Biotech deals perking up

After a quiet year for biotechnology, a sudden wave of mergers and buyouts has sparked interest in a business that relies on deal-making to put the stamp of success on new ideas.

On Monday, Gilead Sciences Inc. of California, one of the nation's largest biotech firms, said it would buy drug developer Myogen Inc. of Colorado for $2.5 billion. Last week Millennium Pharmaceuticals Inc. jumped into a half-billion-dollar bidding war against its Cambridge neighbor Genzyme Corp. over a tiny Canadian cancer-drug maker , AnorMed Inc . And the previous week, a wave of mergers swept through Europe, led by Merck KGaA's $13 billion takeover of Serono SA , a Swiss biotech firm with its United States headquarters in Rockland.

Analysts said it's hard to tell whether the recent handful of deals is a coincidence, or a harbinger of more activity in the life-science business this fall. Declan Quirke , head of healthcare mergers for investment bank Cowen & Co., suggests that after months of lackluster performance for big biotech stocks, an upswing during the past six weeks is giving them fuel to execute long-planned takeovers.

``We haven't seen a lot of deals earlier this year, so things just came to fruition," he said.

The buzz around the recent acquisitions highlights the curious economics of biotechnology, in which many companies angle not to grow profitable, but to be acquired by larger ones.

Though the business is widely seen as a growth engine for Massachusetts, most biotechnology companies never turn a profit. Even long-term survivors like Millennium, Vertex Pharmaceuticals Inc. , and Alkermes Inc. have lost money well into their second decades. So the financiers who fuel new biotech companies depend not on the traditional measure of bottom-line earnings, but on the chance of big future payouts.

``The thing that stifles innovation is if investors don't think they can get money back on reasonable terms," said Michael Greeley of IDG Ventures Boston .

Recently, however, payouts have been few and far between. The public stock offering, which in the past has offered a rich strategy for early investors to cash out of young private companies, has become just another low-profile ``financing event." Numbers provided to the Globe by the National Venture Capital Association suggest that 2004 was the last year in which a large number of biotech firms successfully went public.

``The public markets are very unattractive right now in life sciences -- there are very few IPOs that have gone out, and the ones that have gone out haven't done well," said Richard Aldrich of RA Capital Management LLC , a long time biotechnology executive and investor.

But the recent flurry of acquisitions speaks to another option for small companies: a multi million - dollar buyout by an industry giant.

Such acquisitions are ``hugely critical" for boosting enthusiasm in the younger companies that dominate the Boston life-science world, Greeley said. Not only do they provide investors with a chunk of cash for their initial backing, but they can bring a large company's cash flow and development expertise to help ensure that a new drug reaches the market.

The benefits for investors are clear: AnorMed's stock was trading below $6 a share before Genzyme submitted a hostile bid on Aug. 30. Today, with Millennium also bidding for the company, the price has more than doubled. Myogen's shares leapt nearly 50 percent on Gilead's Monday pronouncement, single-handedly pushing the AmEx Biotechnology Index into positive territory for the day.

Industry analysts seem split on whether the handful of big-ticket deals amount to a trend.

Phil Nadeau , a biotechnology stock analyst with Cowen & Co., calls deals in the biotech industry ``idiosyncratic," and says it's hard to predict when two companies will decide they've found an appealing match.

At Columbia Management , the investment arm of Bank of America Corp. , biotech analyst Bryan Knepper sees the potential start of ``a phase of consolidation," as firms that have seen disappointments in their pipeline of future drugs bid to pick up smaller firms with drugs already in clinical trials.

``Companies are buying innovation," he said. ``You can debate what innovation is, but there are companies that have pipeline gaps, so they need to satisfy that."

Overall, he said, a lively merger market is good for a biotech-dependent city like Cambridge.

``I think research spending is going to be up, and a lot of companies want to get involved in the area because the science is good."

Stephen Heuser can be reached at sheuser@globe.com.