It's Not What It Looks Like

With Big Pharma's appetite for biotech companies being what it is--insatiable--Genentech's purchase this month of Tanox, its first in 30 years of business, appears in-line with current trends. But not if you ask CEO Arthur Levinson.

"Not only does [the acquisition of Tanox] not represent a major strategic shift," said Levinson in a conference call, "I would say it doesn't even represent a minor strategic shift."

Before this month's acquisition, Genentech and Tanox had been co-promoting Xolair (omalizumab), a drug for allergic asthma that was underperforming by Genentech standards. For the first three quarters of 2006, Xolair only made $300 million--and that's a 30-percent improvement over what it was making at the end of Q3 2005.

"We think we can grow the market," said David Ebersman, Genentech's CFO. "Our enthusiasm for this molecule made us increasingly want financial returns that we'll get in trying to make this a big product for us."

With Tanox wholly under its wing, Genentech is pursuing a comprehensive program to propel sales of Xolair, an injectable drug that has struggled to hold share against more convenient inhaled or oral asthma formulations.

"It's a combination of education; it's a combination of new data," Ebersman said. "We have penetrated a small percentage of the asthma market and we are focused on increasing uptake."

Genentech is hoping to expand Xolair's label and get approval for pediatric patients. It is also seeking to develop a liquid formulation of the drug. The Tanox acquisition could also push Genentech into the HIV market--but the company is cagey about whether it will pursue that area or seek a partner for those compounds.

Since 2004, Big Pharma and Big Biotech have veered away somewhat from their strategy of in-licensing products in favor of making full-on acquisitions. These days, ceaseless acquisitions have tripled the going price for biotech companies--to the point that recent analyses have shown that it often is more lucrative for a firm to sell than go public.

The Burrill Biotech Select Index recorded gains of more than 10 percent for small and mid-cap biotech companies in the first three quarters of 2006--growth that Big Pharma is driving. Moreover, companies appear to be seeking more control over products that they initially intended to in-license. Eli Lilly, for instance, recently bought Icos in a $2.1 billion deal that gave the company full control of the previously co-promoted Cialis (tadalafil).

Two other billion-dollar-plus deals in 2005 also grew out of earlier collaborations on specific products: Amgen's acquisition of Abgenix ($2.1 billion) and Pfizer's acquisition of Vicuron ($1.9 billion).

"Such collaborations enable companies to establish whether they represent a good match before taking the ultimate step of outright acquisition," according to the annual Pharma Insights report from PricewaterhouseCoopers.

Yet Genentech's Levinson noted that it could well be another three decades before the company makes another buy. "Sometimes acquisitions can cause a lot of defocus," he said. "The vast, vast majority of ones will fail to meet [our] high bar."