Buy-Side Experts See Major Changes Afoot for Biotech Amid Financial Crisis

10/30/08

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of biotech’s need for cash,” said Tom Brakel, of Federated Kaufman Funds, which is a unit of Pittsburgh-based Federated Investments. Brakel noted that the six largest pharmaceutical firms have about $83 billion in cash.

Last week, for example, we saw San Diego-based drug developer Phenomix cancel its plans for an $86.25 million IPO and then reveal a new partnership with New York drug maker Forest Laboratories that would bring Phenomix $75 million in initial fees.

“There are always going to be companies with great technology that will find a way to get capital, but it may not be through the public markets, and they may have to settle for less favorable terms in a partnership,” said Stephen DuBois, a portfolio manager for investment firm Camber Capital Management.

Consolidation, Consolidation
One potential outcome of the harsh economic situation and other factors will be a significant increase in consolidation in the life sciences industry, according to buy-side experts.

Health care analyst Andrea Bici, of London-based Schroder Investment Management, raised some eyebrows when she predicted that only 75 public biotechs—or roughly 25 percent of the current total—would be in business as independent firms five years from now. (Most of the portfolio managers predicted 70 percent to 80 percent of the companies would be standing in five years.)

Indeed, we’ve already seen some consolidation among cash-hungry biotechs over the past year or so. Needham, MA-based Avant Immunotherapeutics, for one, initiated a merger with Phillipsburg, NJ-based Celldex Therapeutics last year (the firm is now known as Celldex (NASDAQ:CLDX) and is headquartered in Needham). In as similar deal this summer, Bothell, WA-based Sonus Pharmaceuticals, which failed to clear late-stage clinical trials with a less toxic form of chemotherapy, completed a reverse merger with then-privately held Vancouver, British Columbia biotech firm OncoGenex Pharmaceuticals (NASDAQ:OGXI).

Though more tied to expirations of patents on major drugs than on the ailing economy, another factor behind consolidation will be major pharmas’ great appetites for drugs to fill their product pipelines through acquisitions. Adam Koppel, a director at Brookside Capital, a hedge fund affiliate of Boston-based investment firm Bain Capital, said: “Most of these companies have no innovation in their pipelines—they are starving.”

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