LeaderShift Blog

The Cincinnati-based consumer products company bought HDS Cosmetics from North Castle Partners, a private equity firm based in Greenwich, Conn. The companies did not disclose details of the transaction.

The Doctor's Dermatologic Formula line includes products for anti-aging, acne, hyper-pigmentation and sun protection. The products are sold in select spas and in specialty retail and department stores.

P&G officials say the acquisition is part of its corporate strategy of focusing on skin care as a major growth category. Other brands acquired and grown by P&G include Pantene, Olay and Cover Girl.

North Castle invested in Yonkers, N.Y.-based HDS Cosmetics Lab in 2004. The skin care line was created in 1991 by New York City dermatologist Dr. Howard Sobel.

Shares of P&G fell 37 cents Monday to close at $65.72 on the New York Stock Exchange.

More Merger Mania Ahead For Pharma
The scramble for new drugs is keeping companies on the prowl

During a luncheon at the recent JPMorgan Healthcare conference in San Francisco, more than 500 institutional investors were asked to predict the fate of Bristol-Myers Squibb Co. The New York-based drug giant is locked in patent litigation with a company that makes a generic version of Bristol's $3-billion-a-year anti-clotting drug Plavix, a debacle that contributed to the firing of CEO Peter R. Dolan in September. Using electronic keypads at their tables, 60% of the attendees forecast that if Bristol prevails in the case, which goes to court on Jan. 22 in New York, another pharmaceutical maker will buy it within a year.

Merger mania is sweeping through the life sciences sector--a trend that shows no signs of slowing. In 2006 a record 1,009 biotech, pharmaceutical, and medical device companies were snatched up for a total of $135.9 billion, according to M&A tracker Dealogic. That's up from 923 deals in 2005 and 740 in 2004. With echoes of Auld Lang Syne still lingering in the air, 13 acquisitions worth $1.2 billion are already in the can for 2007. Abbott Laboratories, which bought Kos Pharmaceuticals Inc. in 2006 for $3.7 billion, is among the companies loudly declaring a hunger for more deals.

One might expect Boston Scientific Corp.'s disastrous $27 billion purchase of stentmaker Guidant Corp. in January, 2006, which led to a 40% drop in Boston Scientific's share price, to dampen the excitement. Not so. "Demand has not diminished," says JPMorgan pharma analyst Chris Shibutani, who notes that many companies presenting at the conference were marketing themselves as attractive partners for anyone looking to make a deal. "It was stunning."

A confluence of events is driving the deals. First, the American Jobs Creation Act of 2004 freed up pharma companies to repatriate more than $100 billion in foreign earnings at a low tax rate--funds they can use to make investments. At the same time, dozens of blockbuster drugs started coming off patent and going generic, while some companies suffered disappointing clinical trials of drugs in their late-stage pipelines. Now companies are scrambling to find innovation beyond their own laboratories.

Among the major shoppers is Pfizer Inc. Its $12-billion-a-year cholesterol drug Lipitor will lose patent protection in 2011, and in December the company had to drop its experimental cholesterol treatment, torcetrapib, because of unexpected deaths in its clinical trials. On Jan. 22, CEO Jeffrey B. Kindler is expected to outline plans to slash billions of dollars in costs, which may include cutbacks in its $7-billion-a-year research budget. The company already announced a restructuring to improve the way it scouts for drugs developed elsewhere, and it has about $8 billion in free cash to throw at the effort.

Venture capitalists say others are sniffing around their portfolios, too. Often a potential acquirer will follow a drug's progress through years of testing, letting VCs foot the bill, and then swoop in once they're sure the drug is well on its way to market. "Acquirers are willing to pay more for later-stage, de-risked assets," says Ellen Koskinas, a partner with InterWest Partners in Menlo Park, Calif. Last year, Gilead Sciences, criticized by analysts for not investing enough in R&D, gave its pipeline a major infusion by paying $2.5 billion for InterWest-funded Myogen, a biotech that's developing two promising hypertension drugs.

Johnson & Johnson, which forked over $16.6 billion for Pfizer's over-the-counter drug unit last year, could continue its acquisition binge in 2007. With more than $9 billion in free cash flow, J&J can easily make additions to its pharmaceutical and medical device divisions. The company recently picked up small stent developer Conor Medsystems Inc. for $1.4 billion and has expressed interest in building a franchise in neuromodulation, the use of electrical signals to relieve pain, brain diseases, and other disorders. Last year analysts were buzzing that J&J might acquire Medtronic Inc. for its stents, defibrillators, and neuromodulation products. But Medtronic's stock has risen 30% over the last year, and with a market cap of $62.5 billion it would be a lot to swallow, even for J&J. Instead, J&J and other device companies are likely to cherry-pick among more bite-size startups.

