Biogen Move Raises The Ante On Biotech Deals - Inv Bus Dly
Biogen Idec caught the stock markets by surprise on Oct. 12 when its board said the company would consider buyout offers. Biogen Idec's (BIIB)... Biogen Idec (BIIB)caught the stock markets by surprise on Oct. 12 when its board said the company would consider buyout offers. Biogen Idec's stock shot up 23% over the next two days.
The bidding will start at $23 billion, the price reportedly offered by uber-investor Carl Icahn. One likely bidder is Pfizer, (PFE) which lost the bidding war for MedImmune earlier this year to AstraZeneca's (AZN) $16 billion offer.
The recent dealmaking calls to mind the drug industry's merger-happy days of the 1990s and early 2000s. But while many of those deals brought size, they didn't always bring performance, says Linda Bannister, senior health care analyst for Edward Jones.
She spoke with IBD.
IBD: There have been huge pharma mergers in the last decade. How did they work out?
Bannister: If you look back at some of these big acquisitions, like Pfizer buying Pharmacia and Warner-Lambert, you have to ask if they were good acquisitions.
Maybe it was good to gain some scale in marketing and manufacturing, but at the end of the day, what drives a pharmaceutical company is research.
Now we're seeing Pfizer divide itself into smaller, more flexible therapeutic groups. Pfizer has a stated goal of 20% of revenues coming from biologic products. They didn't put a time frame on that but they're moving in that direction.
It would not surprise me to see Pfizer acquiring a major biotech.
IBD: Which companies might be targets?
Bannister: It could be Amgen, (AMGN) though Amgen is somewhat large. It could be Biogen Idec. More likely is smaller biotech companies.
We think that's what we'll see from big pharma in general.
IBD: Something along the lines of Merck's $1.1 billion buy a year ago of Sirna for its RNA technology? Modest as that buy was, how does it fit with Merck's reputation for in-house science?
Bannister: Merck (MRK) is known for its science. Justifiably so.
When big companies buy these biotech companies, you wonder why they didn't just in-license the science. Buying the whole company is like getting a jump start. A biotech manufacturing facility is very specialized and takes time to build and get approved.
Merck has a pretty good pipeline. Two of their recent product launches have done very well, Gardasil and Januvia. Merck still hasn't cleared up all the litigation from Vioxx. They've taken cost-of-litigation charges but they have yet to take a charge to pay any people harmed by Vioxx.
So Merck has that pending potential liability. And with a good pipeline and the potential of a charge for Vioxx, they're less acquisitive than Pfizer.
If you look at the different paths Merck and Pfizer have taken, you see that Pfizer's former CEO was building an empire, while Merck's science and execution have been excellent.
IBD: Some takeovers have been huge, like the $69 billion deal that created GlaxoSmithKline (GSK) in 2000. And Pfizer paid $115 billion for Warner-Lambert in 2000 and $60 billion for Pharmacia in 2002. When is big too big?
Bannister: When I look at Pfizer, I think the company got very large with the result that its costs were too high.
A lot of things that should have been done with those acquisitions, in terms of fully integrating the companies and reducing costs, weren't done because there wasn't an immediate need to do something. That's because they've been benefiting from Lipitor, the largest pharmaceutical product ever marketed.
Now you have that integration occurring, with Pfizer closing some research and development facilities and laying off some of the sales force.
You have to remember the core of the company is the product. To think about merging two big pharmaceutical companies you have to ask yourself, "Did you do something to improve the productivity of research and development?" That's the heart of it.
Once you have scale, it needs to be driven by product development. Often when companies become bigger, that stifles creativity.
IBD: So bigger is not necessarily better.
Bannister: No. And now you're seeing big pharma companies creating silos focused on specific therapeutic areas to try to enhance creativity, to get the scientists more engaged in what's going on.
I think it's important to create smaller groups within such a large company. Big companies become more bureaucratic. That's why you now see big pharma carving out these individual areas of focus on certain diseases. IBD: Biogen Idec says it's open to buyout offers. What if other big biotechs, like Amgen, follow suit?
Bannister: Pharma companies would be interested in Amgen. It's a great biotech company and has a decent pipeline.
Clearly pharma has the cash to do deals. But look at some of the prices recent deals have brought, like 10 times forward sales. That's what AstraZeneca paid for MedImmune. It's a pretty steep price.
We'll have to see if AstraZeneca can crank products out of the pipeline as a result of its acquisition of MedImmune. We won't know if they got their money's worth for a few years.