Mid-Priced Biotechnology Companies Bloom As M&A Targets in 2013

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At the annual health care conference run by JP Morgan in San Francisco this week, and at satellite events surrounding it every year, hundreds of biotechnology companies showcased their work to investors who might advance them the capital to keep going. But the companies’ CEOs are also pitching their value to an equally important part of the audience—big pharmaceutical businesses or mature biotechs on the hunt for smaller outfits they can snap up as acquisitions.

So it’s not surprising that the buzz of the conference centered on what these big buyers may do in the months to come.

Investment capital can keep biotechnology companies alive for years—even decades—as they strive to convert interesting science into lucrative drugs or devices. But an acquisition by a larger partner yields a sudden and often welcome payout for venture capital firms and other investors who otherwise would have to wait for the companies they support to complete an initial public offering.

“Every VC would tell you their preferred exit (from an investment) would be the sale of the company rather than the capital markets,” said Glen Giovannetti, Global Life Sciences Leader for Ernst & Young.

The big questions are which companies are buying, how much they’re willing to spend, and what types of companies they’re looking to snap up.

Pharmaceutical companies that lost patent protection recently on their biggest sellers are under urgent pressure to shore up their revenues to keep pace with industry growth, according to an Ernst & Young report released this week. Pfizer, for example, saw its blockbuster cholesterol-lowering drug Lipitor go off-patent in late 2011.

But there’s a limit to how much these companies can spend. Top biotech firms such as Amgen (NASDAQ: AMGN) of Thousand Oaks, CA—with a market capitalization of more than $67 billion—are probably too expensive for most suitors’ taste right now. But Ernst & Young predicts a heightened demand among big buyers for lesser-priced companies in the range of $5 billion to $20 billion—and bidding wars could drive up premiums on those acquisitions. The accounting firm predicts a rise in those “bolt-on” purchases that could immediately beef up revenues for the successful bidder.

“That’s certainly the talk here this week,” says Giovannetti, one of the thousands attending the JP Morgan conference. He pointed to Novartis CEO Joe Jimenez’s predictions about his company’s M&A plans in an interview with Bloomberg at the conference. Jimenez said the Swiss drug giant would seek acquisitions costing no more than $4 billion.

Those modest Novartis plans are consistent with the downward trends found by the San Francisco biotechnology investment bank Burrill & Co. in a survey of 2012 M&A activity published on the eve of the conference. The highest deal value in 2012 was Nestle’s acquisition of a Pfizer infant nutrition unit for $11.8 billion, compared with 2011, when two top acquisitions exceeded $20 billion and several more were higher than $10 billion. Although the number of global M&A deals in the life sciences increased in 2012, their total value dropped 31 percent to $109.4 billion, Burrill found.

If the big drug companies could spend more to fuel their growth, they probably would. There’s an urgent need to deal with the revenue losses from expired blockbuster drugs. And on top of that, Giovannetti says, the gains once expected from Europe and emerging markets didn’t materialize. Sales for the world’s 16 largest pharmaceutical companies are lagging behind the growth rate of the overall drug market, Ernst & Young found.

But Giovannetti says the big drug companies are torn between conflicting imperatives. Their resources for acquisitions are 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.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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