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Few bargains in biotech acquisitions
When I was a kid, one of my favorite TV shows was The Beverly Hillbillies, the story of a dirt-poor family from Appalachia whose property just happened to be seeping oil. In an early episode, the none-too-wordly Jed and Granny were hosting "Cousin Pearl," who asks about the amount of money the oil company was offering for the oil rights, thinking they may have been hoodwinked by the slick Mr. Brewster. When Jed says, "325, but they are paying in a funny kind of dollar," Pearl's eyebrows raise, expecting the worst. " A funny kind of dollar?" she asks.
"Yes," declares Jed, proud that he has something of value and giving the impression the even $325 is a lot of money for hill folk such as he. "Granny, what kind of dollars did Mr. Brewster say he was paying us?"
"Million dollars," says Granny.
I'm reminded of this often these days, as the M&A bubblings in the biotech markets have turned into what could be seen as a raging boil. And the funny dollars out there these days don't begin with an "m" rather a "b".
But a funny thing happened on the way to the biotech bargain basement the big companies had been picking over, the pharmas and biotechs on display like so many shirts on a clearance rack at Nordstrom's: the acquisition targets started saying, "No, we don't want your funny billion dollars, we're worth more."
Now far be it for me to say that simply because a company is willing to step up to the plate with more than a billion dollars, company executives should drop to their knees and thank God. After all, these CEOs and boards of directors do have a fiduciary responsibility to get every last dollar out of any deal from a potential suitor.
Rather, what seems to be perhaps not funny, but shifting, is the amount these targets are willing to push (and perhaps how brazen some acquirers are being by offering short money).
In a market that saw roughly $60 billion in acquisitions in America and another $34 billion in Europe in 2007, according to Windhover Information, there are some notable offers on the table as I write this where companies have turned up their noses, as if asked to eat week-old leftovers.
Most notable is the current $44 billion offer made by Roche for superstar biotech Genetech—promptly rejected—and the recent attempt by Bristol-Myers Squibb to snatch up the 83 percent of ImClone shares it doesn't already own for $4.5 billion. ImClone, too, said, "no thanks."
While many see these rebuffs as ploys to extract more cash, there is another force at work here. It used to be that big pharma scanned the playing field for the smaller, emerging biotechs, whose pipeline or discovery platform showed promise for future drugs years down the road. The cost of failure in these cases was much smaller and the dollars paid were likewise small and adjusted for risk. The point is, big pharma companies were at least more willing to take those risks in the past.
Now, as pharma companies have been stung by huge multi-billion dollar settlements for adverse effects of blockbuster drugs, the M&A focus has shifted from biotechs of promise (and risk) to those bigger biotechs that have been able to pull themselves through and develop and market their own drugs, some to the tune of billions a year in revenue. In other words: safe bets with not just a pipeline of drug candidates, but also a solid pipeline of greenbacks.
There is one problem here, though. The safer the big pharmas try to be with their acquisitions of biotechs, the more wary these same biotechs become of them. The standard thinking in this regard is the employees and managers of successful biotechs—even big ones—fear being gobbled up by the big marketing machine—I mean big pharma—will sound the death knell for the innovation they are accustomed to. This, despite the argument that some of these biotechs have become the mirror image of those they disdain.
While it would be hard to classify pharma companies as desperate, it's not hard to imagine there are some dry mouths in boardrooms where they need to find something to do to fill their drying wells. As more and more biotechs say no to their pharma suitors, those funny billion dollars will be getting bigger for each and every approved drug a biotech has in its stable.
Which begs the question: when will big pharma stop looking outward to simply acquire someone else's marketable drug and turn their attention back inward, to their own flagging discovery operations? A place, I might add, where it should have looked all along. DDN