The biggest name in biotechnology these days has one big product, one big settlement with the U.S. government and, perhaps, several Big Pharma suitors.
The company is
, which hired an investment banker in November to explore strategic options and whose stock has been rising along with takeover speculation.
The Swiss biotech company's stock closed at $20.97 on Thursday, well up from the $16.44 closing on Nov. 7, the day before Serono confirmed a
Wall Street Journal
report that it had hired Goldman Sachs to help plan its future.
Although a top Serono executive declined as late as Tuesday to comment on his company's plans, there's enough speculation to suggest that something could happen this month.
Medically, Serono is best known for Rebif, a $1 billion-plus treatment for multiple sclerosis that accounted for 44% of its 2004 revenue. Serono's U.S. marketing partner is
Legally, Serono is best known for its October settlement of a
U.S. government investigation into the marketing of Serostim, a treatment for AIDS wasting. This is a metabolic disorder among AIDS patients in which the body consumes muscle and organ tissue for energy rather than using the body's stored fat.
Serono paid $704 million to settle civil allegations and criminal charges. The Justice Department says the payment was the third-largest health care fraud outlay in the U.S.
The Three-Quarters Rule
Strategically, Serono is "an attractive acquisition candidate" for a Big Pharma company "seeking an expanded presence in biopharmaceuticals," says Geoffrey Porges, of Sanford C. Bernstein & Co., in a research report issued this week.
However, Porges warns investors that trying to play Serono now for a big gain via a takeover could backfire. The stock's recent run-up, "disappointing" U.S. results for Rebif in the past few months and the slowing growth of key products indicate that the company's stock doesn't have much more upward mobility, he says.
Porges cut his rating to market perform from outperform, and his target price is $24.
If Serono's asking price is so high that potential suitors walk away, shareholders could be stuck with a stock in the mid to high teens rather than the $20s, says Porges, who doesn't own shares and whose firm doesn't have an investment banking relationship.
Three-fourths of Serono's voting shares are controlled by the Bertarelli family, including CEO Ernesto Bertarelli. If he can orchestrate a bidding war, maybe Serono can get a better price.
The names of potential suitors being bandied about on Wall Street are those that are big enough to buy a company that had $2.46 billion in sales in 2004 and should produce more than $2.6 billion in 2005. In addition to Pfizer, likely suspects include
The most immediate lure of Serono is Rebif, which the company says is the bestselling multiple sclerosis drug outside the U.S. Last year, it produced $1.1 billion in worldwide sales, including $296 million in the U.S.
By acquiring Serono, Pfizer would instantly get a new MS market as well as access to Serono's work with
, the developer of an experimental oral MS drug called Mylinax. Existing MS drugs must be injected.
Mylinax is in late-stage clinical testing, and results should be available in 2007. In addition, Serono markets the MS drug Novantrone.
Although Novartis and GlaxoSmithKline aren't in the MS market, each is collaborating with separate Japanese companies to develop oral MS drugs. The drumbeat of speculation about Novartis increased earlier this week after it decided against making a hostile offer for another Swiss drug company,
, which has received a buyout bid from the Dutch drugmaker
Because so much MS research is in progress, other big drugmakers might find Serono attractive. Sagient Research Systems, which monitors biotechnology drugs, says clinical trials are ongoing for more than three dozen MS drugs -- either new compounds or expanded uses for drugs approved for other diseases.
is testing two MS compounds and helps
Teva Pharmaceutical Industries
market the MS drug Copaxone.
On Rebif's horizon, however, are some potential drawbacks, including the possible resurrection of Tysabri from
. They pulled the drug from the market 11 months ago after having received reports that two patients in MS clinical trials suffered a rare, often fatal brain disease.
Eventually, they detected a third case of this disease in a person participating in a clinical trial for Crohn's disease, a severe gastrointestinal ailment. The companies have reviewed the records of all clinical trial patients and have resubmitted an MS application to the Food and Drug Administration.
The impact of a revived Tysabri will depend heavily on restrictions placed by regulators and physicians' willingness to prescribe it. Porges says Rebif scored big gains in the U.S. during last year's second quarter, but by the fourth quarter "these share gains have actually reversed." If this trend continues, Porges worries that his 2006 Rebif sales predictions will be unreachable.
Serono's other major product is Gonal-F, a fertility treatment that recorded sales of $573 million in 2004 and accounted for 23% of corporate sales. Despite ongoing research in several areas, including cancer and inflammatory diseases, Serono lacks big prospects for at least the next few years.
Serono is typical of biotech companies "that face slowing growth from their initial wave of innovation and lack the critical mass to maximize the profitability of existing products," Porges says. A bigger company could do a better job, he says.