Small biotech companies with promising technologies are finding themselves hot targets for acquisitions and licensing deals with “big pharma” firms.Increased competition, the ever-important rush to be first to market with the latest antidote and a decrease in venture capital has caused a sharp rise in collaboration deals as well as mergers and acquisitions.
Despite an infirm economy, big pharma’s shopping spree is reportedly the fastest-growing mergers-and-acquisitions sector, up almost 90 percent this year.
“M&A has become more and more a topic of discussion at board meetings,” said Sergio Garcia, a partner at Reed Smith, a 1,650-lawyer firm that will add a Silicon Valley shop to its international footprint next month. “That’s something we’re going to see more of as economic conditions either continue to deteriorate or the credit crunch trickles into the life sciences sector.”
Emerging companies, even large pharmaceutical companies, have strong incentives to do deals right now at a time when venture-capital investment in the life science sector appears to be slowing. In recent years, venture capitalists who once had the stomach for the risk of biotech investments have all but disappeared from the marketplace.
According to statistics released by the National Venture Capital Association, there was a 14 percent drop in funds in the U.S. life sciences sector in the second quarter of 2008 compared with last year with $1.9 billion going into 209 deals. The economic downturn has venture capitalists reluctant to take big risks on what by nature is risky business. Getting a drug from the planning stage to market can take as long as 15 years.
“We have a situation where the venture capitalists have backed out, the regulations are going up, and technologies are failing,” said Guy Miller, co-founder, chairman and chief executive officer of San Jose-based Edison Pharmaceuticals.
As several blockbuster drugs approach the end of their patent lifecycle, the pharmaceutical giants stand to lose big sources of revenue.
Since 2006, for example, patents on three of Pfizer Inc.’s big money-makers have expired: the popular antidepressant Zoloft in 2006, and blood pressure treatment Norvasc and allergy drug Zyrtec in 2007. The expirations eliminated a combined $9.3 billion in annual sales. Lipitor, a treatment for high cholesterol, generated more than $8 billion in sales in 2007. That patent expires in 2011.
This and other market forces have combined to create an environment where cash-strapped emerging biotech companies find themselves courted by big pharma in a big way. For those less inclined to sell the companies and products they’ve created, licensing and collaborative deals are a popular avenue.
“The folks looking for capital and to move technologies forward are focused on alliances and partnerships,” Miller said.
Miller said he has turned down recent offers for acquisitions. But in July, Edison entered into a research, development, commercialization and license agreement with Penwest Pharmaceuticals for the treatment of neurological disorders. The deal netted Edison $7.5 million in capital. The company is in the process of raising more money and exploring similar agreements.
San Jose-based Tacere Therapeutics in January entered a collaboration license deal with pharmaceutical giant Pfizer that includes clinical development and commercialization of a hepatitis C virus compound called TT-033. Tacere could receive payments of more than $145 million, along with future royalties on sales of the compound.
Mike Catelani, co-founder and chief financial officer of Tacere, said TT-033, is “very cutting edge.”
This apparently is what scared off venture capitalists. Shortly after founding Tacere in the summer of 2006, Catelani and fellow founder Sara Hall, Tacere’s CEO, went looking for venture backing. From New York to Southern California to Sand Hill Road, there was a clear consensus that Tacere was just too early-stage for the money.
Catelani considers Tacere at a very late stage for a biotech startup. It has identified a clinical candidate and is ready to begin studies. At the time of the VC visits, Tacere stood less than 18 months away from Phase 1 studies.
While VCs were eager to meet with them, Catelani and Hall said, they were denied funding across the board.
“They say they need compelling data, but it costs money to get that,” he said.
