Biotechnology companies that have long devoted their efforts to research & development in their own company have now started borrowing ready- made remedies from other companies via the route of acquisitions & mergers.

The month of December 2001 was the most memorable for the biotechnology industry; it saw three big acquisitions in just a few days. First Millennium Pharmaceuticals agreed to pay around $2 billion in stock for COR Therapeutics, which sells the heart drug Integrilin; then came Medimmune, which announced to pay about $1.5 billion in stock to Aviron for a nasal spray flu vaccine which is assumed close to getting government approval. And the biggest acquisition that swept away the industry was Amgen’s $16 billion acquisition announcement of Immunex. This acquisition gives it rights to Immunex’s wonder drug for rheumatoid arthritis, Enbrel. Earlier Cephalon bought Group Lafon for $450 million, and the very recent news is of Cambridge Antibody Technology (CAT) acquiring Drug Royalty Corporation of Canada for C$ 126m. The air is still hot with possible mergers of Biogen & Celltech and Pharmacopeia & EOS Biotechnology, enough to get any biotech trader’s breath away!

If not always, most of the time the major reasons for acquisition is tremendous pressure on the company itself. This can be seen with the current wonderment in the IT world regarding the acquisition of Compaq by Hewlett Packard. Getting a product on the market is no longer a single event in a company’s life. Ageing populations & high living standards demands better healthcare supported with new successful innovations. This increases pressure on the company; immediate need of another successful product cycle arises the need to accelerate growth. Most of the times in the state of desperation, biotech companies choose partnerships/mergers/ acquisitions.

Another major factor is 'fund raising', it is ultra difficult, particularly in the period of economic recession to raise money for internal growth; even to maintain their stock prices is a difficult task. Investors are not ready to invest unless company can radically improve its productivity or to find a way to raise its value on NASDAQ or related Markets.

Another reason for acquisition is a change in strategy; it accelerates the growth of the company. It is difficult for any biotechnology company to maintain steady flow of successful products. As a result, the increasingly group of bigger companies have no option but to try and acquire smaller companies with brilliant one or more products. If we have a look at Immunex, it has got a wonderful therapy for rheumatoid arthritis in the form of Enbrel; its sales will reach $750m this year. Amgen is counting on sales of this product next year, which is expected to reach $1 billion and by 2006 it is expected to exceed $2.6 billion. Thus Amgen will expect instant success with Enbrel and a number of other promising products including Epogen-for anaemia, Neupogen-immune system support drug, Aranesp-to stimulate the production of red blood cells in dialysis patients and Kineret-another drug for rheumatoid arthritis where- other treatments seem to have failed. Three cancer drugs from Immunex and not counting Abarelix-a prostate cancer treatment, which is awaiting regulatory approval can’t be bad to turn round the fortunes of Amgen and also its health!

The pharmaceutical industry has lost some of its charm this year. Many drugs have lost their patent protection, exposing companies to cheaper generic competition. At the same time research and development has failed to keep pace with most companies ascending growth targets in terms of productivity. Plus pharmaceutical companies seem less likely to make full-scale acquisitions with biotechs companies. This is causing most biotech companies to likely team up with another biotech company to gain greater critical mass and leverage know how. This effect is leaving biotech companies in very strong positions and most can expect a boost in business if the can manage and execute successful acquisitions.

One inspiring reason to go for acquisition is keeping an eye on past. Recent acquisitions and mergers in pharmaceutical industry are showing good results. The examples of GlaxoSmithKline & Aventis both show that companies creating synergies report strong sales growth. This is tempting enough for sister biopharmaceutical companies.

It is prudent to see other possible mergers from the big players still anticipating golden eggs trying to snap the remaining available smaller companies who seem during this times to accept them with open arms. Even investors are trying to second-guess who might be the next! This needs to light up red lights for the good of the industry as a whole. There is a need to cultivate the smaller companies and despite the benefits mentioned above the industry structure cannot be allowed to change drastically to rapidly.

Effects of acquisitions could be highly risky, especially when a huge sum is involved. If we look at current stories of Millennium and Amgen/Immunex, the immediate effect was Amgen’s shares went down by 13% after leakage of the news. Millennium shares were 23% down when the COR deal was announced. Even now when the market is a bit more stable, experienced shareholders are still doubtful about the expected success having seen many inexperience management trying to grapple with acquisitions over a number of years. And they do have a reason to be upset because if we look at the calculated risk of Amgen, the deal’s major factor is Enbrel, the wonder drug. If we check out the current position of Enbrel, there is no doubt its sales are wonderful but the problem is production. Because of insufficient production facilities its inventory is rather weak and not to expectation. Many patients are still on waiting list. In such situation many patients have already shifted on Remicade-a similar product by Johnson & Johnson, and they are not very less likely to come back! Good and experience management is the key to successful M&As and markets and traders should not influence these pointers. Also other mergers have shown that combining research teams and budgets does not necessarily double the number of blockbuster discoveries.

We at TekPlus predict that even though the economy is uncertain and stock markets are volatile, the trend of making big acquisitions will continue in the biotechnology industry in the coming year. We see many large and medium size companies like Chiron, Biogen, Celltech, etc waiting in the queue and some like Theratase already making several approaches to acquire. We believe that caution will be the key word if any are to succeed and execution will be the watchword or should I say the health factor!  

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