Technology "platforms" that have not yet yielded marketable products can nonetheless be sought-after acquisition targets. In October, Merck & Co. paid $1.1 billion for San Francisco-based Sirna Therapeutics, which is developing drugs based on RNA interference, a method for turning off the expression of genes. The company's lead product, to treat the eye disease macular degeneration, is years away from being proven out, but Merck executives believe the technology could produce drugs to treat many other diseases, ranging from asthma to cancer.

Another platform company that may be on the radar screen of potential acquirers is Medarex Inc., which has developed a mouse with a near-human immune system. It could simplify the process of identifying compounds likely to work in humans. In December, 2005, Amgen Inc. acquired Medarex rival Abgenix Inc. for $2.2 billion. With Medarex' cancer drugs now showing promise in early trials, many analysts are betting it will be among the biotechs that get picked off. "Companies are looking for differentiated technologies," says JPMorgan biotech analyst Geoffrey Meacham. "Medarex has one of the better platforms."

As for Bristol, the Plavix trial and a Justice Dept. investigation into whether the company violated any laws in its dealings with generic drugmaker Apotex Inc. have overshadowed what is otherwise a promising outlook. Bristol launched four drugs last year, and six more are in late-stage trials. And on Jan. 11 it announced a collaboration with London-based AstraZeneca PLC  to develop two diabetes drugs. The deal includes an up-front payment to Bristol of $100 million, plus the promise of as much as $1.25 billion in payments based on regulatory and marketing milestones. Could this be the courtship leading to marriage? Merrill Lynch & Co. analyst David Risinger raised that question in a recent report, noting that if Bristol doesn't name a new chief executive soon, speculation about a buyout will only grow. A spokesman declined to comment on M&A speculation except to say: "Everything we do is in the best interest of shareholders."

FULL PIPELINE

Drugmakers' `Arms Race' May Spur Biotechnology Deals

Vincent Aita of Kilkenny Capital Management says he picks biotechnology stocks on their potential as takeover targets. The strategy is paying off.

The number of biotech deals, including acquisitions and product alliances, rose 32 percent to 232 last year, according to data compiled by Bloomberg. At least four of Aita's holdings, including Serono SA and Kos Pharmaceuticals Inc., were bought by bigger drugmakers. Aita, who manages about $200 million in health stocks, is betting there will be even more transactions in 2007.

``There is an escalating arms race,'' Aita said in an interview at the JPMorgan Healthcare Conference this week in San Francisco. ``There are more deals to be had.''

Pfizer Inc., the world's largest pharmaceuticals maker, and Merck & Co. may buy biotech companies to make up for a scarcity of experimental medicines and expiring patents for best-selling products. On the shopping list are companies with experimental compounds as well as those with new drug-development science and technologies, investors at the conference said.

Last year the number of biotech deals in North America, including company acquisitions and joint ventures, increased from 175 in 2005, and the average premium rose to 33 percent from 23 percent, based on Bloomberg data.

Upward Trend

More transactions and higher premiums are likely this year, according to analysts, investors and company executives interviewed this week at the San Francisco conference, the annual meeting where buyers and sellers gather to make deals. About 7,000 people packed hallways and conference rooms at the Westin St. Francis Hotel to hear presentations from 310 companies.

``Premiums are going up,'' JPMorgan analyst Geoffrey Meacham said in an interview. ``You're seeing a lot of bidding wars.''

Driving the trend are big pharmaceutical companies with billions in cash that need new drugs to ensure growth. New York- based Pfizer may lose almost half of its $51 billion in 2005 sales as a result of competition from generic drugmakers to products with expiring patents. Pfizer, with $30 billion, has entered at least six research partnerships since November. Two transactions for which a value was disclosed totaled a combined $450 million.

Merck's Deals

Merck, the fourth-largest U.S. drugmaker, may lose $3 billion in sales this year from its top-selling Zocor cholesterol pill because of generic competition. It signed 35 transactions last year, including the $1.1 billion million purchase of San Francisco-based Sirna Therapeutics Inc., which is developing drugs based on blocking genes involved in disease.

Whitehouse Station, New Jersey-based Merck aims to become ``the best biotechnology company,'' Chief Executive Officer Richard Clark said in an interview at this week's meeting. Merck's biotech deals totaled $1.4 billion in 2006.

``It's science and technology and potential companies -- we're looking at all ends of the spectrum,'' Clark said. ``Obviously, it's competitive.''

Eli Lilly & Co., which is offering $2.28 billion to buy its biotech partner Icos Corp., is spending $1.5 billion this decade on building its own biotechnology operations.

