Fool.com: Big Day for Biotech (News) August 2, 1999

Big Day for Biotech

August 2, 1999

Biotechnology companies of all shapes and sizes posted gains today on several news tidbits and an overarching optimism about the sector's future.

Leading the charge was tiny La Jolla, California-based Sibia Neurosciences (Nasdaq: SIBI) gained on news that it will be acquired by drug giant Merck & Co. (NYSE: MRK) in a deal valued at $87 million. The purchase price works out to $8.50 per share in cash for Sibia, which is focused on developing drugs to treat neurodegenerative, neuropsychiatric, and neurological disorders. Meanwhile, fellow biotech small-fry NeoPharm (AMEX: NEO) was up after Pharmacia & Upjohn (NYSE: PNU) agreed to make an $8 million equity investment in the company, providing NeoPharm with some much-needed funding for its anti-cancer research.

The investments are interesting from the point of view that they contrast with this year's previous trend of big drugmakers skipping over the smaller players and opting to acquire the better-established biotechs out there, i.e. the ones with actual products on the market and more than one or two drugs sitting in the pipeline.

As fellow Fool Warren Gump recently pointed out, the substantial time and monetary commitments made to biotech research over the past decade or so are finally starting to pay off with some major new products, attracting investors' money as well as the interest of big-name pharmaceutical companies, in the process. Warner-Lambert's (NYSE: WLA) acquisition of Agouron early this year and Johnson & Johnson's (NYSE: JNJ) recent bid for Centocor (Nasdaq: CNTO) are the most notable examples of this movement.

Both Agouron and Centocor have built their product lines and development programs by focusing on a specific core technology, protecting it, and dipping into that same technology well over and over again while developing new products. Agouron has used protein structure-based drug design as the technology underlying its cancer and AIDS treatments, while Centocor has emphasized monoclonal antibody technology, which it is using to develop drugs to treat not only cancer and autoimmune diseases, but cardiovascular conditions as well.

Similar large capitalization biotech firms with unique technologies continue to be among the most attractive takeover targets for the big drugmakers, but their price tags are getting steeper by the day. For instance, Biogen (Nasdaq: BGEN), Immunex (Nasdaq: IMNX), and MedImmune (Nasdaq: MEDI) advanced today amid the general biotech optimism.

For investors, the smaller players carry substantially more risk while also holding out the possibility of extraordinary capital appreciation if the companies' research yields an eventual home run treatment. Today's moves by Merck and Pharmacia & Upjohn, as well as Pharmacia & Upjohn's recently proposed acquisition of Sugen (Nasdaq: SUGN), signal that the major drugmakers are more willing to go out on a ledge and invest in a few of these smaller, higher-risk firms. Investors should consider their own risk tolerance levels and knowledge of the "technology" portion of biotechnology before following in big pharma's footsteps.

By Brian Graney (TMF Panic) (TMF Panic)

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