Novartis Cuts, While Biogen Idec Cuts And Runs


Novartis is the latest company to brand its downsizing, cost-cutting campaign. The Swiss drugmaker is calling its initiative, "Forward". It's not an acronym. So, "Forward" means Novartis is going to try to save $1.6 billion in 2010 and get rid of 2,500 employees. Although I don't think "Forward" is the word which begins with "f" that the affected workers would use to describe the initiative.

Anyway, it's another example of a big pharma needing to slash expenses to deal with patent expirations, weak drug development pipelines, etc. Usually a stock goes up on news of cost cuts, but on a weak big pharma tape this morning NVS shares are lower. Only GlaxoSmithKline , which is talking today about its neuroscience drug pipeline today, is in the green by a fraction.

To deal with those issues the major pharmaceutical companies have been buying or partnering with biotechnology companies. But one firm they're apparently not interested in is Biogen Idec . The Boston biotech shocked the market after the closing bell yesterday when it announced it was taking itself off the market because it couldn't find a buyer. Before BIIB said it was up for sale on October 12th the stock was trading at 69 bucks and change. It topped out at $82.51 a few days later. This morning, it's plummeted to the mid-50s.

Every biotech analyst is weighing in on what happened. Some think Genentech and Elan which share BIIB's drugs Rituxan and Tysabri, respectively, got in the way. Others disagree saying the price got way out of line even for cash-rich big pharma. Cowen & Co.'s Eric Schmidt writes in a research note to clients, "The history with busted biotech M & A (merger and acquisition) auctions (SRA, IMCL) suggested that at least 3-6 months may be required for a stock to recover."

Sanford C. Bernstein's Geoffrey Porges says, "This transaction should remove the aura of infallability associated with Carl Icahn's initiatives in biotechnology in recent months." The billionaire activist investor took a stake in BIIB and was a driving force in the company putting itself on the block. Investors thought he'd do for Biogen Idec what he did for MedImmune which Icahn was successful in getting taken out by AstraZeneca for a huge premium.

But Leerink Swann's Bill Tanner remains bullish. He's keeping a 12-month $89 price target on BIIB shares. He argues, "We believe there is no fundamental change associated with yesterday's announcement, and regard the post-market trading activity as an over-reaction." All three of the firms make a market in BIIB.

The shorts--investors who were betting that things might turn out this way and that the stock would go down--are cleaning up, but those who were long and counting on a big pharma company to grab Biogen Idec for a hefty price are taking a big hit ahead of the Christmas holiday. I wonder what impact this will have on the premiums the market will assign to future suspected or announced biotech takeout targets. Big pharma might be thinking it's gained a little leverage. Or maybe this is just an anomaly.

Questions? Comments?