DEALTALK-Biotech takeover interest more fad than fashion

Fri Jul 19, 2013 6:59am EDT

By Deena Beasley

July 19 (Reuters) - Investors betting on a wave of big biotechnology deals following Amgen Inc's $10 billion bid for Onyx Pharmaceuticals Inc may well be disappointed.

Shares of companies like BioMarin Pharmaceutical Inc , Seattle Genetics Inc, Ariad Pharmaceuticals Inc, Regeneron Pharmaceuticals Inc, Vertex Pharmaceuticals Inc and Clovis Oncology Inc have all rallied on news late last month that Onyx had spurned Amgen's offer.

Experts in the field agree that the bid, rejected as inadequate by Onyx, confirms a healthy interest in small to mid-cap biotechs, but said it does not raise the likelihood of more deals in the already hot sector.

A major reason is that valuations have gotten very rich, with the Nasdaq Biotech Index up more than 43 percent in the past 12 months. Some of the companies concerned also have existing drug development agreements with larger drugmakers, making takeovers more complicated and potentially more expensive.

"People are being more disciplined and saying, yes I wish I would have bought it for $2 billion a few years ago, but I'm not going to turn that regret into overpayment now," said an M&A lawyer familiar with the industry.

The sector-wide rally, while making it more difficult for larger companies to put together an economically feasible deal, has also eased the pressure on smaller companies who may not be interested in being acquired.

Amgen's takeover interest in Onyx was followed by news last week that Switzerland's Roche Holding AG sought financing to mount a bid for Alexion Pharmaceuticals Inc , sending the smaller company's shares up 10 percent. With Alexion now valued at nearly $22 billion, chances for a near-term deal have been further complicated.

"I don't think this will drive a biotech buying frenzy," said Morningstar analyst Karen Andersen. She noted that whoever ends up acquiring Onyx might also have been the logical buyer of a company like BioMarin, which develops high-priced drugs used to treat rare genetic diseases.

Amgen's move highlights the appeal of oncology companies like Onyx, which sells drugs for liver, kidney and colon cancer in partnership with Germany's Bayer AG. The company's crown jewel is considered to be Kyprolis, a blood cancer drug fully owned by Onyx which was approved by regulators last year.

Alexion sells just one drug, but it is a premium-priced treatment for a very rare disease that Deutsche Bank estimates will achieve peak annual sales of $4.6 billion by 2018.

"I don't necessarily believe this puts every company in play," said Clay Siegall, Chief Executive Officer at Seattle Genetics, which has seen its shares rise 20 percent since mid-June. "There will be more (deals) with time but I don't think it changes the environment."

He said the focus at Seattle Genetics remains expanding use of its lymphoma drug Adcetris. "Right now we are an emerging company ... we have a great trajectory in the future," Siegall said. "I believe that our big shareholders are supportive of that. I don't have any pressure on me to try to run out and do some deal."

FEW REAL BIDDERS

The last major biotech deal was in 2011 when French drugmaker Sanofi SA acquired Genzyme, another maker of medicines to treat very rare conditions, or "orphan" diseases, for $20 billion.

On June 30, Onyx rejected the unsolicited Amgen bid of $120 a share - a premium of about 38 percent to the company's share price. Onyx said it would consider other potential buyers and its shares have since soared nearly 47 percent. On Thursday, sources familiar with the matter said that Pfizer Inc had decided not to pursue a competing bid, leaving Amgen in the pole position for a takeover and shares of Onyx fell back to the $128 range.

The Onyx offer "says more about Amgen than it does about the deal environment," said Sanford Bernstein analyst Geoffrey Porges. "Onyx fits really well with what Amgen needs. Amgen has a scarcity of near term growth opportunities and a surplus of infrastructure."

Onyx is fairly unique in its status as a biotech company on the verge of becoming profitable. "The buyers recognize that and I think they are really going to step up," Porges said.

BioMarin is also close to becoming a profit-making company, but CEO Jean-Jacques Bienaime said earlier this year that he would not consider a buyout offer for even a 25-30 percent premium.

Shares of BioMarin, which topped Morningstar's 2013 list of biotech takeover candidates, have gained nearly 8 percent in the last month. Onyx was No. 4 on that list, which included companies like Seattle Genetics and Regeneron.

Price is a potential obstacle for buyouts of other perennial takeover targets. Andersen said an acquisition of Regeneron - up more than 11 percent in the last month - has become more problematic given the near doubling in its share price so far this year. Sanofi also holds a big stake in Regeneron.

"Most of these companies would be in the high single-digit or low double-digit billions, whereas with Regeneron you are talking a market cap closer to $22 or $23 billion," Andersen said. "Apply a premium to that ... you have a risky proposition."

Ariad, with shares up 11 percent since the Onyx news, has a commercial product, leukemia drug Iclusig, but its revenue potential is comparatively limited. It also has a pipeline of experimental drugs that will require investment.

Others are encumbered by existing development deals with larger companies. Medivation Inc - up 17 percent over the past week - has partnered its promising prostate cancer drug with Japan's Astellas Pharma Inc, while Pharmacyclics Inc - up 18 percent - is developing leukemia drug ibrutinib in partnership with Johnson & Johnson.

"Seattle Genetics is a very rational acquisition target," Porges said. "But the case of Seattle Genetics is nothing like the case of Onyx where Onyx has already got the cash coming in. Turn off the spending and it automatically becomes profitable."

Meanwhile, neither Roche or Alexion have commented on whether they are in discussions, but some analysts have questioned whether such a costly acquisition would make sense for Roche, which is best known for its innovative cancer medicines and diagnostics business.

"We haven't had a rally like this in more than 10 years - where all the stocks go up and the valuations go out the window," said Summer Street Research analyst Carol Werther. "Once this trend reverses it is going to be very, very ugly."