``The price of poker has definitely gone up,'' said John Lechleiter, Indianapolis-based Lilly's president and chief operating officer, at the conference. ``There are too few good assets and too many bidders.''

Amgen Inc., the world's biggest biotechnology company, and Biogen Idec Inc. also are considering acquisitions and alliances.

Biogen

Biogen since May has bought three companies with a combined value exceeding $270 million to reduce reliance on its biggest product, the multiple sclerosis treatment Avonex. Last week, the Cambridge, Massachusetts-based company agreed to pay as much as $120 million for closely held Syntonix Pharmaceuticals, adding experimental treatments for hemophilia.

Merck's shares rose 53 cents, or 1.2 percent, to $44.79 at the close of New York Stock Exchange composite trading. Pfizer added 18 cents to $26.64, and Lilly increased 37 cents to $52.60. Amgen jumped $1.36, or 1.9 percent, to $73.27 in Nasdaq Stock Market composite trading, and Biogen rose 53 cents, or 1 percent, to $50.97.

`Most Active'

The pace of acquisitions ``is the most active in our history,'' Biogen CEO James Mullen told investors in a presentation at the conference. There were 10 announced company acquisitions last year, up from 8 in 2005, JPMorgan analyst Meacham said in a Jan. 5 investment report

Premiums over the market price of traded shares also are rising. They ranged from 21 percent for Swiss drugmaker Actelion Ltd.'s purchase of Cotherix Inc., a U.S. biotechnology company, to 170 percent for AnorMed Inc., which Genzyme Corp. took over in a bidding war with rival Millennium Pharmaceuticals Inc.

``Last year saw the first hostile bid by a biotechnology company,'' in the Genzyme takeover of AnorMed, said Steven Burrill, CEO of Burrill & Co., a life-sciences investment adviser in San Francisco.

``Premiums are running 50 percent to 100 percent, which means the market is undervaluing the stocks,'' Burrill said.

Biotechnology companies raised $20 billion in partnership deals last year, up from $17 billion in 2005, according to Burrill.

Companies already aligned with bigger drugmakers through partnerships are likely takeover targets, said Kilkenny's Aita.

Amgen

Last year Amgen, purchased its partner, Abgenix Inc., to gain control of the cancer drug Vectibix. Genentech Inc., the world's No. 2 biotechnology company, agreed to buy its partner Tanox Inc. in November, gaining the asthma medication Xolair. The $919 million transaction was the first acquisition in Genentech's history.

Biotech companies in partnerships that may be takeover targets include Onyx Pharmaceuticals Inc., which co-markets the Nexavar kidney cancer drug with Bayer AG, and New River Pharmaceuticals Inc., which sold rights to its hyperactivity treatment to London-based Shire Plc, Aita said. Onyx shares rose 24 cents, or 2 percent, to $12.22 at the close of Nasdaq Stock Market trading. New River fell 37 cents to $55.76.

Others include BioMarin Pharmaceutical Inc., which shares a rare-disease drug with Genzyme, and Millennium, which co-markets its Velcade cancer drug with Johnson & Johnson. BioMarin shares gained 33 cents, or 1.9 percent, to $17.67 today and Millennium rose 21 cents, or 1.9 percent, to $11.46.

Cheerwine to get new leader

The parent company of one of North Carolina's favorite homegrown soft drinks, Cheerwine, is about to get a new leader.

Mark Ritchie, president and chief executive of Salisbury-based Carolina Beverage Corp., says he will step down in March to pursue a career in Christian teaching.

Ritchie, who has led the privately held company since 1992, announced the move to employees Dec. 22. The company began mailing letters to customers this week about the change.

Ritchie, who will turn 50 next year, said he decided to leave about five years ago. Since then, he has worked with his brother, Cliff, to create a smooth transition.

Cliff Ritchie is president and CEO of Cheerwine Bottling Co., the production and distribution arm of the family-run business, and is expected to succeed his brother as president and CEO of Carolina Beverage, pending approval of the business' board of directors.

Carolina Beverage handles marketing and licensing for the cherry-flavored Cheerwine soda and other brands the company owns.

"Cliff and I have worked quietly for two years to figure out the structure," Mark Ritchie told the Salisbury Post. "It's the best time in the time since I've been here for this type of change. We're well staffed in upper management."

Mark Ritchie said his last day will be March 2.

The Ritchie brothers have each worked for Cheerwine and Carolina Beverage for nearly 30 years. During that time, sales have grown from fewer than 1 million cases of Cheerwine a year to 30 million cases of soft drinks annually.

The company employs 400 workers and has five bottling lines at its Charlotte plant. It also makes a bottled water brand, Blue Mist, and recently unveiled the energy drink Savage Energy.

The company serves the Carolinas and parts of Georgia and Virginia.