Don't let microcap myopia keep you from seeing the bigger picture going on in the sector -
There's No Doubt About Biotech Buyouts
By Marc Lichtenfeld
Senior Columnist
12/31/2006 9:09 AM EST
Anyone who's interested in trying his hand at risk arbitrage should get plenty of practice if he focuses on the biotech sector in 2007.
With a profusion of companies of all sizes and at varying stages of product development occupying the landscape, the sector is ripe for significant mergers and acquisitions activity, many industry observers believe.
In particular, Big Pharma names, especially those with weak pipelines, will likely move to snap up smaller firms whose drugs are already approved, thereby quickly gaining a new revenue stream.
Michael Weiss, the CEO of Keryx Biopharmaceuticals (KERX) , says the large drug companies will go after small outfits "and pay a pretty good premium, almost what you'd expect to pay for a nearly perfect sales strategy."
He calls this kind of deal "relatively low risk because Big Pharma puts it into their portfolio, and they know they probably won't have a major product failure."
Jeff Matthews of RAM Partners agrees. He believes companies with approved products, especially in the fields of cancer and diabetes, will prove the most attractive to potential buyers.
Companies that fit the bill include Amylin Pharmaceuticals (AMLN) , Millennium Pharmaceuticals (MLNM) , and some of the larger companies. Smaller players could include names such as Bioenvision (BIVN) .
While I've been a proponent of investing in the large-cap, profitable companies, I'll acknowledge that some investors want the thrill and upside potential of the next great cure for cancer or any number of debilitating diseases. Those investors usually focus on the small-caps.
Weiss believes there will also be M&A activity in very early stage companies. Tiny Memory Pharmaceuticals (MEMY) , which has a partnership with Roche, and Incyte (INCY) , which is collaborating with Pfizer (PFE) , fit that description.
Partnerships of this sort may suggest that the large drugmakers are taking the small-cap biotechs for a test drive, says Bob Wasserman, director of research for Jesup & Lamont, a New York-based brokerage and investment-banking firm.
"We'll see consolidation in terms of buying partners like Eli Lilly (LLY) and Icos (ICOS) ," he says, referring to a $2.3 billion deal in which Lilly plans to take over its much smaller marketing partner for the impotence drug Cialis.
Other conceivable buyout targets are Intermune (ITMN) , which is partnered with Roche in studying a hepatitis C drug, and BioMarin (BMRN) , which is being acquired by its partner Genzyme (GENZ) .
(To see why I'm bullish on BioMarin, click here.)
However, before you charge in to the small-cap arena, be sure to do your homework and know what you're up against. That's the advice of Gabe Hoffman of Accipiter Capital Management, whose Accipiter Life Sciences Fund is up 43% through October, according to HedgeFund.net.
"Don't think about small-cap biotech as a sector, but try to analyze individual companies," he advises.
Steven Burrill, CEO of Burrill & Co., a San Francisco-based life sciences venture capital and merchant banking firm, predicts 30 IPOs in the biotech sector in 2007, a 50% increase over this year. But Hoffman warns, "The more deals you see, the closer you are to seeing the whole sector roll over."
Keryx's Weiss believes that because of some blowups this year, such as Nuvelo (NUVO) and NeoPharm (NEOL) , there's a smaller amount of supply.
"Theoretically, you should have increased demand for those names, especially going into binary events," he states. He suggests that because large-cap biotech had a solid year, "people might be looking to see where other opportunities may lie."
Indeed, the Amex Biotech Index, which is made up of larger-cap stocks, gained 10.8% through mid-December, while the Nasdaq Biotechnology Index advanced only 2.8%.
Burrill believes biotech's "elite companies" will outperform the Dow Jones Industrial Average and the Nasdaq Composite in the coming year.
Names that can be found in this group include Genentech (DNA) , Amgen (AMGN) , Gilead Sciences (GILD) , Genzyme, Biogen Idec (BIIB) and Vertex Pharmaceuticals (VRTX) .
He also expects significant M&A activity, a more proactive stance toward drug safety by regulators and increased funding for stem-cell research.
Important Upcoming Events
Perhaps no other sector is more affected by binary events than biotech. Below is a calendar that lists a few important items to keep on your radar screen during the year.
Company Drug Indication Data Date
Gilead Sciences Aztreonam lysine Cystic Fibrosis Phase III Q1
New River Pharmaceuticals NRP-104 ADHD Phase III Q1
Millennium Pharmaceuticals MLN1202 Relapsing remitting MS Phase III Q1
BioMarin Phenoptin PKU NDA filing Q2
Adolor Entereg OBD NDA H1
Biogen/Genentech Rituxan Relapsing remitting MS Proof of concept H1
Genzyme Tolevamer CDAD Phase III/NDA H1/YE
Genzyme Mozobil Multiple meyeloma/NHL Phase III H1
OSI Pharmaceuticals. PSN357 Diabetes Phase IIa H1
Protein Design Labs M200 Renal/pancreatic cancer/melanoma Phase II Mid-year
Gilead Sciences Viread Hepatitis B Phase III Q4
Myriad Genetics Flurizan Alzheimer's Interim Phase III Q4
Keryx KRX-101 Diabetic neuropathy Phase III YE
Source: Merrill Lynch
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