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Big pharmaceutical firms are buying biotechs


Faced with patent expirations on highly profitable drugs, big pharmaceutical companies are turning to small biotechs to restock their medicine chests.

The latest example came when Pfizer Inc. agreed recently to buy Vicuron Pharmaceuticals Inc. for $1.9 billion. Vicuron, based in King of Prussia, Pa., worked on antibiotics and drugs for fungal infections, key areas for Pfizer.

The acquisition followed one in April by GlaxoSmithKline PLC, which agreed to buy Corixa Corp., a Seattle company focused on vaccines.

Other recent Pfizer deals include the purchase of Angiosyn Inc. and Idun Pharmaceuticals by Pfizer, while Johnson & Johnson acquired TransForm Pharmaceuticals Inc. and Peninsula Pharmaceuticals Inc.

Of course, Pfizer, Glaxo, Johnson & Johnson, Merck & Co. and some other big pharmaceutical companies have always looked to the biotechnology industry as a source of new products.

Drugs licensed from biotech companies account for 30 percent of their revenues, according to consulting firm Deloitte & Touche.

What's changed is that big drugmakers aren't just negotiating product deals, but are snapping up biotech companies themselves. There have been 16 acquisitions of biotech companies by drug companies this year, compared with three in the first six months of 2004, according to data provided by investment bank Barrington Associates.

Fraction of deals

Big drug companies were responsible for a fraction of the total merger deals in the biotech sector, which increased from 59 in 2003 to 99 the next year, according to merger information company FactSet Mergerstat.

But they clearly were the biggest spenders. Pfizer, Johnson & Johnson and others together have spent $5.5 billion to acquire biotech companies this year, half the total value of all mergers in the sector.

There's no mystery to the trend, said Paul E. Kacik, head of health care practice at Barrington. The big drug companies need to fill their product development pipelines because they stand to lose billions in revenue when some popular drugs lose patent protection and face competition.

In addition, the American Jobs Creation Act has allowed U.S. companies to repatriate earnings from foreign subsidiaries at a reduced tax rate, leaving big drug companies with large cash hoards available for investment. The 2004 law was promoted as a way to galvanize job growth by encouraging companies to invest overseas profits domestically.

Pfizer, for example, has repatriated foreign income of $28.3 billion and says the total may climb to $40 billion before the year is over, creating a vast pool for acquisitions.

By 2007, Pfizer drugs with annual sales of $14 billion - one-quarter of total company sales - will lose patent protection. Among them are Zoloft, an antidepressant, and Zithromax, an antibiotic.

So the world's largest drug company has been on a highly visible shopping spree. Pfizer agreed to pay an 84 percent premium for Vicuron - a price that fund managers said prevented a bidding war from breaking out for the firm.

"I suspect some people think we're crazy and buying everything that moves," said John L. LaMattina, Pfizer's research and development chief. "But all our acquisitions have been strategic."

Angiosyn, a San Diego company, added to Pfizer's depth in eye diseases, he said, an area where the drug giant co-markets Macugen for macular degeneration.

Drugs in development at Vicuron could help replace revenue lost when Zithromax loses patent protection in November.

Right now, big pharmaceutical companies are finding willing sellers among smaller biotech companies. According to Ernst & Young, 40 percent of publicly traded biotechnology companies have less than two years of cash remaining, up from 31 percent at this time last year.

At the same time, private biotech companies hoping to go public face investors who have become hostile to new stock offerings.

'Confluence of factors'

"We're seeing sort of a confluence of factors" driving merger deals, said Richard S. Kollender, a principal with Quaker BioVentures in Philadelphia.

Because drug companies are looking for deals, biotechs with promising technology or drugs close to market can command premiums, as in the case of Vicuron.

"These companies are very hungry for assets," said Kollender, adding that a four-way bidding war had broken out over a biotech that Quaker invested in.

Not every deal may be as good as it looks. Kurt von Emster, a partner with MPM Capital LP, said that Corixa was worth more than Glaxo offered for the company. Glaxo offered $300 million for Corixa in April, a 48 percent premium over the company's share price at the time.

The Los Angeles Times is a Tribune Publishing newspaper.

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