BioWorld International Correspondent
With a 62 percent equity stake in Serono SA and a 75.8 percent lock on voting rights, it was no surprise that majority shareholders the Bertarelli family pushed through a resolution to authorize a share capital increase in the biotechnology company at its annual general meeting in Lausanne, Switzerland.
The board of the Geneva-based company now is authorized to issue up to about 7.6 million new B shares in the company in order to fuel the acquisition strategy it has adopted in the wake of an unsuccessful attempt to sell the company.
"We can either use the shares to pay for an acquisition, or we can use the shares to raise cash," CEO Ernesto Bertarelli said during the company's first-quarter conference call last week. "We have not yet decided on which of these two options we are going to exercise or use. It all depends on how the transaction is going to materialize."
Bertarelli would not disclose the timing of an acquisition or the potential targets he has in mind, but he did point to the "firepower" at the company's disposal.
"Without the Bertarelli family losing control, we can execute a transaction of about $10 billion," he said. Although the company does not intend to complete a deal of that magnitude, he added that that figure helps to "frame" the discussion. The company's geographic focus is on the U.S. and Europe. Its technical focus probably will remain within the biologics arena, where its manufacturing expertise lends it an edge.
"Most likely - but not exclusively - we are going to be looking at the biotechnology space. We are not excluding small molecules," he said.
The financial profile of any potential acquisition also would be important.
"We expect to acquire companies that will be accretive to our earnings in two to three years," Chief Financial Officer Stuart Grant said.
Earlier this month, Serono declared an end to discussions on a possible sale of the company, as the Bertarelli family decided that the offers it had received were inadequate. Instead, it would seek growth - and a lessening of the company's dependency on its Rebif (interferon beta-1a) franchise in multiple sclerosis - via acquisitions. Ending the search for a buyer was not unexpected, "not with the price they had in mind," said Markus Metzger, a Cologne, Germany-based analyst at Vontobel AG, a Zurich-based investment bank.
The challenge the company now faces, he said, is to find a suitable acquisition target and to beat off competition from other companies that also are on the hunt. One strategy, he said, might be to focus on companies with products that have a medium-sized sales potential, below the radar screens of big pharma. But Serono's ability to strike good deals remains open to question.
"The track record has not been that good when you look at the in-licensing activities of the company in the past," Metzger said. Moreover, an acquisition could require a premium of between 50 percent and 100 percent over a target's existing market capitalization. "It all depends on whether they are going to pay with cash or with shares," he said.
In the event of a stock-based transaction, structuring a deal in order to satisfy minority shareholders would be important, said Bob Pooler, analyst at Zurich-based Lombard Odier Darier Hentsch, as Swiss stock exchange rules can squeeze minority investors. "It complicates things," he told BioWorld International.
Pooler listed several qualities for an attractive acquisition: existing sales, a U.S. presence, a pipeline in either neurology or oncology and good management. "One that springs to mind could be a company like ImClone [Systems Inc., of New York]," he said. "Erbitux still has a future, with sales in new therapeutic areas to come through."
Moreover, in January, ImClone disclosed that it had engaged Lazard LLC, also of New York, to review "strategic alternatives." A U.S. presence, Pooler said, might attract more coverage. "The aspiration here is they would also get a U.S. valuation," he said.
At present, it does not have a biotechnology valuation, Metzger said, but he does not see any immediate prospect for a change in the stock's prospects. "It's not expensive. It's fairly valued. I don't expect the stock to move at all."
The company last week reported adjusted net income of $171.6 million and adjusted basic EPS of $11.72 per bearer share and 29 cents per ADS for the first quarter, on revenues of $667.5 million. Serono's shares closed at CHF829.50 on the Swiss Stock Exchange Tuesday, down 1.25 percent and down more than 20 percent for the year to date.