Global Pharma Giants Feed On Smaller Biotech Makers

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Ed Damiano (right) delivers insulin to his son David, at the family's home in Acton, Mass. Damiano is working on a bionic pancreas that will automatically control blood glucose in people with type 1 diabetes.
Ed Damiano (right) delivers insulin to his son David, at the family's home in Acton, Mass. Damiano is working on a bionic pancreas that will automatically control blood glucose in people with type 1 diabetes.

GlaxoSmithKline Plc (NYSE: GSK), the biggest British healthcare company, extended its $2.6 billion offer for Human Genome Sciences (NASDAQ: HGSI) on Monday. The $13-a-share bid was first made in April.

Shares of Human Genome Sciences, based in Rockville, Md., rose 42 cents to $13.55.. Separately, Glaxo agreed to pay a fine of $3 billion after pleading guilty to many misdemeanors including its sale of an antidepressant drug, Paxil to minors in the U.S.Nevertheless, U.S. shares of Glaxo rose 79 cents to $46.36, valuing the British drugmaker at $115 billion.

Even as Human Genome Sciences rejected GSK's extended tender for not reflecting an accurate valuation, New York-based Bristol-Myers Squibb (NYSE: BMY) agreed to acquire San Diego-based diabetes drug-maker Amylin Pharmaceuticals (NASDAQ: AMLN) for $7 billion - the fourth billion-dollar plus deal and the largest in the pharmaceutical industry this year.

The takeover of Amylin follows the trend of pharmaceutical companies that acquire biotech companies to benefit from growing medical needs, offset patent losses and boost their internal pipeline productivity. In the process, the acquiring companies also speed up the process of garnering and marketing new products wihout doing all the work themselves.

On Friday, London-based AstraZeneca (NYSE: AZN) , which is making a comeback as a leading pharmaceutical player, said it would pay $3.4 billion to Amylin Pharmaceuticals following the Bristol-Myers acquisition. If the deal goes through, Bristol-Myers and AstraZeneca will share Amylin's profits from diabetes drugs.

AstraZeneca and GSK are also in talks to join hands in an attempt to strengthen their combined pharmaceutical portfolios.

The growing thirst for acquisitions signals a broader trend among pharmaceutical companies that aim to curtail losses and reap benefits from the rising number of diabetics.

According to a recent report by Dealogic, pharmaceutical deals reached $18.5 billion during the first quarter this year, a 5 percent rise from the same period in 2011.

Large companies that seek to stem their nosebleed from mounting patent losses and soaring expenditures on research and development efforts are eyeing smaller biotech companies to diversify their product lines. Acquisition deals eliminate the risk associated with research and development projects by allowing larger companies to cherry-pick their investments in medical products, devices and technologies that have a proven track record in the marketplace.

Last year, drug-makers lost patent protection on products valued at $34 billion in annual sales. That's still the tip of the iceberg. That amount is expected quadruple to $147 billion by 2015, according to Bloomberg data.

We expect this trend will continue and likely intensity as several drug companies have reduced their research and development spending, said Damien Conover, an industry analyst at Morningstar, an independent investment research firm based in Chicago.

Large pharma firms have also been facing problems with getting a go-ahead for their drugs the U.S. Food and Drug Administration, as was the case with Bristol-Myers' experimental diabetes product dapagliflozin, which failed to win the seal of approval from the FDA earlier this year.

In the takeover deal, Amylin has offered Bristol two products that U.S. regulators have already approved for sale - Byetta, a type-2 diabetes medication administered through twice-daily injections, and Bydureon, a longer-acting form of that drug, which is taken once a week. Byetta generated revenues of $518 million in 2011. Bydureon could gross over $2 billion - an event that will create value for Bristol shareholders, analysts say.

Many pharma companies are using the acquisition strategy to cash in on the growing need for Insulin among the rising number of diabetics worldwide. About 346 million are afflicted globally, according to the World Health Organization (WHO), which projects that the number will double by 2030 -- a trend that will unveil fresh market opportunities for the pharma business.   

Other likely takeover targets in the near future could include Actelion (Pink: ALIOF) of Swizterland;  BioMarin Pharmaceuticals (Nasdaq: BMRN) of Novatto, Calif., and Onyx Pharmaceuticals (Nasdaq: ONXX), analysts said. Investors may agree.

Shares of Actelion ticked up 4 percent on Monday, while those of BioMarin jumped more than 5 percent. Onyx shares rose 2 percent. All three companies enjoy a combined market capitalization of $14.3 billion.

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