Drug company CEOs will be driven to look for more M&A opportunities, according to a new report from Frost & Sullivan. In the first half of the year alone, Merck bought Schering-Plough, Pfizer bought Wyeth, and Roche bought the portion of Genentech that it didn’t already own. But there’s plenty of opportunity—and free cash—for more such deals. And Frost predicts that those holding the money the will be looking very closely at opportunities in the beaten-down biotech industry.
What’s so attractive about biotech? For one, the barriers to entry are much greater than they are for traditional drugs. Biotech molecules are large and complex, and difficult to manufacture. And despite President Obama’s insistence that generic biotech drugs would save the healthcare system billions, there is still no path through the FDA for approving them. So companies that invent biotech blockbusters are protected against competition for decades—often even beyond what their patent protection allows. Should such a pathway emerge in the next couple of years, allowing older biotech products to go generic, drug companies can protect themselves by padding their pipelines now with brand new biotech molecules.
In the past, Big Pharma companies were more comfortable partnering with biotechs, via licensing deals, rather than buying them outright. That way, the licensor could finance the clinical trials, rewarding the licensee in dribs and drabs for various milestones that were reached along the way. If the trials failed, the licensor could walk away relatively easily, without suffering much pain to the pocketbook.
But then the recession happened, and everything changed. Thousands of biotech companies are out of cash and fighting for stay alive, presenting tempting deals that weren’t there before. The Amex Biotech Index has dropped 12% in the last 12 months. With prices down, it has suddenly become less risky for pharma companies to buy promising molecules—and the companies that invented them—rather than to leave those biotechs as free agents that could get snapped up by someone else.
As for who’s likely to buy, you can narrow down the candidates by looking towards the companies that have huge cash hordes. Among them: AstraZeneca with $4.3 billion, GlaxoSmithKline with $5.6 billion, and J&J with a staggering $10.8 billion.
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