After Bargain-Mad ‘Paralysis’

The Nearest Exit Ahead of You? Forecast for Deal-Making Surge

By Trista Morrison
Staff Writer

One reason for the decidedly optimistic mood at the J.P. Morgan Healthcare conference may have been recent rumors that 2010 is going to be gangbusters for deal-making.

Michael Gaito, managing director and head of West Coast life sciences investment banking for J.P. Morgan Securities Inc., said mergers and acquisitions will be “a big thesis for investors” in 2010. And a recent Ernst & Young survey reported that 77 percent of life science executives expect accelerated industry consolidation in 2010, with 44 percent admitting they are likely to execute an acquisition in the next 12 to 24 months.

Ironically, however, this year’s J.P. Morgan conference was perhaps most notable for its lack of noteworthy deal flow.

Last year during the conference, ZymoGenetics Inc. signed a $1.1 billion hepatitis C deal with Bristol-Myers Squibb Co., Santaris Pharma AS inked an $847 million miRNA deal with Wyeth Pharmaceuticals, The Medicines Co. acquired antibiotic maker Targanta Therapeutics Corp., Micromet Inc. teamed up with Bayer Schering AG in a $400 million cancer BiTE antibody deal, cancer start-up Forma Therapeutics Inc. burst on the scene with a $200 million Novartis Option Fund deal, and much more. (See BioWorld Today, Jan. 13, 2009, and Jan. 14, 2009.)

This year, however, Galapagos NV’s discovery partnership with F. Hoffmann-La Roche Ltd. - worth a potential $579.6 million but only $8.7 million up front - was the biggest deal. KaloBios Pharmaceuticals Inc. also signed a $290 million deal with Sanofi Pasteur for an anti-infective antibody. (See BioWorld Today, Jan. 12, 2010, and Jan. 13, 2010.)

Of course, despite the J.P. Morgan conference’s reputation for setting the tone for the year to come, deals actually announced during the event are more indicative of activity in the previous year. And most folks agree 2009 was disappointing on that front.

2009: Perfect Storm of Deal Barriers

While 2009 total deal value was off the charts, the numbers were skewed by Pfizer Inc.’s $68 billion acquisition of Wyeth, Merck & Co. Inc.’s $41.1 billion merger deal with Schering-Plough Corp., and Roche AG’s $46.8 billion take-out of Genentech Inc. Backing out those mega-mergers results in much lower numbers, noted Glen Giovannetti, global biotechnology leader for E&Y.

Some of the slow M&A pace was likely due to the fact that these six firms were planning and then integrating their own major deals, and thus not able to do as many others. There was also a fair amount of cost-cutting and bottom-line pressure across the pharma and big biotech sectors last year.

Gaito also noted that pharma appetite for risk was very low last year. “They were waiting to see how a drug played out before acquiring it,” he said, pointing to the fact that Gloucester Pharmaceuticals Inc. wasn’t bought by Celgene Corp. until after lymphoma drug Istodax (romidepsin) gained FDA approval. Meanwhile, three obesity drugs remain on the partnering table even after finishing Phase III trials.

And of course, the economic downturn exacerbated barriers to M&A. According to the E&Y survey, 69 percent of life science execs felt that valuation uncertainty had increased last year, while 57 percent pointed to gaps between buyer and seller price expectations and 53 percent complained of insufficient financing availability to fund deals.

“As the markets were going lower, everyone kept looking for a better bargain,” Gaito said.

Scott Salka, CEO of Ambit Biosciences Inc., likened big pharma’s situation to a kid in a toy store. If you send the kid in with $10, they can pick one thing they want, but if you send them in with enough money to buy one-third of the store, suddenly they can’t decide. “Rather than a flurry of activity, you saw paralysis,” Salka said.

But towards the end of the year, the economy began to stabilize, the bargain-hunting furor subsided, buyers and sellers started agreeing on valuations, and deal flow picked up. Celgene bought Gloucester, Cubist Pharmaceuticals Inc. acquired Calixa Therapeutics Inc., Silence Therapeutics plc merged with Intradigm Corp., Eisai Co. Ltd. bought AkaRx Inc., Novartis moved to acquire Corthera Inc., AstraZeneca plc bought Novexel SA, Myriad Pharmaceuticals Inc. acquired Javelin Pharmaceuticals Inc. and more.

Additionally, a flood of big partnering deals emerged, including Incyte Corp./Novartis AG, Incyte Corp./Eli Lilly and Co., Targacept Inc./AstraZeneca plc, Array BioPharma Inc./Amgen Inc., OncoGenex Pharmaceuticals Inc./Teva Pharmaceutical Industries Ltd. and many others.

2010: Deals Forecasted, but What Kinds?

Gaito called the surge of deal-making activity at the end of 2009 “heartening” - and more predictive of what the industry is likely to see in 2010.

Several venture capitalists have echoed the 2010 optimism. “I’m hopeful we’ll see some really nice exits,” said Wende Hutton, general partner with Canaan Partners.

Giovannetti predicted that the mega-merger trend has just about played out, but that 2010 will bring an increase in pharma-to-biotech transactions. He added that these transactions often begin as partnership discussions, but that venture capitalists increasingly push for an acquisition exit.

Hutton explained that from the VC view, it’s risky if most of the money associated with a deal is tied to milestones that might be five or six years down the road. Yet she was quick to add that while a take-out may be the preferred outcome, “you’d rather have a pharma partner than not.”

Joseph Baron of management consulting firm Extera Partners predicted that 2010 may bring more biotech-to-biotech mergers and acquisitions. In the past, such deals often have occurred out of desperation, and investors have sneered that combining two dogs creates a bigger dog. But Baron maintained that “real economic value creation” can take place when two companies that each boasts one great product are combined.

Giovannetti, however, was skeptical, noting that biotech-to-biotech deals often aren’t substantial enough to generate economies of scale and get hampered by arguments over who will run the company.

From the big pharma perspective, some of the acquisition activity in 2010 and 2011 may shift from the U.S. to emerging countries. Carolyn Buck-Luce, E&Y’s global pharmaceutical sector leader, said big pharma is “just scratching the surface in China and India,” and future expansion into second and third tier cities will require innovative partnerships and acquisitions with companies that can assist with distribution and provide contract sales teams.

Buck-Luce also expects the pharmas to start acquiring biotechs based in China, Singapore, India and Eastern Europe, as well as those with a strong branded generics presence. She called branded generics a “very fragmented industry ripe for consolidation.”

And what are the pharmas themselves saying? If the J.P. Morgan presentation given by Martin Mackay, president of pharmatherapeutics research and development at Pfizer, is any indication, they are hungry for deals - all kinds of deals.

“A few years ago, we had limited types of relationships,” Mackay said. Now big pharma is open to licensing, codevelopment, copromotion, alliances, venture investments, mergers, acquisitions, outlicensing and academic collaborations. Pfizer is “very flexible” in terms of the type of deals it is willing to construct to move its pipeline forward, Mackay said, as he urged biotechs to come explore the many options.