Mating Season for Drug Companies

If you're a drug or biotech company having trouble coming up with something promising in your own laboratory, you go out and buy someone else's science. If you're a small company, you need money in an economic environment that's still tough for everyone.

That's the story line as drug companies have been busy over the past couple of months.

In the latest transaction, midsize biotech company Onyx Pharmaceuticals Inc. will pay $276 million in cash for small, closely held Proteolix Inc. to get an experimental blood-cancer treatment. The payment would rise to as much as $850 million if the drug is approved.

Promising cancer drugs are attractive because of the lack of good existing treatments. Big companies have struggled to develop their own. (For instance, Pfizer Inc. just suspended a late-stage human trial of a lung-cancer drug because of safety concerns.)

Onyx's deal follows recent acquisition announcements by Abbott Laboratories, Johnson & Johnson, and, of course, planned mega mergers agreed upon earlier this year of Pfizer-Wyeth and Merck & Co.-Schering-Plough Corp. That's about $117 billion, mostly due to the two big transactions. Other companies, including Sanofi-Aventis SA, say they're also shopping for smaller acquisitions. Sanofi already spent $9 billion this year on a string of acquisitions.

Given the environment of big companies needing products and small firms needing capital, the pace of deals isn't likely to slow down anytime soon, an analyst says. "What we're seeing with the big pharmaceutical names is they have cash and they're motivated to get something done," says Morningstar Inc. analyst Damien Conover. "We'll see a lot more acquisitions."

Small biotechnology firms used to be able to go to the IPO market to raise cash, but the economic environment for any initial public offering—not just biotech—has been poor. "Right now, the biotech window is barely open," Conover says.

Mating season may just be beginning.