[Updated: 9:20 pm PT] Only a few companies have ever been successful enough to call themselves Big Biotechs. If boards and shareholders lack vision and guts, we’ll look back in a few years and wonder why the Big Biotechs went extinct.
The group of Big Biotechs includes companies like Amgen, Gilead Sciences, Biogen Idec, and Celgene. They grew from scrappy venture-backed startups with a dream into big, independent, profitable, diversified enterprises. They have enduring ability to create new jobs and new medicines. They are like ballasts in a stormy industry.
There are several challenges in the market today that make it harder than ever to create companies like these. The biotech venture community can’t afford to build startups anymore that have Big Biotech aspirations; there’s only a lukewarm biotech IPO market; and Big Pharma companies have an endless appetite for acquisitions to replace their aging drugs with expiring patents. Wall Street values the short-term payday over long-term potential.
All of these factors are conspiring to put a lot of pressure on biotech companies to sell to Big Pharma companies. You’ve seen it with GlaxoSmithKline’s $2.6 billion hostile bid to acquire Rockville, MD-based Human Genome Sciences (NASDAQ: HGSI). San Diego-based Amylin Pharmaceuticals (NASDAQ: AMLN) is reportedly another object of Big Pharma desire. If these deals get done, they could end up tipping over a set of M&A dominos that would significantly change the biotech industry—and not necessarily for the better.
“We’re at a unique moment in the history of the industry,” says Alkermes CEO Richard Pops. “When you look at the companies in the $2-plus billion market valuation tier, it is an incredibly important time and an incredibly vulnerable time. These companies are big enough to help to solve big problems in Big Pharma.
“If you are a Big Pharma company facing a patent cliff, you really have a huge revenue gap to fill, and small companies don’t really help you. They aren’t scaled to solve your problem. And this is precisely why companies in this valuation tier are so vulnerable. When you have a $2 billion valuation, it’s usually because something made your company an economic enterprise rather than a big science project.”
Pops runs one of the Big Biotechs. Rather than being acquired by a Big Pharma company that might want its technology that makes drugs last longer in the blood, Alkermes decided to do the acquiring. It bought Elan Drug Technologies, in a move that turned it into a trans-Atlantic 1,200-employee enterprise with revenue streams from multiple products—and a good shot at profitability for the long haul.
[Updated to add Ariad and Pharmacyclics.] A fair number of companies out there have some realistic chance to be members of the Big Biotech class. I count 23 companies in the NASDAQ Biotech Index with market valuations of more than $2 billion. Will they remain independent, like Alkermes, or go extinct? You can size up the list here yourself.
|Amgen||Thousand Oaks, CA||AMGN||$53.8b||17,500|
|Gilead Sciences||Foster City, CA||GILD||$37.8b||4,500|
|Biogen Idec||Cambridge, MA||BIIB||$31.5b||5,000|
|Alexion Pharmaceuticals||Cheshire, CT||ALXN||$15.8b||1,008|
|Vertex Pharmaceuticals||Cambridge, MA||VRTX||$13b||2,000|
|Regeneron Pharmaceuticals||Tarrytown, NY||REGN||$11.2b||1,729|
|Life Technologies||Carlsbad, CA||LIFE||$7.3b||10,400|
|Amylin Pharmaceuticals||San Diego||AMLN||$4.4b||1,300|
|BioMarin Pharmaceuticals||Novato, CA||BMRN||$4.2b||1,002|
|Ariad Pharmaceuticals||Cambridge, MA||ARIA||$2.8b||150|
|Human Genome Sciences||Rockville, MD||HGSI||$2.8b||1,100|
|Onyx Pharmaceuticals||South San Francisco||ONXX||$2.7b||420|
|Cubist Pharmaceuticals||Lexington, MA||CBST||$2.5b||669|
|Seattle Genetics||Bothell, WA||SGEN||$2.4b||483|
|Vivus||Mountain View, CA||VVUS||$2.2b||38|
|Myriad Genetics||Salt Lake City||MYGN||$2.1b||1,057|
When I look at this list, a few things jump out. Amgen, Gilead, and others at the top have gotten so big and rich that someone would really have to move mountains to buy them. At the bottom of the list are a few little companies, like Vivus, that are surely built for quick and easy takeover. What concerns me more are the companies in the middle. They are the ones with compelling technologies, strong management teams, and at least 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.
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