The biotech bull market that began in October 1999 has created huge valuation gains for many life science companies. Indeed, companies that ended the second quarter in the key mid-cap (>$700 million) and top tier (>$3 billion) spaces added more than $212 billion in market cap since Sept. 30.

But while the run has been great for shareholders, biotech companies have yet to put significant amounts of their paper gains to work in mergers and acquisitions. Indeed, a miniscule amount has been put into acquiring assets. By BioCentury's tally, only $10.5 billion of that group's equity has been used in 21 M&A transactions over the same nine-month period (see "M&A Flow", A2).

Broadening the scope to deals by companies of all sizes, a total of $13 billion worth of paper was doled out in 46 M&A deals in which the terms were outlined. On average, $283 million in equity was issued in each of those deals. Taking out the $4.9 billion stock acquisition of Centocor Inc. by Johnson & Johnson (JNJ, New Brunswick, N.J.), that average falls to $180 million.

Ten other M&A deals were done during the period for which terms were not disclosed. Assuming those deals were done for stock at the $283 million top run-rate, the $13 billion figure would increase to $16 billion, still less than 8 percent of the valuation gain by the top end of the sector.

But while the rise in stock prices has some watchers on Wall Street looking for a summer of M&A, others say that the record amount of cash also raised by the industry will defer the inevitable fire sale by marginal companies. And although deal-makers may hungrily see higher valuations as an opportunity to broker M&A, companies themselves find fault with that logic, saying that they do not base strategic decisions on stock value or pointing out that stock prices can fall just as quickly as they have risen.

The rationale for stock deals

Nevertheless, Deni Zodda, managing director and group head at KPMG Life Sciences, believes that high valuations combined with healthy cash reserves will drive M&A. "We expect companies with big market caps and big cash positions to be active because they have the right combination - the size to do a stock transaction and the cash to fund the operations," he said.