An Unsurprising Increase In Biotech Acquisitions

By James Brumley | July 28, 2010 AAA

One of the most entertaining - and excruciating - dynamics of the pharma/biotech industry is the constant scramble for new drugs. With patent expirations flowing like water, and generics being approved left and right, it's the corporate equivalent to digging a hole in quicksand; the job of adding new drugs to the menu is never done - the best you can hope for is to stay ahead of the backflow.

A Bigger Shovel-Full
That said, Sanofi-Aventis (NYSE:SNY) may be scooping up a pretty big shovel-full if its interest in Genzyme (Nasdaq:GENZ) actually turns into an acquisition. The buzz was that GlaxoSmithKline (NYSE:GSK) was interested in the rare/genetic disease treatment developer, but Sanofi seems more willing to pull the trigger.

The move makes sense too, in the shadow of yet-another generic entry into the blood thinner race. As of last Friday, Sanofi's blood thinning drug Lovenox - the company's second best seller last year - will now be competing with Novartis AG's (NYSE:NVS) generic version here in the U.S. The patent on its other blood thinner, Plavix, is slated for 2011. As such, the clock is clearly ticking on Sanofi's earnings. Sanofi is hardly alone on that front though. (For related reading, check out Pharma Patent Trolls: Cheap Drugs At A Steep Price.)

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Other Biotech Buyout Targets
In the grand scheme of things, none of this Genzyme acquisition business should be a surprise. Big pharma's interest in (and need for) small biotech has been evident for a few years now. If it wasn't Sanofi-Aventis, it would be another buyer. And if it wasn't Genzyme, it would be another acquiree.

With that as a backdrop, there are still a few more biotech companies that are largely considered acquisition candidates.

Targets On Their Chests
Zacks thinks Biogen Idec (Nasdaq:BIIB) and Acorda Therapeutics (Nasdaq:ACOR) are two of them, pointing out that Biogen's pipeline is the absolute best in the business. It's a serious leader in the multiple sclerosis market, and would give any buyer a strong biologics presence.

Allergan (NYSE:AGN) - along with Genzyme and Biogen Idec - was bid up following last month's announcement from Sanofi that a $20-billion-ish biotech firm in the U.S. was in its sights. Clearly Genzyme won that race, but the price pop from all three offers some interesting insight as to which names the market feels are acquisitions targets - the collective wisdom of investors is often on target. If not Sanofi, perhaps another cash-heavy player will snatch up Biogen or Allergan.

There are smaller players on the table as well, but those three remaining names are the frontrunners among the higher-profile biotech stocks.

Bottom Line
Just to put some numbers behind the premise, IMS Health only expects the pharmaceutical market to grow between 5% and 8% over the next four years. In other words, the need for the new revenue and income streams that biopharma can offer is clear.

That said, not all biotech stocks are the same, and counting on an acquisition alone is a lousy reason to own a stock. The old rules still apply. You want a biotech where drug approval looks likely, the company is adequately funded and, in the worst-case scenario that a small biotech outfit isn't acquired, a solid stand-alone investment. That's certainly a narrower band of biotech names, but they're out there. (Learn more about the pharmaceutical and drug stocks, see Measuring The Medicine Makers.)

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