Investors buying into junior biotech companies inevitably have takeover potential on their mind. But recent activity indicates that the trend for merger and acquisition activity in the sector is moving towards companies in the mid-cap range, whose market caps are closer to £500m than £50m.
GlaxoSmithKline has snapped up US-based Reliant Pharmaceuticals for $1.65bn (£765m), which produces a treatment for very high triglycerides, fatty acids which can lead to cardiovascular problems. Reliant’s drug, Lovaza was launched in 2005 in the US and globally sales were $306m (£142m) in 2006.
Just prior to this shares in Gyrus, a UK based surgical equipment manufacturer on which we had a buy recommendation rocketed 58 per cent, following an all-cash bid by Japan-based Olympus, which makes medical devices as well as cameras. Olympus' bid is valued at around £935m and Gyrus’s turnover is more than £200m a year.
Big pharma (and others like Olympus venturing into medical technology) clearly have an appetite for companies that have existing products and attractive revenue streams based upon products that plug holes in the companies’ existing pipeline.
Research and development is both a costly and lengthy process. The time taken to achieve a product launch after trials in humans have been approved (clinical studies) can be up to eight years and the cost is often more than £100m. The strategy of big pharma for smaller biotech companies with promising products is not to take them over but to mitigate their risk by giving them small upfront and milestone payments to start with and then to increase payments as this process advances.
Companies that have existing products, sales forces and revenue streams that are attractive to the bigger pharmaceutical companies include Smith & Nephew and Shire. Although both are in the FTSE 100 and have market capitalisations above £500m, they provide big pharma with valuable market presence. Shire is big in the attention deficit hyperactivity disorder market and S&N is one of the world’s biggest providers of hip and knee replacements.
