Bristol - Myers buyout of Medarex

Shares in Human Genome Sciences (HGSI) rocketed up on news that it had received promising results for its lupus drug. Suddenly, the successes -- and potential successes -- of the biotech industry are in the spotlight again.

The heated-up biotech sector got another boost yesterday when Bristol-Myers Squibb (BMY) said it would buy Medarex (MEDX) for $16 a share, about double its trading price before the offer was made. It is hard to imagine why Bristol would pay such a huge premium, which puts the price of Medarex at $2.4 billion.

Bristol defended the cost of the transaction by saying, "With its productive and proven antibody discovery capabilities, ability to generate interesting therapeutic programs and unique set of pre-clinical and clinical assets in development, Medarex represents what we're looking for in terms of our String of Pearls strategy. This acquisition is another important step in our BioPharma transformation."

In plain English that means Medarex is one of the biopharma companies that is developing treatments that the big drug companies have struggled to match. The biggest selling drugs of the largest drug companies are losing patent protection and generic competition is eating at their sales. Using their cash and large market caps to buy small firms with promising products may be their only way out, beyond ongoing cost-cutting.

On paper, Medarex is not much of a company. It had revenue of $10 million in the March quarter and lost $47 million. The firm's attraction is in its future. Bristol is paying a remarkably high price for that future and there is no guarantee that the risk will pay off. But big pharma does not have much of a future without new drug pipelines, so it will pay for what it does not have.

Douglas A. McIntyre is an editor at BioHealth Investor.

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