Specialty drugmakers circle wounded biotechs

By Toni Clarke

BOSTON (Reuters) - As the crisis in the biotech sector deepens, opportunities abound for companies looking to acquire cheap assets.

But it will likely be mid-cap companies with cash that profit most from the bonanza, not the drug giants.

"The problem for big pharma is that the acquisition of a $200 million product doesn't solve their problems, and there is as much effort to acquire a $200 million product as one with potential sales of $5 billion," said Adrian Hobden, president of Myriad Pharmaceuticals Inc and former director of global biotechnology ventures at Glaxo Wellcome.

For a mid-sized company, by contrast, a small acquisition can go a long way to increasing shareholder value.

"We're working with the mid-caps right now, and they see this as an exciting opportunity," said Skip Irving, partner and managing director at consulting firm Health Advances LLC. "It is a great time for them to find another product or two to put in the bag."

Amid a global credit crisis, roughly 75 percent of the 400 U.S. public biotech companies have one year of cash or less, according Burrill & Co, a specialist life science bank.

Perfectly placed to benefit is Cephalon Inc (CEPH.O). Its chief executive, Frank Baldino, is effectively rubbing his hands in glee over the tasty morsels in front of him, saying he plans to grab them while he can.

"I think you are going to see a roll-up in the industry, and the smart cash is going to be buying great drug compounds that weren't available to us a few years ago," he said.

Earlier this month, Cephalon exercised its option to license worldwide rights to ImmuPharma Plc's (IMM.L) Lupuzor, an experimental treatment for Lupus. It paid a nominal $15 million for the option, and a one-time fee of $30 million to exercise it.

The option significantly reduced Cephalon's risk without requiring the company to forfeit future gains.

"They are great opportunistic hunters -- just like hyenas," said Corey Davis, an analyst at Natixis Bleichroeder. "They go after things that are wounded but still alive."

Specialty pharmaceuticals companies, whose products are typically aimed at specialist physicians rather than primary care doctors, are particularly well positioned to be industry aggregators, experts say.

"For specialty pharmas and mid-cap biotechs that have cash, this is perhaps the best environment there has been in the last 10 years," said David Southwell, former chief financial officer of specialty pharmaceutical company Sepracor Inc SEPR.O, which makes the sleep drug Lunesta.

Other well-placed companies include Shire Plc (SHP.L), Britain's third-biggest drugmaker and maker of Adderall XR for attention deficit hyperactivity disorder, and Endo Pharmaceuticals Inc (ENDO.O), which specializes in pain products.

"Right now the market conditions are such that we can pick investments that we can layer into our existing business," said Blaine Davis, Endo's vice president of corporate affairs.