The Health Care M&A Monthly: Biotech Companies Go on A Holiday Shopping Spree
During the past month, M&A activity has moved at a brisk trot in the biopharmaceutical industry. Between them, the Biotechnology and Pharmaceutical sectors have posted 17 deals, better than one every other day. The combined value of these deals is impressive, exceeding $20 billion. This deal-making started to crescendo after Thanksgiving: In early December when the DJIA broke 10,000 and the NASDAQ passed 2,000, three biotechnology transactions were announced with a combined value of $3.9 billion. This activity continued to gain steam, and reached a climax a week before Christmas with the announcement of the largest biotech merger to date in a deal valued at $16 billion.
Part of the reason for this year-end surge in buying may be traced to a backlog of deals that has piled up since the September 11 attacks on the World Trade Center and the Pentagon suspended much financial activity, mergers and acquisitions included. The ray of hope provided by the rebounding capital markets was sufficient to break up some of the logjam. A similar spurt of activity, and for similar reasons, occurred in the Long-Term Care sector last month.
Even so, these deals suggest that the Biotechnology sector is growing and gaining clout. As the companies mature and develop their manufacturing and marketing capacities to promote the products they create, they have begun to resemble traditional pharmaceutical companies more closely. The blurring of traditional lines between biotech and pharma is one factor giving rise to the biopharmaceutical industry. Like big pharma, the biotechs are now seeking to diversify their product pipelines to secure earnings and growth. And more and more frequently, they are turning to acquisitions to fund this growth.
Investors following the high-tech or e-health industries know that anything to do with technology has recently acquired something of a stigma in the investment community. This has made it more difficult for biotech companies to raise money on the stock markets, compelling them to turn to the acquisition market for growth. Ironically, the disfavor into which technology companies have fallen has helped to depress the stock multiples of some biotech companies, putting them in reach of interested buyers for the first time. The largest deal of the month is just such a case.
Amgen, Inc. (NASDAQ: AMGN) is buying rival biotech company Immunex (NASDAQ: IMNX) for $14 billion in stock and $2 billion in cash, in a deal that values IMNX stock at about $30 per share. Based in Thousand Oaks, California, AMGN discovers, develops, manufactures and markets human therapeutic products based on principles of cellular and molecular biology. It has an impressive stable of drugs, including preparations used to treat cancer and anemia, particularly in kidney dialysis. For the nine months ended September 30, 2001, AMGN earned $956.7 on revenue of $2.89 billion. On a 12-month trailing basis, it generates revenue of $3.8 billion and EBITDA of $1.9 billion. Its current market cap is about $58.6 billion.
Based in Seattle, Washington, Immunex discovers, develops and commercializes drugs for the treatment of cancer, infectious diseases and immunological disorders. Health care giant American Home Patient (NYSE: AHP), which owns 41% of IMNX, has agreed to vote its shares in favor of the takeover. This deal brings with it IMNX’s three bestselling drugs: Enbrel, which treats arthritis; Leukine, which stimulates white blood cells to fight infection; and Novantrone, which kills cancer cells. For the nine months ended September 30, 2001, IMNX earned $128 million on revenue of $709 million. The company has a current market cap of about $14 billion.
This deal yields a price to revenue multiple of about 16.8x. When earlier reports speculated the price might be as high as $18 billion, analysts worried AMGN might be paying too much, particularly with some recent disappointments in IMNX’s pipeline. As currently formulated, the deal offers IMNX shareholders a premium of 17%. Part of the enthusiasm for the deal is predicated on the belief that 2005 sales of Enbrel alone could top $3 billion.
The combination of these two biotechs will create a formidable force in cancer treatment. Their combined market cap is estimated to be nearly $72.5 billion. AHP will also be a winner in this deal, owning about 8% of the combined company and keeping its exclusive international rights to market Enbrel.
In the second largest deal of the month, Millennium Pharmaceuticals (NASDAQ: MLNM), headquartered in Cambridge, Massachusetts, is buying Cor Therapeutics (NASDAQ: CORR), based in South San Francisco, California, for approximately $2 billion. CORR shareholders are to receive 0.9873 shares of MLNM stock for each share of CORR common stock they hold.
CORR is a biotech company involved in the discovery, development and commercialization of new pharmaceutical products for the treatment and prevention of severe cardiovascular diseases. On a 12-month trailing basis, it generates revenue of $125.7 million and net income of $2.23 million.
The price to revenue multiple is 15.9x, but this deal is all about pipeline, not multiples. It adds CORR’s cardiovascular business to MLNM’s existing product line. The deal offers CORR shareholders a 77% premium to the stock's prior-day price and a 64% premium to its trailing 30-day average close.
This month’s activity includes other deals, some of which involved traditional pharmaceutical companies acquiring biotech concerns. Biopharmaceutical company MedImmune (NASDAQ: MEDI) announced it would buy biotech Aviron (NASDAQ: AVIR) for $1.5 billion. This acquisition expands MEDI's pipeline by giving the company rights to AVIR's experimental nasal flu vaccine, FluMist. This deal offers AVIR shareholders a 28% premium on the prior-day price of the stock.
Earlier in the month, Exelixis (NASDAQ: EXEL) announced it would acquire Genomica (NASDAQ: GNOM), a provider of software products and services that enable pharma and biotech researchers to accelerate the drug discovery and development process. The price is $111 million. Why is EXEL paying so much for a company which over the nine months ended September 30, 2001, lost $17 million on revenue of $1.3 million? As of end-September, GNOM had more than $113 million in cash and marketable securities and total assets near $119 million. Given the cash on hand that comes with GNOM, EXEL is acquiring the company virtually for free.
Cephalon (NASDAQ: CEPH), based in West Chester, Pennsylvania, is acquiring Group Lafon, a French pharmaceutical lab that develops and markets a diverse portfolio of products for treatment of the central nervous system, the digestive system and human metabolism. CEPH is paying $450 million, or 5.63x 2002 projected revenue, to add over a dozen drugs to its portfolio and give the company a manufacturing infrastructure in Europe. CEPH is financing the deal through the sale of $500 million of five-year subordinated notes.
Gilead Sciences (NASDAQ: GILD) is selling its cancer business to OSI Pharmaceuticals (NASDAQ: OSIP) for $200 million. GILD acquired its oncology business in 1999 when it merged with NeXstar, but now wants to concentrate on its more mature infectious diseases business. The consideration in this deal includes $130 million in cash, $40 million in stock and $30 million in stock or cash upon reaching certain milestones. This acquisition gives OSIP an enhanced pipeline of experimental oncology products.
Some of these deals are clearly opportunistic, capitalizing on the depressed stock ratios or other idiosyncratic features of the target company. But if the Biotechnology sector can produce successes through mergers and acquisition, investors may be willing to invest more capital there to fund further consolidation of the industry.