The Health Care M&A Monthly: The Envelope, Please: It’s Biotech, Again

For the second month straight, activity in the Biotechnology sector led the health care M&A market. In a slow month which saw a total of only 53 deals announced, the Biotech sector accounted for nine deals, or 17% of the total. Based on prices revealed to date, an aggregate of $851,527,000 was committed to finance these nine. This figure represents 45% of the $1.893 billion that was spent for the month.
The largest deal this month, NPS Pharmaceutical’s (NASDAQ: NPSP) $767 million acquisition of Enzon Pharmaceuticals (NASDAQ: ENZN), accounts by itself for 41% of the month’s total capital committed. In this stock swap, NPS gains not only ENZN’s expertise in developing and manufacturing enhanced therapeutics for life-threatening diseases, but also a biotech company with actual profits. For the most recent 12-month period, it earned $30.5 million on revenue of $101.6 million. The deal is thus valued at 7.55x revenue.
Under terms of the agreement, ENZN stockholders are to receive 0.7264 shares of the new company for each share of ENZN common stock they hold while NPSP shareholders will receive one share of the new company for each share of NPSP they own. Based on current valuations, it is estimated that the combined company’s market capitalization would be approximately $1.6 billion.
Toward the other end of the scale, Harvard Bioscience (NASDAQ: HBIO) is paying $8.3 million in cash to acquire private Genomic Instrumentation Services, dba GeneMachines, which designs genomic and proteomic instrumentation. The price, which includes the assumption of certain liabilities, is subject to adjustment.
However, such straightfoward deals may prove the exception in the current market. Last month’s feature on the Biotech sector predicted that low valuations and high cash burn would send many biotechnology companies scrambling down a variety of paths to survive. Indeed, this month saw a broad spectrum of various transactions to do just that. Without any IPO market to speak of, and a lackluster public market for biotechs, many companies have tried to raise capital through M&A transactions.
Continuing a trend that began with Exelixis’ (NASDAQ: EXEL) December 2001 acquisition of Genomica in a stock swap for $110 million, at approximately the same value as Genomica’s cash holdings, this month witnessed a number of deals whose primary rationale was to get the target’s cash.
Last month, we reported that Dendreon (NASDAQ: DNDN) proposed buying Corvas International (NASDAQ: CVAS) for $72.9 million. It is anticipated that after paying CVAS’ convertible debt, DNDN would be acquiring, among other assets, VAS’s cash horde of approximately $110 million.
Even though the deal offers CVAS shareholders an 86% premium over the stock’s price on the day before the announcement, The Biotechnology Value Fund, CVAS’s largest shareholder, opposes the deal, reasoning that shareholders’ interests might be better served if CVAS were simply to return the cash to them.
In Denmark, two companies just announced plans to merge. Cureon A/S and Pantheco A/S propose joining forces to create a company that will develop treatments for cancer based on a proprietary DNA analogue chemistry. Together they will have a cash stash of €15 million.
While the ultimate goal may be to boost cash, several deals are valued according to a target’s market cap, not its cash, with the result that some deals value the target at lower than their cash. The buyer reasons that since cash is an asset that may be easily burned through, a dollar of cash on hand is not really worth a dollar down the road. Unimpressed by this logic, a number of potential targets have said thanks, but no thanks. Caliper Technologies (NASDAQ: CALP) of Mountain View, California, has twice rejected overtures from Little Bear Investments, LLC. Little Bear most recently offered $110 million, a premium to the company’s $80 million market cap, but a discount on the $154.3 million in cash Caliper had at year’s end.
Other biotechs may not have the luxury to say no. Toward the end of February nearly 20 publicly traded biotechs had cash on hand with a greater value than their market cap. Some of these notables include NPS Pharmaceuticals, Celera Genomics (NYSE: CRA), Sequenom (NASDAQ: SQNM), Incyte Genomics (NASDAQ: INCY) and, of course, both Cambridge Antibody (NASDAQ: CATG) and Oxford Glycosciences (NASDAQ: OGSI).
In January, Cambridge Antibody offered to buy Oxford Glycosciences plc for $179.9 million. Then Celltech Group plc (NYSE: CLL) made a counteroffer. At first OGSI pooh-poohed the Celltech offer, saying it undervalued the company. A scant two weeks later, the OGSI board announced withdrawing their recommendation to accept CATG’s offer because of the current difference in value between Celltech’s offer and CATG’s, and after taking the advice of Goldman Sachs.
At current prices, CATG is offering all stock for a total of £82.9 million, while Celltech is offering cash of £101.4 million. The question is, Do OSGI shareholders want to relinquish the participation in the surviving company that CATG’s offer embodies? Even though OGSI believes they should still go with CATG, they apparently want to have the offer sweetened. CLL, for its part, intends to remain pat; now OGSI has to show its cards.
The threat of bankruptcy underlines the necessity to deal or die. But for some it is simply too late. BioTransplant (NASDAQ: BTRN), a biotech company that licenses monoclonal antibody products, felt compelled to file for Chapter 11 reorganization. It appears that the Catholic University of Louvain was seeking to terminate BTRN’s exclusive license to develop and commercialize two such antibody technologies, which would have undercut its ability to raise capital and to execute its business plan.
Interferon Sciences (OTCBB: IFSC) is selling its Alferon N Injection system to Hemispherx (AMEX: HEB) for $3,326,700 in stock and assumed debt. The system, including its patented drug, is the only FDA-approved natural interferon therapy for venereal warts. After the deal, IFSC will be, in effect, a publicly traded shell, joining many a failed dot-com and biotech firm, whose sole usefulness is to offer itself up in a reverse merger with a private company wanting to break into the publicly traded markets.
Even when the IPO window opens again, M&A activity should not slow down, because there is a backlog of private companies that cannot all be accommodated at once when that window reopens. And those that have to wait may be heartened by the notion that there is still venture capital out there. Boston-based MPM Capital announced a $900 million biotech fund in December. Although there has been a slowdown in deal-making, MPM believes being a large, specialized fund gives it an edge over the smaller players and generalists in the market. Also, MPM realizes prices are low, boosting potential returns on new investments. Similar reasons were used in Houston when Momentum BioVentures was launched with the plan of investing $200 million over the next three years in life science companies.