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Consolidation wave poised to hit state's health care services, biopharma sectors

Mergers, Acquisitions and TakeoversHealthcare IndustryChemical IndustryPharmaceutical Industry

Like a one-two punch, two major Maryland employers in the health care service and pharmaceutical industries were the targets last week of multibillion-dollar acquisition deals.

Both homegrown companies — Human Genome Sciences Inc. and Catalyst Health Solutions Inc. — are based in Rockville. Both were courted by out-of-state companies.

Human Genome ultimately rebuffed a $2.6 billion offer by biopharmaceutical giant GlaxoSmithKline, saying it was too low. But Catalyst agreed to be acquired by a larger Illinois competitor for $4.4 billion, and Human Genome has officially acknowledged it's on the market.

While Maryland has bemoaned the loss of several corporate headquarters that were swallowed up in mergers and acquisitions in recent years, the potential loss of two big employers and their headquarters didn't preoccupy Montgomery County's economic development director, Steven Silverman. In fact, he sees multibillion-dollar deals bringing prestige to the county.

"It's a win," Silverman said. "We think it's a reflection of the strength of the Montgomery County business community."

The proposed deals solidified Montgomery County's reputation as a key part of the state's health care and biopharmaceutical industries. Meanwhile, the futures of Human Genome and Catalyst are tied to broader trends in the health care and biopharmaceutical industries, which make up an important part of Maryland's health care and technology economy.

The pharmaceutical industry that Human Genome operates in sees more brand-name drugs becoming generic offerings in the coming years, and companies are looking for new blockbuster drugs. So analysts expect more large pharmaceutical companies to acquire smaller players — and their drug portfolios — which could mean more merger-and-acquisition activity for Maryland biopharma companies.

Consolidation in health care services also has been taking place across the country for several years, as companies and government try to control skyrocketing costs.

Acquisitions can cut both ways for local economic development. While they can give smaller companies the opportunity to expand under a bigger corporate umbrella, they also can mean job cuts as companies merge operations.

Silverman pointed to the example of MedImmune, a homegrown biotechnology company that was bought by the London-based AstraZeneca five years ago, as an example of an acquisition that helped the local economy. MedImmune, based in Gaithersburg, still employs hundreds in Montgomery County.

"We're looking for job growth and increasing the tax base, and if that happens as a result of an acquisition, so be it," Silverman said. "What we don't want to see happen is a company buying up one of our companies and closing up shop. That's a loss."

The state is sensitive to the loss of major corporate headquarters, such as Constellation Energy Group and Black & Decker, and the loss of jobs in those mergers. Two years ago, the state also lost a high-profile bid to lure defense contractor Lockheed Martin Corp.'s headquarters to the Washington suburbs.

The fate in Maryland of Human Genome, founded in 1992, is suddenly uncertain. Catalyst, which has about 1,600 employees nationwide and 250 at its headquarters in Maryland, has said it will "maintain a presence" in Maryland.

Human Genome, which crafts drug therapies by using the human genome sequence, has a years-long collaborative relationship with GlaxoSmithKline. The two have developed a lupus-fighting drug called Benlysta and are working on other drugs together.

"These smaller- to medium-sized acquisitions with a focus on specific pipeline projects … rather than mega-mergers are likely to continue to be on the agenda of the big pharma companies," said Britta Holt, an analyst with Fitch Ratings Limited in a research note about GlaxoSmithKline's interest in Human Genome.

Human Genome officials declined to comment. GlaxoSmithKline offered $13 per share, nearly double Human Genome's stock price earlier in the week. Bloomberg News reported that Human Genome rejected the company's offer in part because more than 20 major investors bought the stock at higher prices.

After the offer, Human Genome's shares more than doubled, and closed Friday at $14.36.

Big pharmacy benefits managers, such as Catalyst, have started consolidating, as government, companies and individuals try to get drug costs under control. It's unclear how many employees at Catalyst's corporate headquarters will remain as it prepares to merge with SXC Health Solutions near Chicago.

Two years ago, Baltimore's Bravo Health, which operates Medicaid Advantage health plans, was bought for $545 million by HealthSpring Inc. Then in February, HealthSpring was bought by a larger competitor, Cigna Corp., for $3.8 billion.

The company still employs hundreds in Baltimore.

Catalyst CEO David Blair said in an interview that he believes the industry has helped save billions of dollars for its customers. Catalyst acts as an intermediary between health insurance plans, pharmacies and drug manufacturers, and helps manage customers' prescription plans.

Its stock price has climbed from $57 five years ago to about $90 this past week, after receiving a big boost on the news of the merger with SXC.

The SXC/Catalyst deal was prompted by a pair of larger competitors — Express Scripts Inc. and Medco Health Solutions Inc. — agreeing to merge in a $34 billion deal last month. To stay competitive, Catalyst and SXC chose to combine companies, according to Blair.

"There is definitely consolidation in our industry right now," said Blair, who noted that his company has bought a pair of similar companies in the last two years. "Scale is important. You have to buy other companies or be bought."

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