05 sector reports@p16-35:sector.qxd

16 | ACQUISITIONS MONTHLY | June 2010
aqm-e.com
SECTOR REPORTS
FOCUS ON BIOTECH
Big pharmaceutical companies and smaller innovators are looking to collaborate fruitfully as the
downturn rapidly changes biotech's business model. Deborah Cust reports
Bleary outlook
for biotech
June 2010 | ACQUISITIONS MONTHLY | 17
aqm-e.com
SECTOR REPORTS
FOCUS ON BIOTECH
s scientists marvel at the
creation of Cynthia, the
world’s first synthetic
life form, financiers are
despairing at the perennial funding issues besetting developers of pioneering biotech drugs.
The historic biotech model is under
threat as a dearth of available funding and the bleak outlook for IPOs
means businesses previously reliant
on such sources of capital seek fresh
solutions.
“Europe has more problems than
the US in that it created far too
many biotech companies” says
Simon Turton, managing director at
private equity firm Warburg Pincus,
pointing to government support
programmes that have led to "the
establishment of a large number of
firms with talent and technology
dissipated rather than concentrated.”
The situation is different in
the more cash-driven US, says Gil
Bar-Nahum, senior vice president at
Jefferies. “In the US, a biotech firm
might raise US$50m-US$60m
because the market is open and they
know they will have need of it in the
future so they behave proactively,
whereas in Europe firms have a ten-
A
“Accessing
capital has
proved
difficult and
this has
changed
investment
style. We are
seeing projectbased deals
where
development
programmes
are being
managed on
the basis of a
virtual
company
where
everything is
contracted out
and funds are
metered in as
milestones are
hit.”
Stephen Bunting
dency to raise money when they
need it and are more reactive.”
At the same time the large
drug companies are desperate for
new products and looking to get
involved in the development process
at an earlier stage. Historically,
biotechs have tended to take compounds through phase II trials
before out-licensing the product to a
big pharmaceutical group to conduct the expensive phase III trialling.
That has now changed says James
Gubbins, partner at law firm Morrison & Foerster. “Biotech firms are
more likely to work on promising
pre-clinical trials but nothing
beyond phase I," he says. "You
could not IPO many of the
companies now because they are
far too early stage. Investors are
looking for nearer term revenue
and this has driven activity in the
sector down an M&A path rather
than IPO.”
For many M&A will be the only
exit route. So the sector increasingly
looks as if it will replicate technology sector models where businesses
tend to get bought rather than
float. “Many will need to work
out what the get-out is before they
get into the market, which is not a
bad strategy,” says Paul Claydon,
another Morrison & Foerster
partner.
Claydon adds: “There has not been
a nastier place to be recently than an
AIM-listed biotech company as there
is no cash available. There have been
attempted mergers and take privates in order to tide firms over until
cash is available but unless the particular company has a clear USP it is
tough.”
Clearly for a significant number,
the current market will prove to be
just too challenging. But, in what
was perhaps a watershed for the UK
market, the directors of autism specialist Neuropharm recently wound
the company up with £6m of cash
still on its books. Failed takeover
talks, product disappointments and
the costs associated with both day to
day operation and its AIM-listing left
the management with nowhere to
go.
Others could follow this brutal liquidation route. 44% of those surveyed by Deloitte recently believed
that up to two fifths of existing
biotech businesses will not exist in
five years time as a result of the
downturn.
TOP 20 GLOBAL BIOTECH DEALS 1 JAN 2008 - 20 MAY 2010
Rank date Status
21/07/2008 C
06/10/2008 C
22/07/2009 C
07/04/2008 C
21/05/2009 C
02/07/2009 C
12/10/2009 C
27/07/2009 C
04/02/2008 C
07/12/2009
23/12/2009
14/09/2009
03/07/2008
09/06/2008
C
C
C
C
C
25/07/2008 C
15/04/2009
28/09/2009
10/03/2010
16/09/2009
02/11/2009
24/11/2008
C
C
C
C
C
C
Target
Genentech Inc
ImClone Systems Inc
Medarex Inc
LifeCell Corp
Cougar Biotechnology Inc
Elan Corp PLC
Proteolix Inc
Shantha Biotechnics Pvt Ltd
Whatman PLC
Target advisers
Goldman Sachs & Co
JP Morgan/Morgan Stanley/Citi
Goldman Sachs & Co
Merrill Lynch
Bank of America Merrill Lynch
Citi
Bryan Garnier & Co
Goldman Sachs & Co/Numis
Securities Ltd
Gloucester Pharmaceuticals Inc JP Morgan
Corthera Inc
Credit Suisse Group
ESBATech AG
Morgan Stanley
Jerini AG
Credit Suisse Group
Third Wave Technologies Inc Merrill Lynch/XMS Capital
Partners LLC
Acambis PLC
Goldman Sachs & Co/JP Morgan
Cazenove/Piper Jaffray Cos
BiPar Sciences Inc
Crucell NV
Barclays Capital
Facet Biotech Corp
Centerview Partners LLC
Axygen Biosciences
