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Minyan Mailbag: More Pharma / Biotech Mergers Ahead?


Thanks for the sector check up Dr. Miller...


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Miller,

I wonder if this weakness amongst drug stocks makes it even more likely that they will try to stock their medicine chests with biotechs to jumpstart their trickling pipelines. I know you are looking at monetary repatriation as the main catalyst for the shopping binge, but it sure looks like the recurrent disappointments and patent expiration issues may induce panic buying amongst the biggies.

Minyan David

David -

Patent expirations and recurring earnings disappointments will be primary drivers of the "panic buying." The repatriated cash gives us some idea how deep the buying can go.

The big drugmakers have clearly been in denial. They are flooding the streets with biz dev people, but have not pulled the trigger on anywhere close to the number of deals necessary to fix their problems. They have been using the traditional big pharma negotiating technique of trying to pin the acquisition targets against published timelines or cash burn. While the fiddle plays, their Rome burns.

The big drop by Pfizer (PFE) over a relatively minor miss is likely to (finally!) open some eyes. This seems to me to be the first time the reality of the macro issues of patent expiration and barren pipelines has worked its way on to the conference call (and therefore on to the radar screens of the pharma analysts). I find it interesting that this "development" was sufficiently newsworthy to merit a "day two" story by the WSJ, which is worth a read.

Here are a few of my favorite quotes from the article:

"Like its rivals, Pfizer has been unable through its research and acquisitions to replace blockbuster drugs facing generic competition."

"Pfizer management, usually eager to trumpet the company's prowess, hasn't been saying much lately, some investors said. 'Performance has tanked and management has all but disappeared,' said Tim Anderson, drug industry analyst with Prudential Equity Group LLC. "That's very unsettling.'"

The more earnings misses and guidance reductions we see, the closer we will be to the feeding frenzy I've been anticipating for some time. Pay attention to Merck's (MRK) earnings on Monday, particularly the potential they will announce a significant restructuring. A few more stories on how generic Zocor is going to clean Lipitor's clock won't hurt our outlook, either, given the visibility of the stain market.

As I noted earlier, the FASB purchase accounting change throws a huge monkey wrench into the works as pharma can no longer string out biotech indefinitely. Pharma has to get their acquisitions done by the end of 2006.

For the first time in a long time - perhaps ever - biotech seems to be holding the cards. There are multiple sources of cash, particularly "good" cash from private VC firms. Pharma has its own "drop dead" dates to be concerned about from the FASB situation and when the patience of their investors will run out.

As I have said for some time, I'd rather own the acquisition targets than the companies forced to do the acquisitions. But then I'm used to the high volatility of the sector, which I caution is not for everyone.

Hope that helps,

No positions in stocks mentioned.

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