Biotechs With Breakthroughs Can Spurn Product-Hungry Drugmakers Email | Print | A A A
By Frances Schwartzkopff and Trista Kelley
Dec. 15 (Bloomberg) -- Biotechnology companies with cash and promising products can spurn offers from drugmakers hunting for bargains during the global financial crisis and ultimately command higher premiums than their cash-starved peers.
Genmab A/S, Basilea Pharmaceutica AG and Actelion Ltd. are the best-financed experimental drug companies in Europe, Bloomberg cash and liquidity data on 139 companies show. The three firms also have medicines in advanced stages of development, a combination that will help them rebuff unwanted suitors, says Karin Steffens, a senior portfolio manager at Robeco Group in Rotterdam.
Patent losses and a dearth of new treatments are shrinking growth prospects for the world’s biggest drugmakers, spurring the need for licensing deals and acquisitions. Tighter credit and lower stock prices also are increasing the vulnerability of biotechnology companies. Meanwhile, Copenhagen-based Genmab and peers with products and the cash to support research can wait for the stock market to improve, Steffens said.
“You’re still not looking at the price they were at a half- year ago,” even with a 70 percent premium, said Steffens, who helps oversee the equivalent of $251 million under management at the Dutch investment fund as of Sept. 30.
Shareholders of Genentech Inc., a U.S. biotechnology company with $11.7 billion in 2007 sales and cash flow of $3.2 billion, rejected the biggest offer of the year, Roche Holding AG’s $43.7 billion bid for the part of the U.S. company it doesn’t own, as too low.
Digging Heels
Investors of ImClone Systems Inc., maker of the Erbitux cancer drug, likewise dug in their heels, opposing Bristol-Myers Squibb Co.’s offer of $60 a share in August. Six weeks later, Eli Lilly & Co. won with a $70-a-share bid. That represented a 51 percent premium over ImClone’s share price on July 30, the day before Bristol-Myers announced its offer.
“Quality assets will always command a good premium,” said Geoffrey Hsu, who helps manage Biotech Growth Trust Plc, a London- listed investment company. Health-care investment funds with a longer-term outlook “are going to be less willing to take a haircut on what they’re willing to accept.”
The pace of biotechnology takeovers has increased, with 23 acquisitions since July 1 compared with 19 in the first six months of 2008, Bloomberg mergers and acquisitions data show. Pharmaceutical companies were willing to pay at least twice the market value in more than 50 percent of the announced or completed takeovers of the past year.
They’ll have to spend even more to persuade the most-coveted companies, says Stephanie Leouzon, a London-based Credit Suisse investment banker who has managed deals including Shire Plc’s acquisition in September of Germany’s Jerini AG.
Out of Sight
“Even if buyers raise the premiums they’re willing to pay, they may not meet the expectations that sellers would normally have during more stable market conditions,” said Leouzon.
Drugmakers including Leverkusen, Germany-based Bayer and Lilly, based in Indianapolis, have an average $7.5 billion to spend, London-based research firm Datamonitor Plc estimates. Insulin maker Novo Nordisk A/S has earmarked $2 billion for expansion as it seeks to exploit falling stock market prices, Chief Financial Officer Jesper Brandgaard said last month.
Three firms in Germany, which has the highest concentration of biotechnology companies in Europe excluding the U.K., have succumbed to the pressure. Jerini agreed to a takeover in July after struggling to win approval for an experimental therapy to treat a deadly tissue-swelling condition. Shareholders got 73 percent more than the previous closing price from the sale.
Japan’s Daiichi Sankyo Co. agreed to buy Germany’s U3 Pharma AG, a closely held company, for 150 million euros ($200 million) in May. Closely held protein engineering company Direvo Biotech AG was bought by Leverkusen, Germany-based Bayer for 210 million euros in September.
Pay a Premium
“Some of these companies have gone up and down and up and down,” said Graziano Seghezzi, who manages 1 billion euros as a partner at Paris-based venture capital firm Sofinnova Partners and helped manage Actelion’s initial public offering. “I would take a good premium and go. Pharma is willing to pay a premium that the market might not be willing to give these companies for the next two, three, four years.”
Genmab is a prime target because of its drug-development enhancing technology and the likelihood that its first product will reach the market next year, say Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts. Genmab’s experimental cancer therapy ofatumumab, which may compete with Genentech and Biogen Idec Inc.’s Rituxan, helped slow the progress of chronic lymphocytic leukemia in test results released Dec. 8. The company plans to seek U.S. regulatory approval in January.
Genmab’s Value
Approval for ofatumumab and another experimental medicine from its labs would value Genmab at 669 kroner ($119) a share, Goldman Sachs analysts wrote in Nov. 11 investor note. That’s more than twice the Dec. 12 closing price of 246.50 kroner.
“Industry valuations are very low,” said Denis Schmidli, a Zurich-based senior product manager at Pictet Funds SA, Genmab’s fifth-largest shareholder. “We are long-term investors. We can wait until the price makes sense for us to sell.”
Genmab Chief Executive Officer Lisa Drakeman declined to comment.
Possible buyers include GlaxoSmithKline Plc, said Martin Wales, a London-based analyst at UBS AG, in an Oct. 21 note. Europe’s largest pharmaceutical company pays for half the cost of developing ofatumumab and holds 8.9 percent of Genmab, making it the second-largest shareholder. London-based Glaxo declined to comment.
Biotechnology firms are trimming costs to preserve cash reserves that will enable them to operate independently for longer.
In October, Genmab fired 17 percent of its employees and cut back research, helping avoid a possible cash shortage in 2010, Erica Whittaker, a London-based analyst at Merrill Lynch, said in an Oct. 9 investor note.
‘Strategic Freedom’
Allschwil, Switzerland-based Actelion’s four therapies in the last stage of clinical testing and more than 1 billion Swiss francs ($847 million) in cash are enough to give it “strategic freedom of action,” said Chief Executive Officer Jean-Paul Clozel in an Oct. 21 statement.
The 356 million francs that local peer Basilea holds in cash and short-term financial assets are “enough for us to reach profitability if we achieve timely approvals throughout the European Union and U.S.,” said spokesman Jean-Christophe Britt.
Basilea, based in Basel, won European backing on Nov. 21 for its Zevtera antibiotic, and has recently begun marketing two other treatments.
BB Biotech, Europe’s second-largest biotechnology fund after Pictet, bought an additional 55,000 shares in Basilea after U.S. regulators cleared the skin infection treatment ceftobiprole in September. The Zurich-based fund won’t part with its biggest holding, a 7 percent stake in Actelion valued at 510.8 million francs as of Sept. 30, the last time BB Biotech disclosed its holdings.
“It’s always a question of price,” said Daniel Koller, the BB Biotech portfolio manager who oversees the Actelion holding. “In the mid-term, we see a doubling or tripling of the share price.”
To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at [email protected]; Trista Kelley in London at [email protected]
Last Updated: December 14, 2008 19:01 EST
AVX Price at posting:
8.8¢ Sentiment: Buy Disclosure: Held
