Bristol's Medarex Buy Shows Biologics Still Command Premiums

Bristol-Myers Squibb Co.'s (BMY) $2.1 billion purchase of Medarex Inc. (MEDX), with a premium exceeding 90%, demonstrates that companies developing biologic drugs are still able to command high deal premiums.

Biotech drugs, which are produced from living organisms, have become more attractive to potential purchasers because - in comparison to traditional small-molecule compounds from pharmaceutical companies - biotechs generally offer better margins, a higher barrier of entry for competition and, currently, no generic threats.

Such drugs, though, are difficult to produce, and as a result, command high prices.

"Biologic pricing is very robust," Needham & Co. analyst Mark Monane said. "They're getting away from [selling] $3 pills, and Big Pharma sees that going door to door isn't the way to go anymore."

The pharmaceutical industry has good reason to be placing more bets in this area. By 2014, about half of 100 top-selling drugs are expected to be biologics, compared with 28 last year, according to ZS Associates, a sales and marketing consulting firm.

Accordingly, Leerink Swann recently reported that the average one-day premium for biopharmaceutical acquisitions was 84.2% in 2008, after averaging just 28.7% from 1999 to 2007.

Like many drug makers facing patent expirations and generic competition on their biggest drugs, Bristol-Myers has expressed interest in developing biologics. Last year, it attempted to buy ImClone Systems, its partner in selling cancer biologic Erbitux, but was trumped by Eli Lilly & Co.'s (LLY) $6.5 billion offer. That deal provided a 51% premium to the stock price before Bristol-Myers' initial bid.

Bristol is partnered with Medarex in developing ipilimumab in melanoma, prostate cancer and other forms of the disease, and the company is developing multiple other antibody therapies.

Monane believes more deals are likely in the second half of the year, especially in companies focused on cancer, naming Seattle Genetics Inc. (SGEN) and Regeneron Pharmaceuticals Inc. (REGN) as the most likely targets.

Seattle Genetics recently traded up 54 cents, or 5.8%, to $9.87, while Regeneron rose $1.67, or 9.3%, to $19.63 after receiving a milestone payment.

Both companies have biologic cancer drugs in late-stage development, and Regeneron has partnerships with Sanofi-Aventis (SNY) and Bayer AG (BAYRY), while Seattle Genetics has a partnership with Roche Holding AG (RHHBY).

While the attractiveness of biotech drugs are leading to acquisitions of midsize companies, the rich premiums that biotech deals demand are probably hampering any potential purchases of large biotechs like Amgen Inc. (AMGN) and Biogen Idec Inc. (BIIB), which have market capitalizations of $60.3 billion and $14 billion, respectively.

The only large biotech to get bought recently was Genentech. Roche paid $46.8 billion in March for the 44% stake it didn't already own, giving it total control of the biggest player in biologic cancer drugs.

Although that deal only offered a 16% premium to Genentech's price before Roche's initial offer a year ago, it paid at 25 times projected full-year earnings, a level that would put more than a 90% premium on either Amgen or Biogen.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; [e-mail]