Biotech Buyout Action Likely to Continue

PharmaManufacturing.com
08/20/2008

A buyout bull's-eye will likely remain on biotechnology companies over the next few years as major pharmaceutical companies continue taking advantage of a weak dollar and a surplus of cash to buy pipeline additions.

Billion-dollar deals are not unheard of in the drug development industry, but even Roche surprised the market when it offered $44 billion for biotech giant Genentech Inc. Switzerland-based Roche already owns a majority stake in the South San Francisco, Calif.-based company, which sells the blockbuster cancer drug Avastin.

Meanwhile, New York-based Bristol-Myers Squibb Co. has offered $4.5 billion for its partner, New York-based ImClone Systems Inc., which makes the cancer drug Erbitux. In both cases, the biotech companies have lucrative treatments on the market and a varied pipeline of developing products. The biotech companies also consider the buyout proposals too low.

"There's a fair bit of money in the industry today, almost creating a pent-up capacity to do deals," said Terry Hisey, who leads the life sciences practice at Deloitte.

The money, coupled with a small rebound in the market, a weak U.S. dollar and the need for new products have set up an environment for a reasonably long period of M&A activity, he added.

Meanwhile, the major drugmakers have been hit with a series of key patent expirations, and subsequent generic competition is eating away at revenue. There is no system in place for approving generic versions of biotechnology-based drugs, leaving open the potential for more time on the market without competition, and thus more revenue.

Biotech drugs are developed using living organisms and are harder to replicate, whereas traditional drugs are made using chemical compounds.

Going forward, buyout valuations will likely remain high on future offers as companies in effect take an educated guess at what the future revenue potential of a certain drug might be.