Biotech Roundup: Acquisitions, Tysabri, The Myogen Effect
...expand your biotech knowledge base.
Note: My intent in this weekly column is to have a varying ratio between commentary and a review of news and events that happened during the week. In these notes, I'll try to relate the news items to something that is either actionable in the future or that can add to your overall biotech investment knowledge base.
Acquisition chest beating
I lost my note card on exactly which pharma and biotech executives have come out in 2006 and said how much they are going to spend to acquire new products for their pipeline, but I do remember I was on side two of the card already. Bayer, Pfizer (PFE), and Amgen (AMGN) are three that come immediately to mind. Pfizer said they'd spend between $1-6B per acquisition, naming $2B as about the sweet spot. Even though FASB delayed, probably by a year, the effective date of a rule that really harms the financial attractiveness of pharma acquisitions of biotech, it is still looming out there. Instead of a six-month window for acquisitions, we now have a 12-15 month window.
I'd expect this to be a competitive process, driving prices higher the closer we get to mid-2007.
I think this process is instructive as to how the FDA was stung by recent drug safety controversies. I expect the FDA to increase (even more) their predilection for requiring extensive safety monitoring of new drugs whose side effect profiles have a little hair on them. Not all will be as complicated as that suggested by both sides in the Tysabri panel, but they will entail considerable cost and slow adoption of any drug subject to these kinds of restrictions.
This will make drugs more expensive for everyone, of course.
That said, the return of Tysabri to the market is something of a victory. I've written previously that the FDA's removal of Iressa was unconscionable, so I have to cheer the panel's decision on Tysabri. The restrictions, while onerous, still allow patients to make the final choice based upon their personal risk/reward evaluation. The FDA should be more willing to see patients as intelligent, rational consumers of healthcare – particularly in situations where the risks are very serious for numerically minor and identifiable subsets of patients.
"The Myogen Effect"
Last summer, Pfizer bought Vicuron for $1.9B, a 74% premium over the previous day's close. It was one of a few events in 2005 that finally made Wall Street realize biotechs are targets for big pharma.
Myogen was bid up during the last couple of weeks after we named their drug ambrisentan as a potential licensing target for Pfizer. "Licensing target" was morphed by the rumor mill to be "acquisition target." Myogen announced earlier this week they outlicensed the ex-US rights for ambrisentan to GlaxoSmithKline (GSK).
Normally, such news is greeted with cheers by Wall Street. This time, it was greeted with a 14% drop in Myogen's market cap. Wall Street was, mistakenly, shooting for an acquisition and was disappointed when it didn't happen.
Aside from the fact it is this kind of disconnect between perception and reality that drives biotech investors nuts, we think there is a lesson here for both big pharma and CEOs of small biotechs.
At some point in a licensing negotiation, the subject of "Why don't we just buy you?" always comes up. Let's assume the number offered and the number desired is off by 20-30%. Big pharma can now point to Myogen and say, "You're going to lose half of that on the product licensing announcement anyway, so just sell out." Biotech CEOs who traditionally assume a licensing deal means an automatic market cap bump now have a little more thinking to do.
It will be interesting to see if this behavior is repeated as this acquisition/licensing cycle is played out.
A Good Read
Take a gander at Nature Biotechnology's 10th Anniversary Edition. Whether you are a neophyte or experienced biotech investor, there is some good stuff in this issue about the business of this business.
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