By Don Miller
Big Pharma’s rapidly accelerating consolidation pattern snowballed yesterday (Thursday) as Roche Holding AG (ADR: RHHBY) struck a deal to buy the remaining shares it didn’t already own of Genentech Inc. (DNA) for $46.8 billion, or $95 each.
The buyout ends a long battle by Basel, Switzerland-based Roche to acquire the U.S. biotech company and its lucrative cancer drugs. When completed, the merger will create a combined company that would be the seventh largest drug firm in the United States by market share, with roughly $17 billion in U.S. annual revenue.
The deal marks the third mega-deal among large pharmaceutical companies this year — and the second this week – as large drug firms struggle with a long line of blockbuster drugs coming off patent, stiff competition from generic copycats, and a weak pipeline of new products.
Pfizer Inc. (PFE) led things off in late January, as it made a $68 billion offer for Wyeth (WYE). When completed, that merger would form the world’s largest drug company. Then, on Monday, Merck & Co. Inc. (MRK) agreed to pay $41.1 billion in stock and cash for Schering-Plough Corp. (SGP), to become the world’s second-largest prescription drugmaker.
In a smaller, but still high-profile pharma deal, Gilead Sciences Inc. (GILD), agreed to acquire CV Therapeutics (CVTX), stepping in as a white knight and blocking a hostile bid from Japanese rival Astella Pharma (PINK: ALPMF). Gilead’s $1.4 billion deal, valued at $20 a share, represented a 25% premium to Astella’s bid.
Big M&A Deals Limited to Pharmaceuticals
The pharmaceutical industry has been a notable exception to the lull in Wall Street M&A activity in 2009, largely because of its favored status among financial firms who have tightened the reins on lending.
The industry enjoys that status because of its overall stability of revenue and earnings in the face of the global economic downturns, like the current crisis that has pummeled other more traditional sectors like manufacturing and discretionary consumer goods.
For those on Wall Street hoping for a revival of buyout activity, the merger activity shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.
But both the size of the deals and the players involved represent a rare combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate. Buyers need strong balance sheets, lots of cash, and impeccable reputations that can induce cautious bankers to lend.
Roche, for instance, was able to raise $39 billion in the bond market. That, together with cash on hand, gave it the firepower to get a deal done with Genentech.
Deal Ends Long Battle
Roche's bid was initially rejected last year. It later turned hostile after the financial crisis put a crimp in the credit markets and Genentech's shares fell below the offer price.
But after getting additional financing, Roche last week raised its hostile bid from $86.50 to $93 per share, which got the two companies talking again, Roche Chairman Franz Humer said.
The purchase price, at about 22 times Genentech's forecast 2010 earnings, is more expensive than both the Pfizer/Wyeth and Merck/Schering Plough agreements. Those deals came in at multiples of 14 and 12 times 2010 earnings, respectively.
But Pfizer and Merck are widely seen as companies with flagging franchises forced in desperation to engage in mergers and cost cutting.
Genentech, on the other hand, is seen as a very desireable, and more expensive, acquisition because it has cutting edge products in both biotechnology and cancer medicines – with blockbusters Avastin and Herceptin – and an extensive portfolio of new drugs.
“Roche was not forced to pay above $100, like some had initially called for," Vontobel analyst Andrew Weiss told Reuters.
"With this deal Roche secures itself the operating cash flow from Genentech it does not already own, access to Genentech's pipeline beyond 2015 and gains access to Genentech's cash pool of roughly $10 billion," he said.
Roche's deal will no doubt uncover some cost-cutting opportunities as well. But the most compelling reason for the buyout is getting maximum exposure to the fastest-growing section of the global pharmaceuticals market.
Biotechs are Hot
Biotech has become the hottest sector in the pharmaceutical business and the place to be for big drugmakers, as the blockbuster drugs of the 1990s are losing patent protection, negatively affecting sales. Big Pharma’s situation has been made worse by a lack of replacements in the research and development pipeline.
Some factors, however, argue against a buying binge in biotechnology companies.
For one thing, many of the most desireable biotechnology companies have established alliances with other companies, like licensing larger companies to sell their products. Others have attractive drug prospects and seasoned management with unproven technologies.
Nevertheless, some critics say buying biotech is a preferable alternative to mergers between big drug companies.
“For $68 billion, Pfizer could have scooped up a dozen … or more … compelling biotechs with greater growth potential,” said Louis Basenese, a longtime mergers-and-acquisitions expert who is the editor of the Takeover Trader and I think it would have been a more prudent use of capital considering the company’s checkered history of buying big companies – such as Warner-Lambert and Pharmacia – and struggling to integrate and grow.”newsletters. “
Other big drugmakers, including Bristol-Myers Squibb Co. (BMY), may now be forced to scour the landscape for likely merger candidates as the competition for attractive biotechs heats up, and the number of viable candidates decline.
When evaluating potential biotech investments, investors should look at the company’s drug pipeline. And true speculators should cherry pick small biotechs in collaboration with larger ones on late stage trials, said Basenese.
“Genzyme Corp. (GENZ) should be atop almost every list. It focuses on rare diseases – a niche that lends itself to less competition and higher margins,” he said.
A few other biotech companies that may be attractive to Big Pharma are Celgene (CELG), Vertex (VRTX), Amylin(AMLN) and Proctor and Gamble’s drug unit, according to a graphic recently published in the New York Times.
News and Related Story Links:
- Money Morning:
Merck Stokes M&A Fires with $41.1 Billion Bid for Schering-Plough
- Money Morning:
The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market
- Money Morning:
Hot Stocks: Pfizer-Wyeth Merger Underscores That Bigger isn’t Better, Takeover Expert Basenese Says
- New York Times:
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