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