Biotech Values

[DewDiligence]

Drugmakers Shift Emphasis to Biotech M&A

[This article is best read in conjunction with the table in #msg-31868085.]

http://www.ft.com/cms/s/0/9d620a56-85d6-11dd-a1ac-0000779fd18c.html

›By Andrew Jack
September 19, 2008 04:27

The global credit crunch and the equity meltdown may have caused pain to companies in most sectors, but it has had unexpected benefits for cash-rich established drugmakers such as Shire, the Ireland-based specialty pharmaceutical business.

“It has strengthened our negotiating position,” says Angus Russell, chief executive, who has completed a string of deals in recent years, including a friendly takeover currently being completed of Jerini, a Berlin-based biotech company

Jerini’s relatively low stock market value made outright purchase cheaper and simpler than arranging complex licensing terms for its peptide-based medicines that Shire sought. In other cases, fewer options for funding have made biotech companies keener to do deals quickly with it, where they previously had held out for better pricing.

The pattern has been repeated elsewhere and has helped shift the balance of power away from biotech companies in their discussions with larger pharmaceutical groups that are willing to pay high prices as they compete in their search to find future drugs to replenish thin portfolios.

“In the past few years, it was a sellers’ market driving up valuations for less and less mature technology,” says Tibur Papp, head of advisory at PharmaVentures, a UK-based consultancy. “Now the environment is changing and with a significant impact on biotech finance, it has become more difficult to find partners and good deals.” [I.e., it has become more difficult to find licensing partners as opposed to buyout suitors.]

The tough background, reinforced by the collapse of companies such as Ardana and Phoqus, has sparked reflection on the need for further industry consolidation, such as Thursday’s merger of BTG and Protherics, a move that advisers to both companies stress was conducted from a position of strength.

Better solutions have been found by smaller companies that have given up their hopes to remain independent: Acambis, the vaccines developer, is being acquired by Sanofi-Aventis of France, and Novartis of Switzerland recently acquired Speedel.

More broadly, Neil Mackison, head of European healthcare investment banking at Piper Jaffrey, a middle market investment bank, says: “Companies that are running out of money are looking for new strategies.”

With scant prospect for initial public offerings or follow-up equity financing, and venture capitalists seeking returns of 25-30 per cent, he says that some have turned to “venture debt”, offering coupons that he says are typically “in the high teens”.

Those lucky enough to have medicines on the market are doing more deals with specialist royalty companies to provide cash up-front in exchange for the rights to future sales.

That leaves two options: licensing earlier with partners, at a point when less clear-cut clinical trial data mean the prospect of lower prices; and takeovers. “Mergers and acquisitions are definitely top of the agenda, far more than in the past four or five years,” he says.

Given the increasing recognition by large pharmaceutical groups of the need to seek products outside their own laboratories, and sector-wide concerns about a series of existing best-selling products coming off patent in the next few years, biotech companies with promising products are still able to command good prices.

“Products remain the lifeblood of the industry, and the opportunities for low- and mid-hanging fruit are getting fewer,” stresses Robin Campbell, an analyst with Jefferies. “There is a degree of corporate anorexia within big pharma, with their research centres being picked apart, and that means in-licensing and business development people have greater say.”

He also points out that relative valuations of the more promising biotech and pharmaceutical companies have been improving recently, as investors divest from financial institutions and seek more defensive stocks.

Aisling Burnand, head of the BioIndustry Association, the UK trade body, argues: “The fundamentals of the sector are still quite strong. Biotechs have not necessarily been worse impacted than any other sector and are more seasoned in belt-tightening than many.”

But many biotech businesses have few products of uncertain quality. John Mayo, head of Celtic Pharma, a company that buys experimental medicines for resale, argues that big pharma remains suspicious because such drugs are often “hairy”, supported by insufficient clinical trial data to win regulatory approval [hello, RPRX].

As an adviser to the sector says: “The biotech sector needs to consolidate. There are too many bit players with a single product in the clinic, all the infrastructure costs of PLCs, and a £400,000 ($722,597) salary for the chief executive. But egos and valuations get in the way.”‹