Biotechs ape pharma strategy as profits grow

As the biotechnology industry matures and more companies become profitable, many are looking outside their traditional business areas to grow -- with mixed results.

Big pharmaceutical companies have made no bones about their determination to acquire products from biotechnology companies to offset a dearth of new products in their own pipelines.

Now, biotechnology companies, which used to focus on their own research and development programs, are following the same approach on an ever-expanding scale.

"The bigger biotechs are becoming behaviorally more like big pharma," said William Kridel, manager director of Ferghana Partners, a life sciences investment bank. "As companies get bigger they are adding therapeutic categories beyond their core focus."

That's getting some companies into trouble.

OSI Pharmaceuticals whose growth engine is the cancer drug Tarceva, generated a firestorm of opposition from shareholders when it acquired Eyetech Pharmaceuticals, the maker of a drug to treat wet age-related macular degeneration, an eye disorder.

OSI is now taking numerous actions to rebuild the credibility of its management, and has sworn not to make any more major, strategy-forming acquisitions any time soon.

"It's not so easy when you don't have a franchise in an area to evaluate what the market is like," said Anders Hove, general partner at venture capital company Venrock Associates.

Biogen Idec whose fortunes currently depend on two big drugs, has refocused its attention from research and development to acquisitions.

Burt Adelman, the company's executive vice president of development, said at the Reuters Biotechnology Summit in Boston this week that Biogen will look at any product that has the potential for reasonable growth over a reasonable period, no matter which disease it treats. And he said the company is willing to pay a premium to get it.

That kind of thinking doesn't sit well with everyone.

"I'm a bit concerned about this trend," said Eric Schmidt, an analyst at SG Cowen. "I don't believe in-licensing can create a lot of value and its rare to justify the premium you pay for an acquisition."

Botox-maker Allergan which is in the process of acquiring the breast implant maker Inamed Corp is planning to acquire treatments for an ever-expanding array of neurological and urology conditions, ranging from epilepsy and Alzheimer's disease to multiple sclerosis and Parkinson's disease.

Its an odd and, to some, illogical combination.

"In general its better to make acquisitions if they are connected either to the scientific base of a company or the therapeutic base or the technology base," said Kridel.

Genzyme Corp. which relied until recently on one high-priced drug for the bulk of its revenue, has made acquisitions for years and has brought in more products than it has developed from scratch, across a wide set of disease areas.

The criteria for such acquisitions, however, is very strict, said Henri Termeer, the company's chief executive. They have to be very "Genzyme-like."

That typically means products that address niche markets that can be addressed with small, highly specialized sales forces in diseases with clear diagnostic criteria.

According to Stephen Bunting, managing director of British venture capital group Abingworth, Genzyme is one of only a few biotechs to make a success of acquisitions.

One way or another, mergers and acquisitions are likely to continue.

"What we are seeing is the blurring of biotechnology and pharmaceuticals," said Sol Barer, the chief operating officer of Celgene Corp. "The primary focus of the pharmaceutical industry has to be innovation. If we do that we will be rewarded."