR, and Medimmune'sMEDI $1 billion acquisition of AvironAVIR.

Three big deals in three weeks. Surely this signals the start of some major consolidation activity, right?

Not so fast, say some biotech mavens. Sure, there's going to be biotech dealmaking next year, but the biotech sector always leaves the M&A pot on simmer, so this shouldn't come as any surprise. And just because the industry finished 2001 with a flurry of deals doesn't mean that 2002 will necessarily follow suit.

"Wall Street has a habit of taking two or three isolated events and trying to turn them into a major trend," says Jon Alsenas, biotech portfolio manager at ING Furman Selz Asset Management.

Same Bat Time

When biotech stocks sank to year lows at the end of March, there was a similar prediction of merger mania, especially for companies facing a cash crunch. But it didn't really happen. Stocks moved higher and fundraising activity picked up. The biotech sector is on track to raise about $10 billion this year, well off the extraordinary $32 billion raised in 2000, but not chump change either.

The way Alsenas sees it, good biotech companies have had no problems raising cash over the past 18 months, and that eliminates at least one of the big reasons for merger activity. Deals like the Amgen-Immunex merger -- two successful companies joining together to create synergies -- just don't happen very often, certainly not enough to portend some huge uptake in M&A activity for 2002.

"Most good companies can raise cash without problems, so why would they rush out to do deals?" asks Alsenas. "You might see a rash of deals between biotechs that are weak or flailing, but these offer no value to shareholders -- it's like joining together two one-legged guys and claiming you've made a sprinter."

How the Game Has Changed

If successful biotech firms don't have cash problems, they still must figure out ways to feed investors' insatiable appetite for growth. This growth is becoming increasingly difficult to accomplish internally, so the logical answer is to buy it.

Robertson Stephens biotech analyst Mike King says he and other sell-siders are accustomed to biotech firms birthing a drug in the lab and developing it all the way to approval. That's why the initial reaction to the Amgen-Immunex deal was so negative -- it ran counter to what most people expected from biotech firms.

"We're not accustomed to seeing biotech firms grow significantly through mergers and acquisitions, but I think the [Amgen-Immunex] deal is going to change that," he says.

Legg Mason biotech analyst Stefan Loren agrees. "There are some biotech companies out there who will not be able to achieve their growth goals without making an acquisition, and I think Amgen was a good example," he says.

Who else might be playing the role of hunter? Chiron has well over $1 billion in the bank and is in desperate need of promising new drugs in its pipeline. Idec PharmaceuticalsIDPH is making quite a name for itself with two cancer drugs, Rituxan and Zevalin, but to really grow into a well-rounded biopharmaceutical firm, it might have to go out and buy its way into another area of drug research.

Then there are the cash-rich genomics firms like Millennium and Human Genome Sciences HGSI, both of which are still trying to put together rational business plans and in need of drugs to justify their high valuations.

As for potential targets, Loren believes these will be single-product biotech companies that also have strong research capabilities -- the ability to find and develop the next big drug.

On the Radar Screen

"To make deals make sense, biotech companies are going to need more than a single product to justify the cost," he says. "That's why research is important, because it's tough to get good science these days."

So who's being hunted? CV TherapeuticsCVTX, which appears to have a breakout angina drug on its hands, is on many takeover lists. Other companies mentioned include Medimmune (even with its recent takeover of Aviron), Ilex OncologyILXO, Vertex PharmaceuticalsVRTX and, to a lesser extent, BiogenBGEN.

But while all these names thrown into the M&A hat would seem to suggest a very active 2002 for dealmaking, remember that many of these companies were also identified as sure-thing merger participants in 2001.

"I don't see a spate of mergers coming; there's simply no historical precedent for it," says John McCamant, editor of the Medical Technology Stock Letter. "After all, Amgen and Immunex were talking to each other for two years before a deal happened. These things are too complicated and take too long for people to expect a wave of consolidation."