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strained. Slower revenue growth and pressures on drug pricing have diminished their operating cash.
So far, they’ve been able to buoy their share prices and maintain returns to shareholders through cost-cutting moves such as divestitures, and by borrowing to increase dividends and buy back stock, Ernst & Young reports. But that has raised debt levels for the top 16 pharma companies. Their financial capacity to cut deals—what Ernst & Young calls their firepower—dropped by 23 percent between 2006 and 2012.
As a result, large pharmaceutical companies will mete out their cash selectively on acquisitions, Giovannetti says. The big firms were already more exacting in 2010 and 2011 when they negotiated collaborations and licensing opportunities to fill their long-term pipelines.
“We saw upfront payments on deals decreasing pretty significantly,” Giovannetti says.
Increasing the strain on big drug companies is the fact that they’re not alone in the market. There’s a growing class of large biotechnology companies, specialty pharma, and generic drug businesses on the prowl for acquisitions and partnerships, Ernst & Young reported.
But that’s a boon for the smaller companies seeking alliances or buyers. Examples abounded in the three days of the JP Morgan conference alone: The San Diego genetic sequencing company Illumina (NASDAQ: ILMN) announced its $350 million acquisition of Verinata Health, a Redwood City company that makes tests for fetal abnormalities. Verinata could also receive up to $100 million in milestone payments. BioMarin (NASDAQ: BMRN) of San Rafael said it would buy the small molecule drug discovery company Zacharon of San Diego for $10 million. And the Irish company Shire announced its purchase of Lotus Tissue Repair of Cambridge, MA for an undisclosed amount.
Both Illumina and BioMarin are prime acquisition targets —each has a market capitalization of about $6.4 billion. But both companies have sniffed at the idea of purchase offers unless they come at a steep premium. After Illumina turned down several bids from Roche, the major Swiss drug company announced this week that it was no longer interested in the purchase. BioMarin CEO Jean-Jacques Bienaime said he would advocate against the company’s acquisition at a premium of as much as 30 percent.
While big pharmaceutical companies may maintain their discipline and hold out for lower acquisition costs, those growing biotechnology companies that remain independent may become even more powerful competitors in the market for M&A deals as well as alliances, especially if they have revenues from products already on the market.
During the conference, Amgen announced a deal worth up to $185 million with BIND Biosciences of Cambridge, MA, which makes nanoparticles that help chemotherapy drugs attack cancer cells. BIND will receive an upfront payment of $46.5 million. With possible royalties and milestone payments, the deal could be worth well over $200 million, BIND CEO Scott Minick told Xconomy editor Catherine Arnst.
Foster City biotechnology leader Gilead (NASDAQ: GILD) will fund research for the private company MacroGenics of Rockville, MD, on its double-barreled antibodies that can target two antigens at once, the smaller company announced on Monday. MacroGenics could also receive payments of $30 million to more than $1 billion, depending on the progress of the research up through clinical testing.