Deutsche Bank AG
Athenix Corp
Omrix Biopharmaceuticals Inc UBS Investment Bank
Source: Thomson Reuters
Ranking value
(US$m)
46694.84
6076.01
1924.56
1717.09
947.45
885.00
851.00
783.59
756.40
Acquirer
Roche Holding AG
Eli Lilly & Co
Bristol-Myers Squibb Co
Kinetic Concepts Inc
Johnson & Johnson
Johnson & Johnson
Onyx Pharmaceuticals Inc
Sanofi Pasteur SA
GE Healthcare Life Sciences
Acquirer advisers
Greenhill & Co, LLC
UBS Investment Bank/Deutsche Bank AG
JP Morgan
JP Morgan
–
–
Lazard
–
UBS Investment Bank
Celgene Corp
Novartis AG
Alcon Inc
Maia Elfte
Hologic Inc
–
–
–
Deutsche Bank AG/Morgan Stanley
Goldman Sachs & Co
640.00
620.00
589.00
529.65
525.57
Sanofi Pasteur SA
Morgan Stanley
518.68
Sanofi-Aventis SA
Jhc Nederland BV
Abbott Laboratories
Corning Inc
Bayer CropScience AG
Johnson & Johnson
–
–
–
Lincoln International
–
–
500.00
443.82
443.24
400.00
400.00
387.35
C=Completed, P=Pending, U=Unconditional
18 | ACQUISITIONS MONTHLY | June 2010
aqm-e.com
SECTOR REPORTS
FOCUS ON BIOTECH
What's more executives working
in the industry are even more
pessimistic, believing as many as
two thirds will go in that time. A
third of all respondents predicted an
outflow of scientists from smaller
companies to larger, cash-rich players.
An IPO is unlikely to be the ultimate objective of a biotech developer in the future. Companies
currently attracting funding do so
on a project basis, and keep headcount low by outsourcing much
work.
“They would have no plans to
develop an infrastructure with a
view to an IPO” says Morrison &
Foerster’s Gubbins. “Big pharma
want development they can push to
pipeline with lower costs and lower
risk.” That suggests that being taken
over by larger pharma should be the
goal of many.
Stephen Bunting, managing
partner at life sciences investor
Abingworth, agrees. “Accessing
capital has proved difficult and this
has changed investment style. We
are seeing project-based deals where
development programmes are being
managed on the basis of a virtual
company where everything is con-
Mike Kingston
James Gubbins
Paul Claydon
tracted out and funds are metered in
as milestones are hit.”
Bunting adds: “There is currently
quite a lot of interest in start-ups and
early stage which may be surprising
given the current environment.
With early stage, there is generally a
limited amount of capital required at
the outset. You can add significant
value without the need for raising
major amounts of capital.”
The downturn has provided a
great opportunity for smaller
companies to look at how they
can reduce costs or improve the
efficiency of larger and less
agile customers. The large pharmaceutical companies are under more
and more cost pressure and are
therefore increasingly looking at
both consolidation and new outsourcing models.
There has been a degree of consolidation, often driven by necessity
rather than desire, although that is
unlikely to lead to the wide scale
rationalisation that the sector
needs. For biotechs, much depends
on relative valuations. Those discussions can prove hard, given the difficulty valuing both the companies
and their drug development portfolios.
“There is a fine line between finding a good strategic partner and limiting your exit options. If the
company has a truly innovative
product and has maintained
attractive commercial rights,
either in the form of a profit
share or geographically, big pharma
will still have interest," says
Jefferies' Bar-Nahum. "If it's simply a
royalty stream, it's more of a financial equation and is typically less
interesting from a buyout perspective”.
Significant uncertainties surround
regulation and legislation in the sector at the moment. Regulators or
payers, such as governments and
insurer, are harder on reimbursement now says Warburg Pincus’ Turton. The ‘me too’ type products will
find it harder to be reimbursed but
for the cutting edge-type products it
will be easier and these will be at an
even greater premium. For those,
there will continue to be real
demand.
“The FDA are of course also getting tougher but we still believe
they will back innovative projects
that address unmet needs or that
reduce health care costs,” says
Abingworth’s Bunting.
Editorial Calendar for 2010
www.aqm-e.com
May
Sector focus
Banks
Country focuses
June
July
August
Natural resources
Turkey
Pharma, healthcare
other financials
Nordic
Italy
Leisure, hotels,
property
India
Other features
Debt advisory
Midlands UK
Consumer, retail
South of England
Outbound Reports
Eastern Europe
Iberia
Acquisition finance
Legal M&A
September
Country focuses
Telecoms and
technology
BRIC
Other features
Environment
Sector focus
October
November
Energy
Support services
Middle East
Asia-Pacific
Transportation
Infrastructure
Russia
Competition policy
Corporate acquirers
Outbound Reports
December
Germany
Debt advisory
Americas
Restructuring
Review of the Year issue