Monday, February 28, 2011

Genzyme: one less hope for a biotech to graduate to big pharma status

Add Genzyme to the list of biotech companies that made it to scale, and could have ultimately "graduated" to big pharma status. While I am happy for GENZ shareholders (and employees), GENZ's fate further confirms that all biotechs - even the successful ones - are due to be acquired by big pharma.

Genzyme joins Genentech, MedImmune, ImClone, and OSI, as operating companies with revenues in excess of $1B that have been absorbed by Big Pharma.

Why this matters? Because building a company to be acquired and building the best company are two different strategies. Given the developments with the companies above, one could question the wisdom of adopting any strategy but building to sell.

Who's left:

Amgen - there were loud rumors about PFE buying AMGN 3-4 years ago after reimbursement for Amgen's Epo was reduced. The emergence and success of D-Mab (osteoporosis drug) has kept Amgen an independent company - and there is still hoped for sales growth from personalizing Vectibix, but there doesn't seem to be either another exciting late stage product in development, nor much talk of AMGN acquiring companies or drugs to build and diversify their portfolio.

One factor surprisingly prominent in driving M&A discussions is the age of the selling CEO (GENZ's Termeer is 64), and AMGN's Kevin Scharer turns 63 on Wednesday, Mar 2. CEOs generally don't put their companies up for sale because they hit a certain age, but rather they are a little more receptive to acquisition overtures and because CEOs on the metaphoric "back nine" of their careers don't hold acquisitions hostage to demands for a significant role in the resulting merged company.

Biogen - which has previously been put in play by Carl Icahn, so you can't expect it to stand-alone for too long.

Celgene - I think the one to watch. They have the resources (i.e. cash flow) to reinvest in expanding the product portfolio, their CEO is hungry, and they might not be viewed as attractively by acquirers simply because Celgene is not the product of a novel technology platform. (Revlimid is a fantastic drug, but it's technical roots go back to the 1960's.)

Cephalon -  Strong with almost $3B in annual revenue, CEPH has the added advantage of a diverse business. The company has a new CEO as of December 2010 following the death of their founder and CEO, so I'd assume that the new CEO will want to stay independent for the immediate future, while the company climbs a steep growth curve from a number of new product releases over the last 2-3 years. As of now, CEPH lacks a blockbuster drug, which often drives acquisition interest.

Gilead - made further steps towards the big leagues by buying Calistoga last week, which not only adds scale, but also gets the company into a new, large market (oncology.)

Onyx - no way they're independent 3 years from now. Either Nexavar's growth continues and their partner Bayer decides to buy them, or Bayer's follow-on (son of Nexavar) makes the company put themselves up for sale.

Vertex - The company of "Billion Dollar Molecule" fame has lived many lives, and probably rebuffed many suitors, but the future of this company is completely tied to it's late-stage HepC drug. The drug, a potential blockbuster, is partnered with JNJ ex-US, meaning one of 3 things is likely to happen to VRTX:

1) The drug is a smashing success - JNJ decides to buy VRTX to get 100% of the growth, especially since they'll have a great view of sales performance, as they distribute the drug in Europe and elsewhere.

2) The Hep C drug is a middling success, but ultimately shares the market with one or more of the competing emerging HepC drugs. In this scenario, VRTX becomes valued at whatever option value the market perceives JNJ to place on VRTX, at least until VRTX gets another non-HepC product to the late stage.

3) drug not approved, Vertex leaves a big, smoking crater. (Clinical data released so far indicates the drug is strong and that this scenario isn't likely.)

Keep in mind: VRTX's current $9B valuation is ~5% of JNJ's valuation. To an acquisition-driven company like JNJ, VRTX would be a snack.

Are there any other candidate companies that could grow into multi-billion dollar competitors to big pharma?