Biotechs Get Smart With Cash

Amgen, Biogen and Genzyme do the right thing by reducing the float.
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A rash of big buybacks has broken out among big biotech stocks, and analysts say the moves represent both a wise use of cash and even a defense against takeovers.

Shares of

Biogen Idec

(BIIB) - Get Report

,

Genzyme

(GENZ)

and

Amgen

(AMGN) - Get Report

each got a boost in recent days after the companies announced buybacks.

The news was welcome relief for investors in these traditional high-growth stocks, none of which have seen much growth lately. Each has lagged both the

S&P 500

and the Amex Biotechnology Index, of which they're members, for the 12 months ended May 22, the day before the buyback binge began.

During that time, the 20-stock biotech index rose 30.7%, while the S&P 500 climbed 23.1%. Over the same period, Amgen was down 20.4%, Genzyme was up 7.1%, and Biogen Idec gained 4.4%.

The cluster of buybacks suggests that the biotechs can't find sensibly priced acquisitions in an inflamed merger market, says Albert Rauch, a biotechnology analyst at A.G. Edwards. "A lot of biotechs keep a lot of cash on their balance sheets to buy things," he says.

However, they don't want to hold too much cash for fear of attracting unwanted suitors, Rauch says. Thus, repurchasing stock may discourage a takeover and be a better investment than overpaying for an acquisition, he adds.

A.G. Edwards analysts have buy ratings on Amgen and Genzyme and a hold rating on Biogen Idec. They don't own shares.

With a market capitalization of $65.5 billion, Amgen would be a tough target for all but a thimbleful of Big Pharma giants. But Rauch says other biotechs may be worried given recent deals, most notably

AstraZeneca'

(AZN) - Get Report

$15.6 billion bid takeover of MedImmune.

"The MedImmune deal makes them feel vulnerable," Rauch says. "Big Pharma is interested in acquiring a lot of biotech companies."

The Biogen Idec deal is the biggest of the repurchase proposals. It wants to buy up to 57 million shares, or 16% of its common stock, and it plans to spend as much as $3 billion.

The decision was a "shareholder-friendly move in more ways than one," says Mark Schoenebaum, of Bear Stearns, in a May 30 report to clients, one day after the deal was announced.

The company is returning cash to shareholders "in the context of scarce affordable, high-quality licensing or acquisition opportunities," says Schoenebaum, who has a peer perform rating and doesn't own shares. His firm has had a recent noninvestment banking relationship.

Biogen Idec is employing a modified Dutch auction, in which investors can tender shares at a price between $47 and $53 a share. This tactic enables shareholders to choose a share price range, but the company will determine the lowest price it will pay for the stock.

A few hours before Biogen Idec's announcement, Genzyme declared it would buy up to $1.5 billion, or 20 million shares, of its common stock over the next three years. That represents about 7.5% of outstanding shares.

Genzyme said it acted to "reduce the dilutive effect" of its stock-based compensation programs, adding that this "reflects Genzyme's confidence in the long-term value of its common stock."

Genzyme "has had a history of good acquisitions," says Karen Andersen of the independent financial research firm Morningstar. Given this background, she says the buyback represents "a better use of money" than a big merger deal.

Meanwhile, Genzyme is involved in a midrange takeover, offering $345 million for

Bioenvision

(BIVN)

, its partner in the leukemia drug Clolar. The acquisition

is being contested by a major shareholder.

Amgen was first of the trio to announce a buyback, telling investors on May 23 that it would repurchase approximately $3 billion worth of stock, or just under 5% of its market capitalization. Amgen will finance the deal with $4 billion in debt securities.

"This deal renders Amgen more leveraged but not over-leveraged," says Christopher Raymond, of Robert W. Baird & Co., in a research report. "Amgen still generates a healthy amount of operating cash flow."

Noting that Amgen is accelerating an existing stock-repurchase program, Raymond wonders whether the move suggests "the potential for another midsized acquisition at some point." Amgen spent $2.2 billion last year and $1.3 billion in 2004 for a pair of companies.

Raymond, who is neutral on the stock, doesn't own shares. His firm expects to receive or intends to seek investment-banking compensation in the near future.

Morningstar's Andersen considers the buyback as a "safety net" in case Amgen experiences a "worst-case scenario" for its anemia drugs Aranesp and Epogen, which accounted for 46% of revenue last year. The Food and Drug Administration has ordered

tougher labels for these drugs to reflect research showing an increased risk of cardiovascular side effects.

One FDA advisory committee, looking at the drugs given to chemotherapy patients, recently endorsed

stronger prescribing restrictions and recommended more clinical trials to assess safety.

In the fall, an FDA advisory panel will examine these drugs' impact on patients with chronic kidney disease. The FDA will then act on the panels' recommendations for Amgen's drugs and for

Johnson & Johnson's

(JNJ) - Get Report

anemia drug Procrit.