Morningstar Advisor - August/September 2010 - 32

Spotlight

Top Takeover Targets in Biotech
Because of the financial vulnerability of many small-cap biotechs and the hefty cash balances at pharmaceutical firms, we predicted going into 2010 that the biotech market for mergers and acquisitions would be active. It hasn’t played out that way so far. Large pharmaceutical companies instead focused on mega-mergers with their peers. But as pharmaceutical consolidation winds down, we still think small- and mid-cap biotechs represent attractive targets for big pharma. Here, we list in order the 15 firms most likely to be taken over. 1 Vertex VRTX Vertex is close to commercializing telaprevir, a potential blockbuster treatment for hepatitis C that has demonstrated superior trial results when compared with the current standard of care. 2 Auxilium Pharma AUXL Xiaflex is nearing the market for two rare conditions, which would significantly boost the firm’s profit potential. 3 Human Genome Sciences HGSI Human Genome becomes more of a target thanks to impressive data for its lupus drug Benlysta. 4 InterMune ITMN Lead product candidate pirfenidone has shown interesting data in idiopathic pulmonary fibrosis. However, recent actions by the FDA against InterMune will likely lower its high ranking as a takeover target. 5 Celgene CELG Hematological cancer blockbuster Revlimid has patent protection through 2026, and the firm’s rapid growth and extensive pipeline leave it poised to remain a leader in blood-related cancer treatments. 6 Exelixis EXEL With a broad portfolio of oral cancer drug candidates—and a particularly promising PI3K program—Exelixis has emerged as a top takeover target. 7 Genzyme GENZ Manufacturing woes and management pressure at this wide-moat biotech could open the door for potential acquisitors, and several intriguing clinical programs could evolve into commercial drugs around 2012, the worst time in pharma’s patent cliff. 8 Crucell CRXL Crucell’s marketed vaccines and novel biologicsmanufacturing platform have drawn Johnson & Johnson JNJ into an equity stake, and this interest could expand to an acquisition. 9 Elan ELN Johnson & Johnson’s equity stake in Elan could turn into an acquisition if management of Tysabri use and side effects are improved. 10 BioMarin BMRN BioMarin’s successful focus on the small but highly profitable niche of rare genetic diseases— increasingly popular with large pharma—makes it an acquisition target. 11 Rigel Pharma RIGL Rigel received disappointing data for its lead arthritis drug, but its large pharma partners could move for an acquisition if Phase III data are positive. 12 Lexicon Pharmaceuticals LXRX Lexicon’s positive midstage data for diabetes and gastrointestinal drug candidates have boosted the prospects for its knockout mouse technology. 13 Biogen Idec BIIB Despite Biogen’s woes with Tysabri, we think that the firm could become an attractive target if it makes progress with the drug’s risk management. 14 Shire SHPGY Shire is capitalizing on Genzyme’s stumbles in rare genetic diseases, and a solid gastrointestinal and central nervous system portfolio provides additional strength. 15 ZymoGenetics ZGEN The market for hemostat Recothrom may be limited, but midstage candidates in oncology and infectious disease look promising.

lower in emerging markets. According to AstraZeneca, for example, the cost of a sales representative is more than 50% lower in emerging markets than in developed countries. Low marketing costs help offset the lower pricing power. From a marketing perspective, branded drugs have a sizable leg up over generics in emerging markets. A little more than 90% of emerging-markets drug sales are branded drugs (including “branded generics,” which are copies of an original drug developed by a different company but with a brand that signifies quality). This figure is significant: Most patients in emerging markets pay out of pocket, but they are willing to pay more for drugs from a trusted manufacturer. Patients and physicians view generic drugs as being inferior to branded medicines. In addition, counterfeit drugs have plagued emerging markets for decades, instilling distrust toward nonbranded drugs. Meanwhile, the large multinational drug companies have built strong reputations for manufacturing and safety by delivering a high level of service and educational materials to physicians and patients. (Educational marketing services are very valuable in emerging markets, where fewer public resources are available to doctors and patients.) The sterling reputation of branded drugs in emerging markets also gives the drugs much longer lifecycles than what they have in developed markets. Branded drugs in developed markets are on the market 12 to 14 years before patents expire and generic drugs destroy the market share. In emerging markets, branded drugs tend to retain their marketleading positions for several years after losing patent protection. Pfizer’s Norvasc lost its key patent in 2001, for example, but it is still number one in its market in China. And, importantly, Norvasc’s price hasn’t eroded.
Emerging-Markets Leaders

Four firms are poised to take advantage of emerging-markets growth: Sanofi-Aventis,

32 Morningstar Advisor August/September 2010

Morningstar Advisor - August/September 2010

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