Pharma's Deal-Making Frenzy: Lots of Noise, Less Substance

(MoneyWatch)  Reading the mainstream press over the last few weeks could give you the strong impression that pharma has entered a phase of deal-making frenzy. Here's how Reuters describes it today:

Big pharmaceutical companies are set to step up the hunt for assets to buy in promising fields like biotechnology, as well as non-prescription areas of healthcare. ... competition is fierce.

Certainly, there is a handful of major deals being negotiated:

• Roche is trying to acquire Genentech.
• A mystery bidder is competing with Bristol-Myers Squibb to acquire ImClone.
• King is making a hostile bid for AlPharma.

And yesterday's news regarding the new CEO at Sanofi-Aventis contained a hint that the company may have to go on a buying spree in order to bolster its pipeline.

But before you start buying up small-company stock hoping for that buyout premium, check out this bucket of cold water that is being held over the market's head, as detailed on the IN VIVO blog:

A month ago, everyone had the same question: which Big Pharma will be the next to buy-out a biotech partner. First, Roche/Genentech. Then Bristol/ImClone. Who would be next? So far, the answer is: no one. It turns out that there just aren't all that many partnership out there where a buyout is in fact an option. We looked at 12 partnerships cited by analysts and other business media as potential partner-turns-into-prey stories, and it turns out that eight of them involve contracts that prohibit one partner from making an unsolicited offer for the other.

Companies with various standstill agreements include Eli Lilly and Amylin, Biogen and Elan, Bristol and Gilead, Wyeth and Progenics, and Johnson & Johnson and Vertex. As IN VIVO puts it, "If you expected a flurry of Bristol/ImClone style deals to keep you entertained this fall, think again."

The speculation is that the mystery bidder competing for ImClone is Pfizer, because it has so much free cash. As I noted recently, Pfizer has thus far refrained from the over-priced deals that were a hallmark of the pre-Jeff Kindler era. Imclone must look tempting to Pfizer because it has bet a lot of its future on cancer products, Imclone's speciality.

But the IN VIVO analysis makes me think that ImClone's price is being bid up not so much by Pfizer vs. Bristol, or by ImClone's inherent value to either company, but rather by a market that simply has a restricted supply of free takeover targets.

It will be interesting to see if Pfizer (if it is Pfizer) can maintain its discipline or whether it will give in to its historical weakness for showering over-valued erstwhile competitors with free money.