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Big Pharma Paying More for Small Firms

http://biz.yahoo.com/ap/071017/drug_companies_acquisitons.html?.v=1
October 17, 2007

Large Pharmaceutical Companies Find Buying Risky Early-Stage Firms Getting Pricier ....But they have been paying top dollar for many of these companies to add to their pipelines.

NEW YORK (AP) -- The large pharmaceutical companies, facing a slowdown in their own development pipelines, are laying big bets on small, private drug companies early in the product development stage.

This trend, highlighted recently by Bristol-Myers Squibb Co.'s purchase of Adnexis in late September for $430 million in cash, is driving up valuations for those startups at the same time that Wall Street is raising the hurdles for them to go public. Investors in initial public offerings increasingly are shying away from companies that don't have products in the later stages of development.

Big Pharma's push for companies so early in the development process highlights the competition and desperation drug giants are facing in developing and maintaining a robust pipeline.

"The big companies are looking all along the development pipeline, from technology to marketed products," said Alex Barkas, managing director of Palo Alto, Calif.-based Prospect Venture Partners.

And they aren't afraid to shell out the cash to get what they want.

In 2006, 29 venture-backed private biopharmaceutical companies were acquired by either private or public companies for a total of $2.29 billion, according to VentureOne, a research unit of Dow Jones & Co.

But through the third quarter of 2007, there have been only 18 such deals, though the total is already a staggering $4.41 billion.

Aside from Bristol-Myers' deal for Adnexus, other recent deals involving major drug companies include Merck & Co.'s $366.4 million buy of NovaCardia Inc., Amgen Inc.'s acquisition of Ilypsa for $420 million, and Roche Holding AG's buy of NimbleGen for $272.5 million.

"Pipelines are drying up and have been for some time," said analyst Gene Mack from HSBC. "As a result, early biotech companies have a better bargaining position than five or 10 years ago."

For a long time, the large pharmaceutical companies were able to bolster their product offerings by signing lucrative partnerships with the smaller companies, rather than buying them outright.

"Pharma companies were saying, 'Why should I buy the cow if I can get the milk for free?'" said Bryan Roberts, managing general partner Venrock Associates in Menlo Park, Calif.

But the product-partnership agreements have become complex and can lead to difficult situations for both sides as they attempt to manage both the development and commercialization of products.

Also, the improved position of the smaller companies means they can demand larger royalty payments and better terms.

"There is more money in the private market, so they are no longer a little company desperate to do a deal," said Jean-Francois Formela, a partner at Atlas Venture.

During these courtships, the larger companies conduct research into the smaller company and, like Bristol-Myers with Adnexus, often decide that it makes more sense to buy them outright.

"A lot of these deals start with companies in partnering talks and those turning into competitive transaction talks," said Laura Berezin, a partner at Cooley Godward Kronish LLP, a law firm in Palo Alto.

Purchasing the smaller business not only gives the larger company control over the rights and development of the product, but also prevents competitors from potentially partnering on other products or technologies in development.

While pharmaceutical companies hunt early-stage firms, Wall Street seems less willing to embrace them. Many venture-capital observers acknowledge a disconnect between the value given to companies in buyouts and those given by Wall Street. [Another way of saying this is that the market where drugs and drug candidates are bought and sold is very much more efficient than the stock market.

"The public markets have gotten more perceptive in regards to the risk in later-stage clinical development. They are requiring more validation that a company really has a product," Roberts said. He described early-stage companies as lottery tickets that can turn out worthless or incredibly valuable, with little insight into the outcome.

The delay in tapping the public market means these small companies will likely need to raise more money as clinical trials get larger and more expensive in the later stages.

That can make a takeover an attractive option; it eliminates both the need for another round of financing and the risk held by investors, said Terry McGuire, managing general partner at Polaris Venture Partners.

"There is a moment when the smaller companies pass the baton to the larger pharma or biotech companies," said McGuire. Larger companies can provide the expertise and infrastructure required to take development to the next level.

Barkas said he even expects to see companies formed with the sole purpose of capitalizing on this buyout trend.

"I think you will see more companies that are literally tailor-made to specific industries or pharmaceutical companies in order to manage their needs or fill the holes in their pipeline," he said.