Biogen-Icahn? Pfiz-ogen or Pfiz-zyme? Is All of Cambridge Biotech Suddenly Up For Sale?

Thank you Carl Icahn. Thanks for stirring the pot by purchasing a few million shares in the local economy. In just the last 12 days, you’ve raised the market cap of Cambridge’s biotech giants by, oh, I don’t know, a few billion dollars.

It’s nice work if you can get it, this activist investing. But in case you missed it, here’s what’s been going on lately. Back in August, Icahn announced he had purchased 2.74 million shares of Biogen Idec, good for roughly a 1 percent stake. The stock perked up, but it had been looking good pretty much all year, given the company’s strong results and growth prospects (despite yesterday’s disappointing third-quarter results). The stock climbed steadily into the fall, reaching the mid-60s. Then, on October 12, Biogen’s board announced it would entertain offers for the company. Shares shot into the 80s, and suddenly, Boston-area biotech was awash in rumors: Icahn offered $23 billion himself for the company. Pfizer is going to buy it. Hey, wait, Genzyme would also make a good takeover target—in fact, Pfizer is going to buy it. On October 15, Genzyme’s stock jumped nearly 5 percent—but no one is certain whether that was because of Icahn or because virtually simultaneously with the takeover talk came good clinical-trial news for Genzyme’s leukemia drug Campath. Let’s call it a bit of both.

Time to step back and attempt to cut through this fog of rumors and speculation—to the extent that’s possible. We’ve spent the last few days scouring news reports, blogs, and other speculation, as well as talking to a few knowledgeable sources, to try to see a little more clearly into this matter. Firm conclusions are hard to reach, but below are some key points.

First is the very real possibility that Icahn actually holds much more than 1 percent of Biogen. It’s not 5 percent, because he hasn’t filed a 13D form that is required when an investor hits that level. But two good sources tell us his holdings are likely above what has been disclosed so far.

In any case, whether it’s 4.9 percent or 1 percent, when Icahn comes knocking, board members listen. At least at Biogen they did. We don’t know exactly what kind of communications Icahn had with Biogen or its directors, but it’s clear that it was his interest that spurred the company to officially entertain buyout offers. In yesterday’s third-quarter earnings call, Biogen CEO Jim Mullen said that the company wanted to get through the process as quickly as reasonable, but stressed there was no guarantee a sale would take place.

It’s been widely reported (apparently starting with the Wall Street Journal) that Icahn bid $23 billion for Biogen, but we haven’t confirmed it. Even assuming the figure is correct, not everyone is buying that Icahn’s serious. As Fortune noted, “Most observers believe Icahn instigated the company’s sale, then made the bid to gin up an auction atmosphere.” The Financial Times and Boston Globe columnist Steven Syre agreed. Wrote Syre, “But I’d bet buying Biogen is the last thing Icahn wants to do. The idea was to trigger other, higher offers from the big drug companies.”

But if not Icahn, who would buy the company? And is a deal really likely to take place, given the now hefty price tag Biogen would command with its stock trading in the high 70s or low 80s and a market cap of roughly $23 billion?

On the first question, Pfizer is the consensus choice as the most likely suitor—it’s in every report we found on the subject. But what about dark horses? The Financial Times, Fortune, and Sanford C. Bernstein & Co. analyst Geoffrey C. Porges (quoted by Bloomberg) also mentioned Sanofi-Aventis and GlaxoSmithKline. The FT threw in Novartis, Fortune added Wyeth to the list, the Boston Globe mentioned Johnson & Johnson, and a JPMorgan report listed Roche. Biogen itself isn’t naming names: it just reports receiving several “expressions of interest.” (And no wonder that at yesterday’s earnings call Mullen termed all the speculation “unsettling”.)

That any of these firms would be interested reflects the challenges confronting Big Pharma today. Drugmakers are struggling with their pipelines, especially with many blockbuster drugs coming off patent. They’re also turning their attentions increasingly toward the protein-based drugs that biotech specializes in. Biogen has a good pipeline and strong future prospects, which Mullen laid out recently. “Biogen’s size would give a buyer immediate scale in the biotech field,” the FT wrote. Indeed, several news sources have speculated that Big Pharma might be desperate enough to pay a premium for a company like Biogen, which would fit nicely into Icahn’s plans. “Mr. Icahn…is betting clear-headedness will not prevail,” the FT continued.

But there are problems with any takeover of Biogen. As Fortune and others noted, Biogen shares rights to its big cancer drug Rituxan with Genentech—and it shares rights to the multiple sclerosis drug Tysabri with Ireland’s Elan. Any change of control at Biogen, noted the Associated Press, gives its partners the ability to purchase the rest of the rights to the shared drug. Even if Elan told Icahn that it wouldn’t stand in the way of a sale, as has been reported, that still leaves Genentech.

Meanwhile, Forbes devoted an entire article to the specific subject of why Pfizer shouldn’t buy Biogen, citing the rights issues to Rituxan and Tysabri, the company’s high price, and the difficulty of assimilating the biotech into its already disorganized R&D system. We found no special reason out there why the other Big Pharma companies listed as potential suitors would find a perfect match in Biogen.

Pfizer, not surprisingly, has had little to add. But in his Q3 earnings call last Wednesday, Pfizer CEO Jeffrey Kindler said this: “And with regard to Biogen Idec, obviously we don’t comment on that kind of speculation…But, I just have to say, we will always keep eyes and ears open at any means to build our business through alliances, licensing, or acquisitions and when the right opportunities present themselves, we will act appropriately.” I’d say that goes in the definite maybe category.

In short, if you’re looking for a definite forecast, we don’t have it. Yesterday’s Boston Globe quoted David P. Southwell, chief financial officer of Marlborough, MA, biotech company Sepracor, as skeptical a sale will go through any time soon. “If I were a Biogen employee, I wouldn’t be worried yet,” he said. At the same time, the piece noted, Citigroup analyst Yaron Weber put the chance of a sale at 80 percent.

Maybe they’re both right. With Icahn around, something usually happens. But I’d be willing to bet that despite Mullen’s efforts to make the process as speedy as possible, it won’t happen that quickly. In the meantime, for all you stock traders out there, various analyst reports that we’ve seen show the company might sell for a stock price in the $85-$100 range (JPMorgan). On the other hand, without a sale, the stock might only be worth $60 (Bear Stearns). Happy trading.

We can’t wrap this up without a look at Genzyme (which reported strong growth in its Q3 earnings report this morning). The speculation that it, too, is an acquisition target seems to have started on October 15, the Monday after Biogen’s late Friday announcement that it would entertain offers. “It’s not surprising to me that investors are moving on to Genzyme because what seems to be the asset du jour for pharmaceuticals companies is biologic capability,” Cowen & Co. analyst Phil Nadeau told Reuters. But this view was countered by John McCamant, editor of the Medical Technology Stock Letter, who said Genzyme’s more diversified revenue streams didn’t fit as well with large drugmakers. “Unless you can find somebody that wants to go into these specialty niche markets, I don’t see Genzyme addressing Big Pharma’s need for a fix,” said McCamant. A Wall Street Journal Deal Journal blog entry that same day tapped, you guessed it, Pfizer as a likely Genzyme buyer.

A different Reuters article quoted another Bear Stearns research report. “Genzyme and Amgen are, in our opinion, the only major biologics companies that could realistically be purchased if Biogen disappears,” the report stated. “Genzyme seems to make the most sense as a potential target for a major pharma company looking to bulk up its biologics capabilities.”

Does that help? Genzyme itself has no comment on the subject.

Update: Go Sox!

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