Just as the broader markets have experienced pain, big pharma has uncovered opportunity. Depressed valuations have given giant pharmaceutical companies the chance to rebuild their pipelines through new acquisitions.
M&A Central
In this year's first quarter, the pharmaceutical industry witnessed Pfizer (NYSE:PFE) acquiring Wyeth (NYSE:WYE), Merck (NYSE:MRK) taking out Schering-Plough (NYSE:SGP) and Roche (OTC:RHHBY.PK) purchasing Genentech. This outbreak of merger and acquisition activity may just be getting started. Eli Lilly (NYSE:LLY), Bristol-Myers Squibb (NYSE:BMY) and AstraZeneca (NYSE:AZN) have each recently stated that they, too, are open to small- to mid-size acquisitions.
Big pharma is experiencing a sense of urgency to stock its R&D pipelines. Companies in the space are now dealing with an FDA that is tightening up on new drug approvals. Compounding this challenge is the fact that many blockbuster prescription drugs are facing intense competition from generics, or will be in the next few years, as they go off patent. On April 22, GlaxoSmithKline (NYSE:GSK) cited competition from generics as its primary factor for missing Q1 analyst expectations.
Preying On Biotech
In recent years, many of big pharma's acquisitions have come from the biotech space. This trend will undoubtedly continue to transpire deeper into 2009. With added pressure to market new drugs, big pharma is likely to augment its in-house R&D activity by purchasing biopharma companies that already have drugs in late-stage clinical trials.
Two prime examples of biotech companies that could soon be snatched up are Biogen Idec (Nasdaq:BIIB) and Amylin Pharmaceuticals (Nasdaq:AMLN). If activist investor Carl Icahn has his way, both companies could soon be gone for the right price.
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Biotech ETFs Could Benefit
While it is difficult to accurately pick biotech takeout targets that have been flying under the radar and have not already experienced a run-up in price on takeover speculation, some biotech ETFs could stand to gain if merger and acquisition activity picks up again on a sector-wide basis. Some ETFs to consider include the iShares Nasdaq Biotechnology Index (Nasdaq:IBB) and the Biotech Holders Trust (NYSE:BBH). (For further reading, see Ups And Downs Of Biotechnology.)
The Bottom Line
While this recession has brought trying times for investment portfolios, it has also afforded big pharma the opportunity to go on a warpath of acquisitions. Indications are that this buying spree will persist into the foreseeable future. If it does, many biotech investors could benefit from the resulting takeovers.
For more, see Using DCF In Biotech Valuation.
