J&J’s Acquisition of Scios Emphasizes Large Pharma’s Need for New Products

Johnson & Johnson’s recent $2.4 billion acquisition of Scios Inc. is the latest in a string of pharmaceutical/biotechnology deals driven by the need of major pharmaceutical players to replenish their drug pipelines. Scios provides treatments for cardiovascular and inflammatory disease. It only has one drug on the market, but it gives J&J a likely lucrative heart drug and a possible future blockbuster. Scios will gain sales and research help from its new owner, which should help speed up its growth. The Scios deal fits with J&J’s past practice of buying smaller biotech companies that can provide growth, says Stephen O’Neil, a pharmaceuticals analyst at J.J.B. Hilliard, W.L. Lyons Inc. “J&J keeps their hands off their acquisitions and lets them operate for themselves, and they have a good track record with this kind of deal,” he notes. John Maddox, Managing Director of Infusion Pharma Consulting LLC, a Morristown, N.J.-based strategy consultancy, says there are significant drivers behind recent deals like J&J/Scios: earnings pressures, the need for companies to acquire a global footprint, and the need to fill gaps in product pipelines. For example, the recent merger of NPS Pharmaceuticals Inc. and Enzon Pharmaceuticals Inc. was a deal motivated by the opportunity to obtain Enzon’s cash hoard, says J. Nelson Campbell, a pharmaceuticals banker at Adams, Harkness & Hill. “You could say Enzon and NPS was a merger of necessity, at least for NPS. When you can’t access the capital markets, you only have two choices: a merger with a cash-rich company or a sellout to a larger pharma firm,” he states. Setting the stage for these “cash-on-the-balance-sheet” types of deals is the lack of financial buyers. Campbell says that in other industries with depressed valuations, there would be offers from leveraged buyout funds. That doesn’t happen in biotech/pharma, he adds, because there is nothing harder to value than a pre-clinical biotech company with no cash flow, he says. Another problem for the biotech/pharmaceutical industry is that many investors don’t perceive the companies as desirable holdings in a down market. “The classic biotech stock is a cash burner. And in the current environment, investors don’t want to own things whose payoff is a long ways down the road,” says Campbell. While the J&J/Scios deal is a classic example of a huge pharmaceutical company gobbling up a promising, much smaller player, it isn’t the most common type of pharma deal getting done these days. According to a study released last month by PricewaterhouseCoopers, deal size has shrunk significantly from 2001 to 2002. Excluding Pfizer Inc.’s proposed $60 billion combination with Pharmacia Inc., total deal value last year was only $11 billion compared with $61 billion in 2001, due in part to continued closure of the public markets to most biotech players. Looking forward, the study states that the market’s current risk aversion environment will prevent much in the way of mega-deals, but that small deals in regional markets, such as the European biotech sector and the emerging Asian markets, will be quite brisk this year. Another characteristic of the biotech/pharmaceutical industry is that the main product of biotech startups is intellectual property, says Bob Maggiacomo, CEO and managing director of Synergy Capital Partners, Los Angeles. This makes it hard to do a hostile acquisition because if you lose the goodwill of the founders and researchers, you can be left with little more than an empty shell of a company, he says. Thus, the m&a drivers that Maddox outlined must be looked at against the background of these unique characteristics of the biotech/pharmaceutical industry. On the product diversification front, he says that there is no other industry in which you can lose 80% of your sales overnight as drugs lose their patent protection. The only industry players with a relatively wide pipeline of drugs in development are Pfizer and, possibly, J&J, he says. All of the other players are looking for new products, but despite the development of a host of new discovery tools, research and development productivity is not increasing. Increased distribution is also a major asset that a big pharmaceutical company, like J&J, can provide to a small company like Scios. Copyright 2003 Thomson Media Inc. All Rights Reserved. (http://www.thomsonmedia.com)