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 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.
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.