By Angela Zimm
Jan. 12 (Bloomberg) -- Vincent Aita of Kilkenny Capital Management says he picks biotechnology stocks on their potential as takeover targets. The strategy is paying off.
The number of biotech deals, including acquisitions and product alliances, rose 32 percent to 232 last year, according to data compiled by Bloomberg. At least four of Aita's holdings, including Serono SA and Kos Pharmaceuticals Inc., were bought by bigger drugmakers. Aita, who manages about $200 million in health stocks, is betting there will be even more transactions in 2007.
``There is an escalating arms race,'' Aita said in an interview at the JPMorgan Healthcare Conference this week in San Francisco. ``There are more deals to be had.''
Pfizer Inc., the world's largest pharmaceuticals maker, and Merck & Co. may buy biotech companies to make up for a scarcity of experimental medicines and expiring patents for best-selling products. On the shopping list are companies with experimental compounds as well as those with new drug-development science and technologies, investors at the conference said.
Last year the number of biotech deals in North America, including company acquisitions and joint ventures, increased from 175 in 2005, and the average premium rose to 33 percent from 23 percent, based on Bloomberg data.
More transactions and higher premiums are likely this year, according to analysts, investors and company executives interviewed this week at the San Francisco conference, the annual meeting where buyers and sellers gather to make deals. About 7,000 people packed hallways and conference rooms at the Westin St. Francis Hotel to hear presentations from 310 companies.
Upward Trend
``Premiums are going up,'' JPMorgan analyst Geoffrey Meacham said in an interview. ``You're seeing a lot of bidding wars.''
Driving the trend are big pharmaceutical companies with billions in cash that need new drugs to ensure growth. New York- based Pfizer may lose almost half of its $51 billion in 2005 sales as a result of competition from generic drugmakers to products with expiring patents. Pfizer, with $30 billion, has entered at least six research partnerships since November. Two transactions for which a value was disclosed totaled a combined $450 million.
Merck's Deals
Merck, the fourth-largest U.S. drugmaker, may lose $3 billion in sales this year from its top-selling Zocor cholesterol pill because of generic competition. It signed 35 transactions last year, including the $1.1 billion million purchase of San Francisco-based Sirna Therapeutics Inc., which is developing drugs based on blocking genes involved in disease.
Whitehouse Station, New Jersey-based Merck aims to become ``the best biotechnology company,'' Chief Executive Officer Richard Clark said in an interview at this week's meeting. Merck's biotech deals totaled $1.4 billion in 2006.
``It's science and technology and potential companies; we're looking at all ends of the spectrum,'' Clark said. ``Obviously, it's competitive.''
Eli Lilly & Co., which is offering $2.28 billion to buy its biotech partner Icos Corp., is spending $1.5 billion this decade on building its own biotechnology operations.
``The price of poker has definitely gone up,'' said John Lechleiter, Indianapolis-based Lilly's president and chief operating officer, at the conference. ``There are too few good assets and too many bidders.''
Amgen Inc., the world's biggest biotechnology company, and Biogen Idec Inc. also are considering acquisitions and alliances.
Biogen
Biogen since May has bought three companies with a combined value exceeding $270 million to reduce reliance on its biggest product, the multiple sclerosis treatment Avonex. Last week, the Cambridge, Massachusetts-based company agreed to pay as much as $120 million for closely held Syntonix Pharmaceuticals, adding experimental treatments for hemophilia.
Merck's shares rose 29 cents to $44.55 at 9:37 a.m. in New York Stock Exchange composite trading. Pfizer shares were unchanged and Lilly's shares increased 19 cents to $52.42. Amgen shares jumped 59 cents to $72.50 and shares of Biogen were up 6 cents or $50.50.
`Most Active'
The pace of acquisitions ``is the most active in our history,'' Biogen CEO James Mullen told investors in a presentation at the conference. There were 10 announced company acquisitions last year, up from 8 in 2005, JPMorgan analyst Meacham said in a Jan. 5 investment report
Premiums over the market price of traded shares also are rising. They ranged from 21 percent for Swiss drugmaker Actelion Ltd.'s purchase of Cotherix Inc., a U.S. biotechnology company, to 170 percent for AnorMed Inc., which Genzyme Corp. took over in a bidding war with rival Millennium Pharmaceuticals Inc.
``Last year saw the first hostile bid by a biotechnology company,'' in the Genzyme takeover of AnorMed, said Steven Burrill, CEO of Burrill & Co., a life-sciences investment adviser in San Francisco.
``Premiums are running 50 percent to 100 percent, which means the market is undervaluing the stocks,'' Burrill said.
Biotechnology companies raised $20 billion in partnership deals last year, up from $17 billion in 2005, according to Burrill.
Companies already aligned with bigger drugmakers through partnerships are likely takeover targets, said Kilkenny's Aita.
Amgen
Last year Amgen, purchased its partner, Abgenix Inc., to gain control of the cancer drug Vectibix. Genentech Inc., the world's No. 2 biotechnology company, agreed to buy its partner Tanox Inc. in November, gaining the asthma medication Xolair. The $919 million transaction was the first acquisition in Genentech's history.
Biotech companies in partnerships that may be takeover targets include Onyx Pharmaceuticals Inc., which co-markets the Nexavar kidney cancer drug with Bayer AG, and New River Pharmaceuticals Inc., which sold rights to its hyperactivity treatment to London-based Shire Plc, Aita said.
Others include BioMarin Pharmaceutical Inc., which shares a rare-disease drug with Genzyme, and Millennium, which co-markets its Velcade cancer drug with Johnson & Johnson.
``You don't often see biotechnology companies selling out of weakness,'' Aita said. ``Partnering and M&A have been the lifeblood of the industry. Consolidation isn't going away.''
To contact the reporter on this story: Angela Zimm in San Francisco azimm@bloomberg.net
Last Updated: January 12, 2007 09:50 EST
