Big Pharma Is Scrambling To Buy More Biotech Firms

Roche Holdings' $43.7 billion bid to buy out the remainder of Genentech highlights drugmakers' growing reliance on biotech products as conventional medicines are cannibalized by generics.

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The deal would be the largest biotechnology acquisition ever, reflecting Genentech's unrivalled position in cancer, and comes on the heels of a spate of big-ticket purchases.

Industry analysts expect more to follow.

"Big pharma is looking to spread its wings and bolster its pipeline," said Simon Friend, global pharmaceutical leader at PricewaterhouseCoopers.

"Just about every major drug company you talk to says they are devoting a much higher proportion of their own research and investment in stuff they are buying to biotech," said Paul Diggle, an analyst at Nomura Code.

"I suspect Amgen and Genzyme will be the two companies people think about next." Other big recent deals include Takeda Pharmaceutical 's agreement in April to buy Millennium Pharmaceuticals for $8.8 billion and AstraZeneca buying MedImmune last year for $15.6 billion. (Video: Roche move a good deal).

And in the last month alone, Novartis has agreed to buy Speedel for about $880 million, while GlaxoSmithKline clinched a record $3.3 billion insomnia drug licensing deal with Actelion.

Drugmakers are scrambling to secure promising pipelines and technologies to ensure future growth as many of the world's top conventional, or small molecule, drugs face patent loss over the next five years.

Biotech drugs look to be a better bet, with sales growing 12.5 percent in 2007, more the double the rate of overall pharmaceutical sales, according to IMS Health.

U.S.-based Genentech's cancer drug Avastin is widely expected to become the world's biggest selling drug next decade, as its use expands into additional and earlier treatment settings.

Large molecule biotech drugs are also less exposed to generics, since they are much more complex to manufacture.

A weak dollar has increased the attraction of assets in the United States, which remains the centre of biotech research.

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That, coupled with recent stock market turmoil, means some large overseas companies are scenting value.

"Given the current economic environment, the valuation of a number of public biotech businesses is particularly attractive, so you may see a bubble of biotech M&A," said Ian Oliver, a senior manager in the life sciences team at Ernst & Young.

Last year was already a record year for biotech mergers, acquisitions and strategic alliances, according to Ernst & Young, with deals worth potentially $60 billion clinched in the United States, while $34 billion was done in Europe.

Roche's offer to buy the 44 percent of Genentech stock it does not already own would rewrite the record books again.

The Swiss group is in an unusual position as the majority owner of Genentech but, even so, it may need to put more cash on the table to win over the minority shareholders.

Its offer of $89 a share represents a premium of just 8.8 percent, which looks measly compared with an average of 63 percent, according to Credit Suisse, for recent pharmaceutical buys of biotech companies.

Roche -- whose option on Genentech's pipeline products expires in 2015 -- insists its offer is fair and generous but the market is betting on more, with Genentech shares rising 14 percent to just over $93 in early U.S. trade on Monday.

"Ultimately, we see an upward revision to $89 a share and view the initial offer as a first step," said JP Morgan analyst Geoffrey Meacham.

Cazenove and Baird also see a higher offer as likely.

Paying significantly more could derail Roche's forecast that the deal will boost earnings in the first year after closing.

Another risk is that Roche may lose top talent at Genentech by bringing the business fully into the Roche fold.

Franz Humer, Roche's chairman, stressed that Genentech's research and early development would continue to operate independently and separately from Roche's other research units.

But the experience of AstraZeneca, which recently lost former MedImmune CEO David Mott after a one-year lock-in ended, shows that prime assets can walk out of the door.

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