Stop the M&A Obsession: Biotech Needs More Companies to Stay Independent

7/18/11Follow @xconomy

Given what investment bankers did to the financial system just a couple years ago, it surprises me how many people still accept what they have to say at face value. But quite a few people in biotech are still lapping up all sorts of short-sighted, destructive advice from the financial powers that be.

The latest bit of wisdom passed down from Wall Street came in a Reuters story this past week. It speculated about 11 publicly traded biotech companies that various investment pros consider to be takeover candidates. These companies have the kind of novel drugs that Big Pharma needs to replenish its empty pipelines. If you’re a shareholder in one of these little companies, this sounds exciting. Just hold onto your shares a little while longer, or buy some now while you can, and wait a couple quarters for a suitor to pay a 30, 40, or 50 percent premium. Instant returns! That will make everybody happy, right?

What stories like this usually fail to mention is who really stands to gain, and who loses, in these deals. Investment bankers, C-level executives, lawyers, accountants, certain consultants—they all pocket big money. Bench scientists, lower-level management, and entire regional economies can get whacked as hundreds or thousands of people lose their jobs.

The so-called winners in these deals often end up with a pyrrhic victory. While the quarterly and annual financial reports of the acquiring company might look good for a while, they often are left with an organization that is too bloated to really do the innovative work of developing new drugs. What happens a year later? These same fee-seeking investment bankers start whispering in the ears of executives, and reporters, about the next crop of biotechs that need to be harvested to fill up Big Pharma’s empty hopper.

Don’t get me wrong, some acquisitions can work out well for everybody involved. This tends to be true with small, private, venture-backed biotech companies that are essentially built to create a single drug, or maybe two, with a small team that can be easily integrated. Recent examples that made sense were Daiichi Sankyo’s purchase of Berkeley, CA-based Plexxikon; Gilead Sciences’s buy of Seattle-based Calistoga Pharmaceuticals; and Amgen’s takeover of Woburn, MA-based Biovex. These were cases of little companies that needed the resources of a bigger enterprise to make the most of their drug candidates. They also were able to provide healthy returns to their venture backers. And because the little company didn’t have many employees, the acquirer had fewer integration headaches and didn’t need to make mass layoffs.

What’s more problematic is when the bankers aren’t satisfied with the puny fees they get from those $500 million to $1 billion acquisitions. So they start beating the drum for multi-billion dollar mega-mergers. These are the kind of deals that can generate monster fees, like the potential takeovers listed in the Reuters report. The target list includes Biogen Idec (NASDAQ: BIIB), Vertex Pharmaceuticals (NASDAQ: VRTX), Dendreon (NASDAQ: DNDN), Seattle Genetics (NASDAQ: SGEN), Exelixis (NASDAQ: EXEL), and Intermune (NASDAQ: ITMN), along with some smaller players.

Most in the financial crowd sees these companies as nothing more than any other liquid security, like a pork belly or a securitized mortgage. They don’t care … Next Page »

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  • E

    It is ironic that the author uses Biogen Idec as an example of a small biotech creating jobs and struggling to stay indepedent given the company’s own history. The company is a merger of Biogen (Cambridge) and Idec (San diego) which subsequently lead to the layoff of hundreds when the San Diego site was shut down.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    E—my point is that Biogen Idec has been better off staying independent the past several years. You’re right, to stay independent, Biogen did close the San Diego site and lay off hundreds of workers, which was a blow to the San Diego biotech community. But a Big Pharma acquirer would most likely have made the same decision.

  • http://na John

    Luke,

    Agreed! Thanks!

    So certain biotechs (ie: Dendreon) are responsible and must do everything in their power to prevent such an occurrence from happening. They are responsible for having contingencies in place (ie: poison pill) to prevent/thwart an unwanted takeover. They are also responsible for assuring their top 10 large shareholders/institutions are convinced with the growing future value story of the company to remain solo and see it reflected in a steadily rising stock price. You mentioned about DNDN moving into a a new building to invite & schmooze large institutional investors and thats fantastic!
    Dr Gold needs to sustain contact and remain close to any large shareholder proponents of DNDN (Soros, Cohen, JPM, etc) and remain even closer to any large “opponents” of DNDN (Soros, Cohen, JPM, etc) because we don’t know what relationship they have with certain big pharma acquirors or boutique firms (like RBC or Lazard).

    J

  • David

    Biogen represents the dilemma many of these larger biotechs face. If they cannot grow quickly, they must either sell or chop. Biogen elected to chop: eliminating what many felt was a therapeutic area with much potential. The savings by cutting the oncology TA are reflected in their current stock price, but it remains questionable whether or not they will face the same dilemma in a few years if they cannot maintain a high rate of growth.