Healthy Skepticism Library item: 7222

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Publication type: news

Hirschler B.
Big pharma cash keeps biotech on a roll
Reuters 2006 Nov 17
http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-11-17T122813Z_01_L15577866_RTRUKOC_0_US-BIOTECH-MA.xml&WTmodLoc=USNewsHome_R3_reutersEdge-1

Abstract:

Who will hit the jackpot next? That’s the question biotechnology investors are asking after a record year for acquisitions of smaller firms by large drugmakers hungry for products to fill their development pipelines.

Britain’s Shire Plc was the latest biotech firm in the bid spotlight this week, its shares jumping to a five-year high following speculation AstraZeneca Plc might be considering an offer.

Citigroup analysts reckoned such a bid could value Shire at $13 billion, compared with its current value of $10 billion, though other analysts were skeptical.

AstraZeneca declined to comment.

Not only is the value of biotech deal-making running at all-time highs, but take-out premiums are also breaking records, in some cases topping 100 percent.

What’s more, the pace of M&A is accelerating, with eight $250-million-plus transactions totaling $16.6 billion announced since July, up from five worth $2.6 billion in the first half of the year, according to Sanford C. Bernstein.

Big pharma’s checkbook has helped push the benchmark American Stock Exchange biotech index <.BTK> to levels not seen since the tech boom in 2000.

Yet Andy Smith, a fund manager at SV Life Sciences, which has some $1.2 billion under management, is confident valuations have further to run.

“We are entering a purple patch where not just one, not just a handful but most of the pharma companies believe they have to grow their pipelines by acquisitions,” he said.

“If most pharma companies think that, then you are more likely to get price inflation. I expect further price inflation as deals continue to happen.”

Merck & Co Inc fanned the flames with its deal on October 30 to buy Sirna Therapeutics Inc , a specialist in RNA interference (RNAi), or gene silencing, for $1.1 billion — a premium of 102 percent to the previously prevailing share price.

That created ripples worldwide.

In London, shares of biotech minnow SR Pharma Plc have more than doubled since the Sirna announcement, hitting a four-year high this week as investors bet Merck’s endorsement of RNAi augured well for SR Pharma’s similar early-stage work.

KNOCK-OUT PREMIUMS

Navid Malik, an analyst at Collins Stewart, said the Merck deal and other transactions such as Novartis AG’s 305 million pounds ($576 million) purchase of NeuTec Pharma at a 109 percent premium in June, showed how prices had moved.

“The ballpark numbers are very different to what they were six months ago,” he said. “Pharma companies do not want to go into bidding wars, so they are prepared to pay knock-out premiums.”

There is certainly no shortage of money. Large drug firms may be struggling to find tomorrow’s blockbuster but today’s megabrands are throwing off cash.

Bernstein analysts estimate the world’s leading pharmaceutical companies could buy the entire publicly traded U.S. biotech sector — excluding the two biggest firms Amgen Inc and Genentech Inc — in less than nine months with their cash on hand of around $135 billion and operating free cash flow totaling some $80 billion a year.

With that financial clout and competition for assets increasing, it is perhaps no surprise that the average biotech take-out premium has jumped to 62 percent this year from an average of 49 percent over the past eight years.

Fred Hassan, chief of Schering-Plough Corp , who has made no secret that he is shopping for biotech assets, says he has been taken aback at just how much prices have increased.

Hassan told Reuters in a recent interview that price inflation had triggered a change of tack by venture capitalist owners of private biotech companies, who were now focused on exits via trade sales rather than initial public offerings.

According to Russell Medford, chief executive of U.S. biotech firm AtheroGenics Inc , average returns from trade sales are now around 2-1/2 times higher than those from IPOs.

“The preferred exit strategy in 2006 has been acquisition — that’s unusual,” he said.

In the past, big pharma has only been interested in biotech products once they have become established in clinical trials. But the dash for promising assets means deals are now being struck earlier, while attention is also switching from products to enabling technology.

“Big pharma is investing at an earlier stage,” said Smith of SV Life Sciences. “The days of a platform (technology) company being non-investable are now gone.”