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Predictions for 2011 | Biotech

Industry consolidation will continue

By Robert Weisman
Globe Staff / January 2, 2011

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The state’s biotechnology industry starts the new year with its largest company staring at a hostile takeover offer and its second largest closing sites, cutting jobs, and narrowing its research focus.

So it’s a safe bet 2011 will be another year of consolidation in an industry seen as vital to the Massachusetts economy. But potential buyers will move cautiously as global drug makers such as Pfizer Inc., Roche Holding AG, and AstraZeneca PLC struggle to digest recent big biotechnology acquisitions.

That caution is already on display in the disciplined approach French pharmaceutical giant Sanofi-Aventis SA has taken in its pursuit of Cambridge-based Genzyme Corp., the leading Massachusetts biotech with a market value of more than $18 billion. Rather than boost its bid after Genzyme’s board and shareowners rebuffed its $69-a-share offer, Sanofi opted to extend the offer to Jan. 21 at the same price.

“As the Genzyme drama has indicated, there is less of a willingness to pay a significant premium,’’ said Kevin J. Gorman, managing partner at Putnam Associates, a life sciences consulting firm in Burlington. “If you look across the spectrum, everybody needs drugs. But they’ve seen enough failure in their own pipelines and in companies they’ve acquired that they’re less willing to gamble than in the past.’’

Still, big pharma faces a steep “patent cliff’’ over the next two years, when many top-selling drugs lose their patent protection and begin competing with low-cost generics. So they will be looking to buy established biotechs as well as venture-backed start-ups with compounds that show promise in clinical trials.

One way buyers can protect themselves is to structure deals using milestone payments and contingent value rights, provisions that reduce the initial purchase price but give stockholders added compensation if the drugs made by the acquired company prove successful in the marketplace. Analysts have suggested Sanofi and Genzyme might reach a deal this year using such a mechanism.

Meanwhile, publically traded biotechs like Genzyme and Biogen Idec are under growing pressure from activist investors to boost their stock prices by selling themselves or spinning off businesses.

George A. Scangos, the new chief executive of Weston-based Biogen Idec, the state’s number two biotech, unveiled a restructuring plan in November that will close a big cancer research lab in San Diego, end oncology and cardiovascular medicine research, and cut 650 jobs worldwide. Scangos said he couldn’t guarantee the entire company wouldn’t be sold within five years.

Charles River Laboratories International Inc., a Wilmington-based company that sells medical research equipment and services to drug makers, is also reportedly under pressure to sell itself after its bid to buy a Chinese company was nixed by investors.

So while buyers might be more patient and haggle more about the price, it’s unlikely the consolidation trend will abate.

Robert Weisman can be reached at weisman@globe.com.