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Author: TMFTwitty Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 243  
Subject: Genzyme's Oncology Acquisitions Date: 3/2/2004 2:47 PM
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Genzyme's Oncology Acquisitions

By David Nierengarten
March 2, 2004

Genzyme (Nasdaq: GENZ) flexed its big biotech muscles last Friday, announcing that it will acquire Ilex Oncology (Nasdaq: ILXO) for about $1 billion in stock. Ilex's share price jumped almost to the acquisition price of $26, while Genzyme's shares sagged about 5%.

On Monday, Genzyme continued its shopping spree and announced its intention to buy up Impath's (Pink Sheets: IMPH) cancer-testing services for $215 million in cash. Impath filed for Chapter 11 bankruptcy status last September.

I believe we can now apply the term "serial acquirer" to Genzyme, with the two deals coming just six months after the purchase of SangStat Medical (Nasdaq: SANG) for $600 million.

So, will shareholders take part in the happiness that undoubtedly has overcome the investment bankers brokering these deals? Through these buys, Genzyme acquires something it has been lusting after for years: a ready-made oncology pipeline and, as an added bonus, cancer diagnostic tools from Impath.

Genzyme has been somewhat of an oddity in the big biotech world of Amgen (Nasdaq: AMGN) and Genentech (NYSE: DNA). Unlike the others, Genzyme has not devoted a good chunk of its R&D efforts to cancer-fighting drugs. Rather, it has attacked the world of rare genetic diseases through its enzyme replacement therapies. Its flagship drug, Cerezyme, for the treatment of Type I Gaucher disease, pulled in nearly $740 million in 2003 sales, out of total revenues of $1.58 billion. Additionally, Genzyme has targeted kidney disease and arthritis. It also markets an array of diagnostic tests to complement its therapeutic arm.

With these and other products, Genzyme is one of the bigger biotech companies, clocking in around $10 billion in enterprise value (EV). Its EV/EBITDA ratio is about 40, and it produced about $115 million in free cash flow last year. It has been sitting on $1.2 billion in cash, so investors probably could have anticipated some acquisitions by management.

Ilex Oncology, by contrast, has been bleeding cash despite having an approved monoclonal antibody treatment for B-cell chronic lymphocytic leukemia (CLL), Campath. It raked in $72 million in sales last year; Ilex received about half of that total because Schering-Plough (NYSE: SGP) took its share for marketing the drug. Later this year, Ilex is also expecting the FDA to act on a new drug application (NDA) for another leukemia drug, clofarabine. Ilex lost about $56 million last year and holds about $100 million net cash, essentially giving Genzyme a 10% discount off of the billion-dollar price tag.

Ilex's pipeline holds two other drugs in phase 1 and an osteoporosis candidate in phase 2, in addition to a trial to determine Campath's effectiveness in treating multiple sclerosis. Two more preclinical leads round out the portfolio.

Is Ilex worth $900 million? It's not cheap, but given the breadth of Ilex's oncology pipeline and the way it adds a whole new direction to Genzyme, Genzyme could make the acquisition work. While the biotech has the ability to absorb Ilex's losses, investors can expect lowered earnings from Genzyme for the near future.

The bid for Impath's assets also makes sense, if Genzyme plans to build its oncology franchise. Impath tests for leukemias and other cancers, so clearly this acquisition is reasonable in conjunction with the Ilex buyout.

All in all, Genzyme is essentially aiming to buy a cancer franchise, from diagnostics to therapeutics for about $1.1 billion. While I don't think it's a bargain (after all, Ilex was trading at $6 and change just last year), the broad platform that Ilex possesses could pay off down the road.

Motley Fool contributor David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He is an active member of the TMF community as DavidMN, and enjoys the Biotechnology discussion board. He doesn't own shares of companies listed.
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