Monday, April 14, 2008

Currency Threats: Bioterrorism Defense

The U.S. biopharmaceutical industry may be trying to seal the borders again: this time the prime threat is not re-imports from low-price or price-controlled markets but corporate acquirers armed with high value currencies.

The battle over reimportation has gone on for the better part of a decade, and the industry hasn’t gotten a sympathetic response. But biopharmaceutical companies may get a more favorable hearing from a broader scope of politicians to a new form of protectionism.

Takeda’s $8.8 billion cash purchase of Millennium (see here) dramatizes the power of the currency-enhanced foreign acquirers. If Takeda had made the same bid (in dollars) a year ago, it would have spent about 15% more in yen.

At least Millennium’s market cap in dollars rose over that time. A lot of other US based companies haven’t been so fortunate, meaning that they are now doubly vulnerable to an unwanted takeover bid from overseas: not only is their stock price down, but the declining value of the dollar in Yen or Euros compounds that impact.

The combined effect of the depressed dollar and a weak stock position is most evident in a company like Schering-Plough, where the total market capitalization is about 50% of what it was a year ago (currently at roughly $28 billion). With the yen up in value by 15% over a year ago and the Euro in similar position, if there ever were a bargain time for a company looking at Schering-Plough (Vytorin problems and all) it would be now.

Schering Plough CEO Fred Hassan declared last Friday that his management team would “power out” of the Vytorin decline, but the advantage offered to potential foreign purchasers suggests more of a power outage than a power-out.

Some parts of the US biopharma sector may be able to seek political protection from unwanted foreign purchase offers. When biotech was new, some start-up companies and research centers were able to elude offers by overseas entities by making politically potent arguments about the value to the nation of protecting the lead in a new science and new technology. The Scripps Clinic, for example, had to rework a 1993 agreement with Sandoz (Novartis) after members of Congress questioned what they saw as a transfer of taxpayer-supported research at Scripps to an overseas company.

Biotech is, obviously, no longer the exclusive province of US science, and protectionist sentiments haven’t stopped major infusions of foreign capital from coming to the rescue of the domestic banking system.

But that doesn’t mean there aren’t arguments to protect US biomedical research companies from foreign ownership. In recent years, there has been a renewed interest in protecting sectors that relate to responses to bioterrorism or reducing the vulnerability to attacks.

Concern about foreign purchases moved to the forefront of Congressional attention about two years ago when a Dubai company wanted to take over the operation of six major US ports. The resulting debate centered on creating procedural hurdles to discourage future purchase offers that affect companies deemed important to national security. (See here).

Managements who want to fend off ex-US offers may find a sympathetic Congressional ear if they have medical technologies in their research labs that serve as countermeasures or protections against bioterrorism events (such as vaccines or antidotes). It may behoove some US-based pharma firms to rekindle their efforts in biodefense.

UPDATE: Thanks to an alert reader for pointing out that we had garbled our facts a bit in describing the Sandoz/Scripps brouhaha 15 years ago. The point was correct--some in Congress objected to what they saw as a national interest threat from an agreement between a leading US research institution and a "foreign" firm.


Anonymous said...

You have your facts wrong about JNJ/Scripps/Sandoz. JNJ enjoyed a right of first refusal relationship with Scripps from about '83-93. Sandoz then stepped in once the JNJ relationship ended. Sandoz and Scripps did catch a lot of grief over the "foreign" nature of Sandoz. Nevertheless, the deal did go through with some modifications from the original proposal.

Chris Morrison said...

Thanks anonymous, we've made the correction and noted the change.