Betting on More Biotech Buyouts


By Gene Marcial A significant number of mergers and acquisitions have hit the biotech sector this year. And the betting among industry pros is that more are coming. "The recent acquisition of Aurora by Vertex, and Celera's (CRA) purchase of Axys Pharmaceuticals (AXHP) in mid-June foreshadow a new wave of consolidation in the industry," says John McCamanat, editor of the Medical Technology Stock Letter in Berkeley, Calif.

The merger wave is partly due to a situation where many companies with exciting technology lack a sound business plan, he says. And biotech executives with solid business acumen who can steer their companies to profitability are in short supply, McCamanat believes. In addition, he says, the cash hordes built up by the larger biotechs will allow several of them to compete with the big pharmaceutical companies for prime acquisitions.

Which are the likely targets? McCamant thinks the activity will revolve around the small and midsize biotechs with market caps below $500 million. Companies that are low on cash are the most vulnerable and will usually consider a merger or acquisition to give them some measure of control over their future. One other factor that will be a key is the syngery in programs and technologies of the two companies planning to combine.

THE "A" LIST. Among the stocks that McCamant thinks are vulnerable to being acquired: Hyseq (HYSQ), which seeks to discover therapeutic targets for its partners using genomics technologies and currently trades at 11.30 a share; Maxim Pharmaceuticals (MAXM), which develops drugs for cancer and infectious diseases, now at 6.45; NeoRx (NERX), which develops novel biopharmaceuticals for various cancers, trading at 3.50 a share; Onyx Pharmaceuticals (ONXX), which makes drugs based on the genetics of human disease, particularly cancer, now at 11.48; Ribozyme (RZYM), which seeks to identify gene functions, trading at 9.80; StemCells (STEM), a developer of stem-cell-based drugs to treat diseases of the central nervous system, at 5.39; and Valentis (VLTS), which produces proprietary gene-delivery systems, trading at 5.92.

Equally good bets for investors, says McCamant, are the large biotechs that are likely to pull the trigger in their acquisition plans. On top of McCamant's list of would-be acquirers: Chiron (CHIR), a major biotech focusing on producing biopharmaceuticals, vaccines, and blood-testing products, currently trading at 51; COR Therapeutics (CORR), which specializes in cardiovascular disorders, currently at 29; Elan (ELN), a worldwide leader in drug-delivery technology, now at 60; and Cell Genesys (CEGE), whose gene-modification technology seeks to treat major life-threatening diseases, including prostate cancer, trading at 20.

Chiron tops McCamant's list for these reasons: Even after acquiring Pathogenesis last year, Chiron is still on the prowl, says McCamant, because it has a need for products in the late stages of clinical trials. And Chiron has funds available that it raised recently specifically for acquisitions.

BETTER FITS. COR also needs new products, and it, too, has sufficient cash, helped by its stock, to make an acquisition. Ditto for Cell Genesys, which also has a good cash position to do a purchase to augment its own drug pipeline. And Elan has a strong history of acquisitions and is known for its ability to make quick and creative decisions. So it could, says McCamanat, announce an acquisition anytime soon.

McCamant says while the big pharmaceutical companies have larger budgets for acquisitions and are very keen on seeking biotech buyouts, he expects many of the deals will be done between the biotech companies, partly because their cultures are more compatible and also because such deals can be more synergistic than they are with the big drugmakers.

The bottom line: McCamant thinks many biotechs are currently undervalued -- and are ripe pickings for a buyout by either the major pharmceuticals or the large biotechs. Marcial is BusinessWeek's Inside Wall Street columnist


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