Who’s on Biotech’s Endangered Species List? Mid-Sized Drugmakers
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one or more products generating enough revenue so they don’t have to worry much about when the next financing round comes. Essentially, they’ve got potential to be pillars of the industry for a long time. Think Cambridge, MA-based Vertex Pharmaceuticals, Tarrytown, NY-based Regeneron Pharmaceuticals, Cheshire, CT-based Alexion Pharmaceuticals, Bothell, WA-based Seattle Genetics, South San Francisco-based Onyx Pharmaceuticals, or Dublin and Waltham, MA-based Alkermes.
Every board of a successful company, at one point or another, is going to have to consider the question of whether to sell. Big Pharma isn’t going to make this decision easy. Pfizer has lost a lot of revenue from the patent expiration of atorvastatin (Lipitor), and it is sitting on a mountain of cash—$24 billion—it can use to buy biotech companies. Merck’s cash horde is $15.6 billion. Johnson & Johnson has $30.3 billion lying around.
With cash like that on hand, many Big Pharma companies can afford to be aggressive. Pops says an investment banker recently told him that the premium companies are paying, in recent hostile situations for biotech companies, averages 70 percent above their current market price.
“Their ability to acquire is very high, and ability to pay premiums is very high,” Pops says. “It’s hard to walk away from that.”
While I think there are situations where it makes great sense for a small biotech to get acquired (Calistoga/Gilead, Avila/Celgene for example), I’m often skeptical of big acquisitions. Bigger might be better when it comes to sales forces and manufacturing operations, which can benefit from economies of scale. But it isn’t better when it comes to innovation, and Big Pharma’s R&D pipeline tells the sorry tale. Big Biotechs and mid-sized-biotechs-that-could-be-big like the ones in the chart above have done a better job at coming up with innovative new medicines.
That’s really what’s at stake here. A lot of smart people who know how to make new drugs are in good situations to be productive at mid-sized companies. I don’t know what the ideal size is for a drug development organization, but those with at least a few hundred million dollars in the bank and a few hundred employees can get a lot done. And when those people get swept up in an acquisition, they often end up in a huge company that’s financially rich but not as good at developing new medicines.
I realize this isn’t the kind of thing shareholders consider when mulling whether to sell. I realize most people want that lottery ticket and want it now. But if you’re a shareholder in one of these mid-sized companies, you know that whatever the Big Pharma company is offering today is based almost entirely on the lead asset—in Human Genome’s case it’s belimumab (Benlysta)—while almost zero value gets assigned to the R&D pipeline.
That’s the part that matters more to the future of the industry, and it’s threatened. When people at a biotech company rallied together around a clear purpose, and have some success together, it’s a valuable thing for medicine. This is where new drugs come from. The trust, respect, and experience of good teams take years to really come together. And it can all be undone in a matter of minutes. Let’s not let these endangered companies go extinct over a fleeting market impulse.