September 26, 2014
By Josh Baxt, BioSpace.com News
Without a doubt, the life sciences mergers and acquisition market has been exceptionally hot over the past two years, with big-name players such a Swiss drugmaker Roche and Valeant snapping up promising younger startups with an eye towards the bottom line. Even more conservative companies have gotten into the act, with stalwart Merck & Co. dipping its toe in the water to acquire hepatitis researcher Idenix for $3.8 billion, as the buying spree continues.
Roche, which is buying Brisbane, Calif.-based InterMune for $8.3 billion and San Diego’s Seragon for $1.7 billion, has only been one of many, including Covidien , Medtronic and Zimmer , to go shopping in recent months. As liquidity continues to flow throughout a vibrant biotech sector rejuvenated by a banner year for biotech IPOs, many startups and private companies are liking their chance with possible sales.
So why would a company choose to exit instead of taking a bite at the IPO market—and the lucrative cashing in that goes with it? Sometimes, a merger or acquisition can be the best of both worlds for larger companies looking to innovate and smaller ones hoping for institutional-grade support and logistics. These transactions fill a vital role in the biomedical life cycle. For the purchasing companies, they offer the hope of a more robust pipeline, footholds in new markets or perhaps even a more innovative culture. For the companies being acquired, they validate years of hard work, provide more resources to take a therapy to the next level or offer a graceful exit to pursue the next project.
The Busy Season
Looking at the latest headlines, it’s clear that corporations want to buy. According to PricewaterhouseCoopers (PwC), companies announced 62 deals worth $167.4 billion in the second quarter. A few recent announcements include Valeant’s multibillion offer for botox maker Allergan (which is still fluctuating as both companies’ stock prices gyrate); Medtronic’s pending deal with surgical device creator Covidien for $42.9 billion; orthopedics maker Zimmer’s pending $13.4 billion deal for rival Biomet, and Merck’s $3.8 billion offer for hepatitis researcher Idenix.
All this activity is a big positive for investors, who are seeing nice returns, but it’s also good news for small startups seeking capital.
“This whole biotech ecosystem is interconnected,” says Peter Rahmer, vice president at The Trout Group, an investor relations and strategic advisory firm . “What keeps a vibrant biotech environment going in California is cash flow, company formation and successful exits through M&As and IPOs. Seragon is a return to the VCs, who can put that money back into new companies.”
Driving the Activity
Sometimes companies want to gain access to new markets. However, more often than not, they are simply looking for late-stage therapeutics to reinvigorate their pipelines. “Intermune got their IPS (idiopathic pulmonary fibrosis) drug approved in the U.S. and Roche is picking up the income stream,” says Rahmer. “It’s easier to pick up late stage assets to expand the pipeline.”
As for valuations, these can be driven by the IPO market, which has also been quite hot. Somecompanies take a dual track, pursuing both M&A and a possible IPO. For example, Lumena had filed for an IPO before it was ultimately purchased by Shire for $260 million. While pursuing a public offering can increase a small company’s leverage, the IPO market can cut both ways.
“If you’ve been thinking about life as a public company, you’ve been ramping up infrastructure, generating more expenses and will need more capital,” notes Dimitri Drone, pharmaceutical and life sciences deals leader at PwC. “If the IPO market is not working out, you may have created something that needs to be sold.”
Shifting Roles for Biotechs
While traditional pharma companies are still leading the M&A charge, mature biotechs are also stepping in. In the past few years, Amgen picked up Micromet and Onyx . For emerging biotechs, this may be the best result, as they can become part of a larger biotech with a similar makeup.“Small biotechs would often rather be bought by one of their own,” says Drone. “The cultures are more aligned, there’s less bureaucracy. If they go with a biotech, as opposed to pharma, they may still get to work on their pet project.”
But there’s another concern for the Amgens of the world: Biosimilars are starting to inch their way towards the market and that will change the business climate, perhaps permanently. “The biosimilar market will become more mature and copycat versions will come out,” says Drone. “Biotechs need to bulk up and get big now, while things are still good.”
The Jobs Picture
But how do these deals affect the overall biomedical climate in terms of capital production, innovation and the Holy Grail of biotech: employment? These are exciting times in capital markets but they can often lead to less job growth and companies consolidate. While deals mean more cash flow, they can also mean job losses, especially in the short-term. However, there’s an upside. As those dollars get recirculated, startups have more opportunities to get funding—but sometimes the involvement of venture capitalist shareholders can mean pressure on companies to downsize their costs.
“The longer-term view is that it continues to show biotech entrepreneurs that there’s a reward for pursuing these opportunities,” says Rahmer. “You can get acquired, you can go public. The natural flow is positive for California because it will only encourage people to take more chances and be more entrepreneurial.”
