BOSTON - At a time when many biotech firms are struggling to go public through initial public offerings and recent legislation like Sarbanes-Oxley is making it tough for smaller companies, investors often urge firms to exit via acquisition, but it's the responsibility of those companies to make sure they remain attractive to potential buyers.

That was the advice from a panel discussion, titled "The Age of Acquisition: Business Strategies for Biotech Companies." It was one of several to kick off the final day of BIO 2007, the international conference conducted by the Biotechnology Industry Organization. The annual meeting, which had a record-breaking 22,000 in attendance, officially wrapped up with a closing reception Wednesday night.

But before that, visitors to the Boston Convention & Exhibition Center took their last strolls around the 200,000-square-foot exhibit hall and attended their last sessions, one of which tackled strategies for acquisition, currently one of the most explosive trends in the biotech industry.

According to statistics gathered by law firm Nixon Peabody, the 300-plus merger and acquisition deals involving biotech in 2006 marked a 25 percent increase over 2005 and was higher than the number of deals done in any previous year. Some of the year's biggest deals include Merck KGaA's purchase of Swiss firm Serono SA for $13.3 billion and Abbott Park, Ill.-based Abbott Laboratories Inc.'s $3.7 billion buyout of Cranbury, N.J.-based Kos Pharmaceuticals Inc.

It's no secret that it's a seller's market these days, with big pharma looking to fill pipelines with late-stage products to boost revenues as their top-selling products go off patent in a few years. According to Nixon Peabody numbers, an estimated $100 billion in brand products will go off patent by 2010. So it's no wonder big pharma, and even large biotech, is willing to pay an average premium of more than 50 percent to snatch up biotech firms.

Even so, companies can't just rest on their laurels and assume that acquisition will be an easy exit for their investors. In order for biotechs to get the kinds of valuations that make shareholders happy, they must position themselves as good acquisition targets, said Thomas Gunning, vice president and general counsel of EMD Serono Inc., the U.S. affiliate of the newly merged Merck Serono SA.

His main objectives included bringing good people on board, building a company that "you can sell when business is good and prospects are better," and avoiding "contingent liabilities like the plague." Those liabilities, which might not be readily noticeable to an interested buyer, will surely show up during the exhaustive due diligence process, and "if things are really bad, you may not be able to complete your sale," Gunning said.

Issues that portend significant problems include the lack of assurances that any of the seller's collaborators won't bail on existing alliances, and compliance issues such as fines related to sales and marketing practices. Over the years, many large pharma firms - Bristol-Myers Squibb Co., Eli Lilly and Co. and Pfizer Inc. - have been hit with large fines from government regulatory agencies, so "there are a lot of buyers who have been very much sensitized to compliance issues," Gunning said.

Once an acquisition closes successfully, the buyer and seller must integrate their respective businesses, and it is oversight in that process that can spell trouble for mergers. Gunning recommended acting fast on the most critical items and employing small task forces to implement the best parts of both companies across areas of business.

A Buyer's Perspective

No stranger to the acquisition process, Cambridge, Mass.-based Genzyme Corp. has integrated several companies into its business model over the last seven years, with a predominant focus on "getting access to products," said Carol Greve-Philips, the company's senior director of business development.

Genzyme bought Geltex Pharmaceuticals Inc. in 2000, which added Renagel (sevelamer hydrochloride), a product approved to control serum phosphorus level in chronic kidney disease patients on dialysis. Prior to that acquisition, Genzyme primarily had focused on recombinant protein technology, but "we were looking to diversify" our business, Greve-Philips said. Though Renagel "didn't really have a strategic fit at the time," Genzyme was able to create its renal business around that product.

The company also added Synvisc, an osteoarthritis drug, in a 2000 deal with Biomatrix Inc.; gained rights a year later to a second-generation enzyme replacement therapy for Pompe disease; and, most recently, picked up the late-stage cancer drug Mozobil after winning a bidding war with Millennium Pharmaceuticals Inc. to buy Vancouver, British Columbia-based AnorMED Inc. for $580 million. (See BioWorld Today, Oct. 18, 2006.)

Genzyme's acquisition strategy often is driven by one of four incentives, Greve-Philips said. In some cases, when going after a certain product, the company discovers a technology platform or pipeline behind that product. Other times, Genzyme already owns a portion of the product rights through an existing collaboration and enters into the acquisition to secure the remaining rights.

Sometimes, the costs needed for "commitment to success of the program" require such a significant investment that "you acquire the company as part of the bargain," she said. And, in certain situations, firms are looking for a larger company to buy them out.

But even after companies have entered negotiations for an acquisition deal, some questions still remain, such as how to determine valuation, a process that is still "an art," according to David Reid, senior vice president and managing director of Pfizer's legal division.

Though there are several methodologies for measuring value, such as estimated product revenue, market volume and market share, there is no perfect model for computing valuation, he said. Most of the time, the true value of an acquisition isn't seen until years later.

"Some people say that AstraZeneca [plc] paid too much for MedImmune [Inc.]," Reid added, referring to the London-based pharma firm's April bid to buy Gaithersburg, Md.-based MedImmune for $15.2 billion. "Maybe, maybe not," he said. (See BioWorld Today, April 27, 2007.)

Looks like the industry will have to wait and see.