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

7/18/11Follow @xconomy

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what kind of long-term effect a takeover might have on the employees, a regional innovation cluster, or the company’s ability to create more valuable drugs. They want the fees, they want to help their clients boost their short-term returns, and they want to put pressure on executives to go with the flow.

From where I stand in Seattle, a takeover of Dendreon or Seattle Genetics would almost surely be bad news. The Northwest’s biotech hub has suffered a series of body blows over the past 10 years, mostly after successful biotechs got acquired by larger companies that slashed jobs and sucked a lot of life out of the region’s biotech talent pool. Dendreon and Seattle Genetics have proven themselves the past couple years, creating valuable new cancer drugs, which has enabled them to hire hundreds of people from all over the country. If a Big Pharma company takes either of them out, it would almost surely defeat the progress these companies have made for the region’s biotech cluster. And I seriously doubt that the acquirer would do any better a job at using the underlying technology to come up with more drugs like Dendreon’s sipuleucel-T (Provenge) or Seattle Genetics’ brentuximab vedotin (Adcetris).

While the Boston and San Francisco biotech hubs are much bigger than Seattle’s, and wouldn’t be hurt as badly by a couple of acquisitions, it would diminish each region’s ability to create innovative new drugs if their flagship companies got swallowed into the belly of some Big Pharma.

When I interviewed Biogen Idec CEO George Scangos in mid-June, I asked him whether the company’s resurgence reduced some of the pressure to sell, which Biogen has felt throughout much of the last four years. He said all the right things, never closing the door to the option of an acquisition. But he also didn’t say anything to suggest he’s itching to sell.

“I think we have a very solid future as a successful, independent, growing company with a $23 billion market cap,” Scangos said at the time.

George Scangos

Carl Icahn, the billionaire activist investor, has spent much time and energy agitating for a Biogen Idec sale in the past. But this spring, with little fanfare, Icahn decided to sell about $260 million of his holdings in the company when it was riding high around $98 a share.

Interestingly, I haven’t seen Icahn agitate in public for a Biogen Idec sale for some time.

What’s even more interesting is that Icahn probably made much more money by holding onto Biogen as an independent stock than he could have by selling the company to, say, Pfizer a couple years ago. No doubt, $98 a share is much higher than what Biogen could have fetched then. Biogen shares climbed from $69.43 to $82.51 on the day in October 2007 when Icahn first publicly urged Biogen to put itself up for sale. No such acquisition has ever materialized, and in the process Biogen has maintained its upside potential. The company closed at $104 a share on Friday.

So it’s clear that stockholders who held the entire time are better off with Biogen as an independent company. But it also begs a number of other important questions: Would Biogen be any better at developing innovative new drugs inside a Big Pharma company? Would the employees be any better off? Would Boston be a more vibrant biotech cluster? Would Icahn have gotten any richer?

As with the Biogen example, I think many other supposed “takeover candidates” that investment bankers so eagerly tout would actually be better off on their own. Biotech companies ought to look past the fast money acquisition deals, and think hard about staying independent the next time fee-seeking investment bankers come around singing their siren song.

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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.