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Biotech Roundup: Big Bang, Icahn, Black Robes...


C'mon, boxcars! Get those acquisitions rolling!


Big Bang?

Gilead's (GILD) offer to acquire Myogen (MYOG) at 50% over the previous day's close was certainly a shot heard 'round the sector. I likened it to the June 2005 takeout of Vicuron by Pfizer (PFE). Pfizer's shot did not set off the acquisition frenzy we expected, though it did mark a bottom in the NASDAQ Biotech Index (NBI) for the year.

Will Gilead's big deal be the big bang that starts pharma and biopharma alike running for their checkbooks? It's hard to tell for sure. It certainly goosed the sector as the NBI closed at the highest level since May 10.

Bidding War

Genzyme (GENZ) appears to really want to acquire AnorMED (ANOR). GENZ lowballed the company at $8.65, and Millennium Pharma (MLNM) came in with a bid at $12. AnorMED's Board seems a little peeved at Genzyme for the low bid, so they are telling anyone who will listen that Millennium has the right to match any other offer.

So does the combination of the AnorMED bidding war and the Myogen take-out mean we're (finally) at the point where the acquisition bandwagon gets rolling? Let's see if October holds any additional, similar surprises...

Icahn Conned

I have no idea why Carl Icahn thinks ImClone (IMCL) is worth even $35.50 a share. Regardless of whether it was him or ImClone's management who turned down the offer, I expect it will be a price that will be looked at fondly a few years from now. The only way ImClone gets $36/share is if the acquisition frenzy gets far crazier than even I expect.

Amgen's (AMGN) competitive EGFR drug Vectibix will start eating into Erbitux revenues with some rigor in 2007. By the end of the decade, if the early efficacy and side effect data hold up, YM Bioscience's (AMEX:YMI) no-side-effect competitor nimotuzumab will eat both products for lunch in the marketplace.

All "major pharmaceutical companies" have more than enough cash to make an all-cash bid for ImClone. The fact the deal was an all-stock deal leads me to believe the potential acquirer was a second-tier player or a smaller bio-pharma company. Those shareholders certainly dodged a really large bullet when ImClone said no.

There are many great biotech companies out there. I have no idea who sold Carl Icahn on ImClone, but he/she was one hell of a salesperson.

Black Robes, Big Consequences

The Supreme Court is hearing arguments in a patent case pitting Genentech (DNA) against MedImmune (MEDI). This case could reverberate across the sector, so it bears watching.

MedImmune licensed Genentech's famous "Cabilly" patent covering monoclonal antibody (MAb) production. It eventually sued to get the patent thrown out.

"Not so fast," said the lower courts. "You don't have the right to sue since you are already licensing the patent." The theory was that by signing a patent licensing agreement and paying the royalties, MedImmune explicitly admitted the patent was valid.

MedImmune said signing the license was merely a business decision and was done under protest. The company couldn't afford to ignore the patent and risk treble damages from willful infringement, so it signed the license agreement.

If the Supremes find for Genentech, it means patent holders can bully anyone who wants to bring a patent-covered product to market inside the decade or so most patent litigation takes. Sure, they already do this, but it means a licensee essentially never has any recourse while the patent is valid.

If MedImmune wins, expect the number of patent lawsuits (which our intellectual property attorney rightfully calls "The Sport of Kings" due to the cost) to soar. Expect also to see Genentech besieged by similar lawsuits since nearly all companies with the MAb drug license the Cabilly patent.

Genentech got about a penny per share in earnings, or about $20 mln a quarter, in Cabilly-based licensing fees in 2005.

Buy Your Votes Here

The corporate governance system is broken. It has been for a long time, it's just lately people other than stock message board posters have decided to write about it. Apparently, that makes the concerns legitimate.

The only useful component of Regulation SHO was the requirement to label a transaction a short sale. All the rest of it is bunk, as I commented on when the regulation went into effect. With the ability to tag a transaction as a short sale comes the ability to tag the associated shares as "phantom" shares and, therefore, not eligible to be voted in a shareholder vote.

If you think that's far-fetched, remember that tagging shares already happens. In the rules that brought us the dividend tax cut, the IRS tacked on a little clause noting that the "cash in lieu of dividend" payments that you receive when you purchase stock from a short seller are not eligible for the lower dividend tax rate. They are instead taxed at your regular income level. So, the technology certainly exists.

Why's this an issue? If you have a company with one share outstanding, there should be only one vote at shareholders' meetings. If that share is lent to a short seller who completes that transaction, all of a sudden there are two shares to vote. The "real" one and the "phantom" one bought from the short seller.

DTC supposedly works all this out by (1) crossing their fingers and hoping fewer people vote than the total number of outstanding shares held in "street name;" and by (2) apportioning votes received according to the percentages yes/no when the crossed fingers don't work. That strikes me as an odd way to run an election.

At some point, it's going to be obvious (even more obvious?) the regulatory system we created in the 1930s is completely overmatched by modern trading strategies and needs to be overhauled. I'm not holding my breath because there simply isn't the political will there to get it done. Republicans don't want to appear anti-business and Democrats are gorging at the money hose recently turned their way by prominent members of the hedge fund industry. Let's just hope we don't need another complete financial and economic meltdown to make it happen.
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