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Source: Reuters
By: Toni Clarke

Even amid aggressive cost-cutting, many big pharmaceuticals companies continue to seek biotech acquisitions in the hope of finding new drugs to replace those lost to generic competition.

But they will have to pay more than they did a year ago. The average value of U.S. biotech companies is increasing as funding flows back into the sector after a drought caused by the credit crisis.

At the start of the year, 51 percent of the 328 publicly traded U.S. biotech companies had a market value of less than $100 million each, according to Burrill & Co, a San Francisco-based investment bank. Now that figure is only 41 percent.

"This clearly shows that conditions have improved considerably since the initial capital markets meltdown," said Steven Burrill, the firm's chief executive.

Financings and partnership deals brought in more than $13 billion for the biotech sector in the third quarter, up 147 percent from the same period a year ago.

Biotech has increasingly become the engine room for innovation in the drug industry, as highlighted by strong results this year from trials of Human Genome Science Inc's (HGSI.O: Quote, Profile, Research, Stock Buzz) lupus drug Benlysta and Dendreon Corp's (DNDN.O: Quote, Profile, Research, Stock Buzz) cancer drug Provenge.

Most big pharmaceutical companies are trying to conserve cash as they prepare for the loss of revenue from big-selling products that are set to lose patent protection over the next few years. And several, including Merck & Co (MRK.N: Quote, Profile, Research, Stock Buzz) and Pfizer Inc (PFE.N: Quote, Profile, Research, Stock Buzz) are busy consolidating big mergers.

Even so, executives at the Reuters Health Summit said they need to make acquisitions and form partnerships to fill holes in their pipeline of new products, even if the terms are not quite as advantageous as they were a year ago.

"We continue to see business development as a major contributor to future growth," said Jeffrey Kindler, chief executive of Pfizer, "and we have the capacity to do it."

Some 233 mergers and acquisitions were announced in the healthcare industry during the third quarter, and though volume was in line with the prior quarter, the number of dollars spent rose 38 percent to $38.4 billion, according to a recent report from Irving Levin Associates.

Merck, which has averaged 50 biotech deals a year since 2003, says it plans to keep up the pace and possibly double that number, even as it prepares to cut around 16,000 jobs as part of its $41 billion merger with Schering-Plough.

Richard Clark, the company's chief executive officer, said the company would remain cautious and "fiscally responsible" in its acquisition strategy but sees partnerships and acquisitions as crucial to future growth.

"We examine 5,000 to 6,000 possibilities a year," he said.

John Lechleiter, the chief executive of Eli Lilly & Co (LLY.N: Quote, Profile, Research, Stock Buzz), said that though the company must be "mindful" of its cash position, it would consider deals in the $1 billion to $2 billion range, a level also indicated by Merck's Clark.

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