Biotech Values

[Preciouslife1]

No way out for small public firms?

Nature Biotechnology 26, 484 - 485 (2008)
doi:10.1038/nbt0508-484b

http://www.nature.com/nbt/journal/v26/n5/full/nbt0508-484b.html
No way out for small public firms?
Peter Mitchell1

It has been smaller private firms, rather than public biotechs, that have been gobbled up by big pharma.
Although buyouts of private biotech firms leaped in 2007, exceeding the 2006 value by more than three times, the dollars spent purchasing public biotech companies rose by only 50%. And if the London-based AstraZeneca's $15.6 billion purchase of MedImmune is excluded, the aggregate dollar value of public biotech acquisitions in 2007 drops below the previous year's level.

These kinds of numbers (see Table 1) suggest a problem for small and mid-cap public companies. They now face slim chances of relieving cash shortages by accessing today's volatile public markets, and their most likely acquirers—big pharma firms—are less interested in larger public companies that carry regulatory barriers, additional sites and large workforces (though Japan's biggest pharma, Takeda, is interested enough to pay $8.8 billion for Millennium, of Cambridge, Massachusetts). That means uncertainty for today's unprofitable public biotechs: there is no cash to pull in, and the investors can't get out.

Table 1: Takeovers of public & private biotech firms, 2005–2007 Table available in link provided above fyi.

In current acquisitions, "pharma firms don't necessarily want to buy the company; they want to get hold of the relevant intellectual property and product programs, which they will then transfer internally," says Kate Bingham of London-based SV Life Sciences Advisers, adding that private companies are easier to buy because they're "smaller and more virtual with few staff and sites," without the "burdensome requirements" of public reporting, US Securities and Exchange Commission filings and Sarbanes-Oxley compliance. Moreover, says Bingham, private companies with early-stage products are seen as less of a gamble, because any failure at the US Food and Drug Administration is cheaper and further in the future than it would be with a more mature public company with later-stage products.

Even favorable clinical data may not help the foundering public firms, says Genghis Lloyd-Harris, partner at London-based Abingworth Management. He notes that, in the current bear market, quoted biotech companies' share prices tend to slump, even when they announce good news. "Ironically, good news creates increased liquidity, leading some investors to rush for the exits on the back of it," he says.

What should happen in this environment is mid-level mergers, but Lloyd-Harris believes that the opposite will happen. "The pace of biotech-to-biotech mergers is slowing, because CEOs tend to batten down the hatches in a market like this," he says. Conscious that their firm's share price is seriously depressed, they fear that a merger may sell their investors short, although that's irrational because most companies with which they would merge also would have a depressed share price. "But the boards of both companies frequently have blinkers on that stops them negotiating a deal," says Lloyd-Harris.

Perhaps the way forward for public biotechs under shareholder pressure is to be more realistic on valuations. Lehman Brothers' Peter Welford points out that last year, several such companies were searching for buyers—Biogen Idec, of Cambridge, Massachusetts; PDL BioPharma, of Fremont, California; and ImClone, of New York—but didn't accept the deals on offer. The intensifying pressure in 2008 combined with the closed capital markets might be too much to resist, forcing investors to accept a haircut in return for an exit. The process might be further catalyzed by currency effects: the weakness of the dollar may tempt European and even Japanese companies to become opportunistic acquirers in 2008, though European biotechs will look very expensive to potential US acquirers. Some of the big fish—notably Genentech—have already declared their intent to go hunting for good-value buys, says Eric Schmidt, managing director at Cowen & Co. in New York.

If merger and acquisitions (M&As) opportunities don't emerge, many cash-starved public biotechs will have to resort to unconventional ways of raising funds, says Schmidt. One possible resort is the committed equity financing facility. Here the finance company guarantees to buy equity in very small tranches from the cash-poor company and then dispose of it in a planned way so as not to destabilize the stock price. Leading players in this game are London-based Kingsbridge Capital and Azimuth Opportunity.

Another option is the collaborative development deal, a space dominated by Symphony Capital in New York. Here the bank identifies one of the biotech firm's specific products and offers to co-fund its development for a given period, after which the biotech firm must buy back the product rights at a fixed price. Deals of this kind have been done with Exelixis, of S. San Francisco, and Isis, of Carlsbad, California, and are getting more common all the time, says Schmidt. Interestingly, both these types of deals and plain licensing have a better track record for product success than M&As (Box 1 ).

Other more drastic options include bundling up a company's royalty streams and selling them for cash, or even sale-and-leaseback deals where a company disposes of its real estate to a cash buyer and rents it back.

But the best strategy for many small-caps might be waiting for now, and hoping. Robin Davison, senior analyst at Edison Investment Research in London, points out that pharma companies are bureaucratic organizations that take time to make decisions. "They are faced with a wealth of opportunity where they can acquire companies pretty much at the value of the cash they hold, but they have to think it through first." The second half-year could see them act on their thinking, says Davison.

That doesn't take away the current uncertainty. "Maybe this time round we will see the first real wave of biotech bankruptcies, of those lesser quality companies that can't find partnership agreements or acquirers and don't have good fund-raising prospects," says Schmidt. "But these companies do tend to have nine lives. In the past, the financing window has generally opened up just in time to bail them out."