Preventive Medicine : Biotech Firms Adopt Plans to Ward Off Takeovers
Answer: Because the companies are flush with cash, their stock prices fluctuate wildly and they possess extremely attractive--albeit still unproven--technology that has some larger companies drooling.
Question: Why are San Diego-based biotechnology firms scrambling to adopt anti-takeover packages?
In recent weeks, Gensia Pharmaceuticals, Immune Response Corp. and Mycogen have adopted plans to stymie acquisition bids that boards of directors judge to be inadequate or unfair to shareholders. Industry observers say several other local biotech firms are readying packages designed to abort hostile bids.
But, although company executives are unanimous in their support of the rights packages, some observers question whether the packages are needed in an industry that has seen few hostile takeovers.
The anti-takeover plans “flip in” when a person or group acquires 15% or more of a given firm’s outstanding shares. The anti-takeover packages include a dividend that consists of the right to purchase future shares at a substantial discount if an uninvited acquisition bid occurs.
The plans are designed to bolster the number of outstanding shares, making it prohibitively expensive for an uninvited takeover to occur. Unlike comparable plans adopted by a wide range of companies during the 1980s, however, the plans don’t include golden parachutes for top executives.
Unwanted takeover bids are rare in the biotech industry because, “unlike a retail, airline or automotive company, the technology you’re buying resides in the people at the company you’re acquiring,” said Jim McCamant, editor of the San Francisco-based Medical Technology Stock Letter. “In those other businesses, the (top) people are not nearly as critical.”
Consequently, “if the company is doing a good job, then nobody in this industry is going to want to do an unfriendly takeover,” McCamant said. “The plan leaves me a little mystified. . . . It sounds like a nice little business for lawyers.”
Margaret McGeorge, a biotech industry analyst with Sutro & Co. in San Francisco, said few biotech companies have adopted anti-takeover packages because “it’s pretty hard to do a hostile takeover in this industry. . . . Companies are so heavily dependent on the assets that walk out the door in tennis shoes at 5 p.m. each day. You could really upset the balance by a less-than-friendly takeover.”
But executives at companies that have adopted rights packages defended them as a necessary precaution, arguing that their smaller firms are increasingly attractive to giant pharmaceutical companies.
Gensia Vice President Martha L. Hough said corporate boards have an obligation to accept solid acquisition bids. But biotech company officials increasingly believe that rights packages are needed in order to protect shareholders from bids that don’t offer a clear-cut benefit to shareholders, Hough said.
Properly constructed rights packages give boards time to “consider other options” if a company is hit with an acquisition bid of questionable value, she added.
Rights packages can protect biotech companies, which are known for dramatic stock-price swings, from being acquired when their stock price is artificially low, Hough said.
“Stock price volatility has been pretty phenomenal in our industry. A rumor can start about a company that will set the stock plummeting . . . and there’s no net underneath for people to know where the right price is.”
When a stock is trading extremely low, a cash-rich pharmaceutical might view a biotech as “a very cheap way to increase their R&D; effort,” Hough said.
Low stock prices make a company even more attractive for an unwanted acquisition if the takeover target has a cash hoard on hand from a recently completed initial or secondary offering. That’s the case in each of the three local companies that have adopted rights plans.
Mycogen, for example, has about $75 million in cash. Gensia had about $105 million in cash and short-term investments at the end of 1991, while Immune Response has about $104 million in cash.
Young biotech companies are even more ripe for a takeover attempt if they are getting close to marketing a product, “especially if it’s a blockbuster,” Hough said.
“We’ve already seen a number of acquisitions within our industry,” said Steven L. Basta, spokesman for Immune Response. “Shareholder rights packages give the board the power to control that (acquisition) process.”
Most observers agree that the industry will eventually be hit with a wave of acquisitions and mergers--if only because some smaller, under-capitalized firms will simply run out of money.
“If their market has a sharp decline (in stock prices), you’ll see larger pharmaceuticals snapping up the more interesting small companies,” Hough said.
“Most of the deals to date have been very friendly,” said Mycogen spokeswoman Marie C. Burke. “But everyone recognizes that there’s going to be a substantial consolidation in the biotechnology industry.”
Biotechnology Stock Values Gensia Pharmaceuticals: $9.25 (52-week low) $46.75 (52-week high) Immune Response Corp. $6.875 (52-week low) $62.75 (52-week high) Mycogen. $11.25 (52-week low) $19.25 (52-week high)
