The Health Care M&A Monthly: The Biotech Boom Continues--

Sixteen Deals Announced Worth $50.0 Billion

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For the third time this year, the Biotechnology sector leads the pack in merger and acquisition activity. With 16 deals announced worth a provisional total of $50.0 billion, biotech captured 20% of July’s deal volume and, more tellingly, 71% of its dollar volume.

The single biggest factor responsible for this is the announcement of the largest biotech deal ever. Roche Holding (SWX: ROCZ.S) is offering to pay $89.00 per share in cash to acquire the remaining 44.1% of Genentech (NYSE: DNA) that it does not already own. When the calculator stops clicking, that works out to a purchase price of $43.7 billion, which is 188% greater than the now second-largest biotech deal, AstraZeneca’s (NYSE: AZN) $15.2 billion acquisition of MedImmune announced last year. Currently, DNA is the largest biotech by market cap and the second largest in global market share of 20.6%, after Amgen’s (NASDAQ: AMGN) 21.3%.

Founded in 1976, Genentech is a biotech focused on treatments for cancer, asthma, growth hormone deficiency and other diseases. Among its premier products, it markets Avastin for metastatic cancer of the colon or rectum and metastatic non-squamous non-small cell lung cancer; Rituxan for B-cell non-Hodgkin’s lymphoma; Herceptin for node-positive or node-negative breast cancer; and Lucentis for neovascular (wet) age-related macular degeneration. The company also has valuable collaborations with Roche, Biogen Idec (NASDAQ: BIIB), Novartis Pharma, Seattle Genetics (NASDAQ: SGEN) and OSI Pharmaceuticals (NASDAQ: OSIP), among others. Notably, DNA was one of the first biotechs to become profitable. Today and based on trailing 12-month figures, the company generates revenue of $12.2 billion, EBITDA of $5.2 billion and net income of $3.1 billion. The company is realizing the promise of biotech in ways that could only have been dreamed of a few years ago.

Based in Basel, Switzerland, Roche is a global pharmaceutical company, with complementary therapeutic and diagnostic focuses. For the six months ended June 30, 2008, it generated revenue of CHF 22.0 billion ($20.9 billion) and net income of CHF 5.6 billion ($5.3 billion).

Roche and Genentech’s relationship dates back to 1990 when Roche acquired a majority interest in the South San Francisco-based firm. Through tiny accretions, Roche’s ownership interest now stands at 55.9%. In 1999, it made a move to acquire the rest of DNA, but all that came out of that skirmish was a marketing agreement, noted below. Why seek to acquire the remaining ownership interest now? At the level of corporate philosophy, Roche wants to innovate systems of personalized medicine that balance diagnostic tests with therapeutic treatments, and it needs advanced biotech to achieve that goal. In terms of generating blockbuster drugs and their associated revenues, Roche believes this combination will strengthen the overall group’s access to innovative research, by lowering the Chinese Wall between the two companies’ R&D teams, as it were. It is also calculated that this deal would result in operational efficiencies and annual synergies of up to $850.0 million per year. Finally, under the marketing agreement signed in 1999, Roche has the right to license and sell DNA drugs outside the U.S.; that agreement expires in 2015, requiring Roche to renegotiate if DNA remains independent, but to do nothing but enjoy the increased revenue if it does not.

The deal offers DNA shareholders an 8.8% premium to the stock’s prior-day price and a one-month premium of 19.0%. The unadjusted price to revenue (P/R) and price to EBITDA (P/EBITDA) multiples are 3.6x and 8.4x, respectively. The price offered implies a purchase price of about $99.1 billion for a 100% interest in the company, and corresponding P/R and P/EBITDA multiples of 8.1x and 19.1x, respectively.

DNA shareholders have voiced concerns over what the market perceives to be a low acquisition premium and whether DNA’s innovative corporate culture, thought to underpin its results, can be sustained as a wholly-owned subsidiary. The market may want to extract an additional premium; on news of the offer, DNA’s price rose to $93.88. We suspect, though, that DNA would readily assent to the offer at between $95.00 and $97.00 per share. DNA might also be able to extract some additional guarantees that keep its unique corporate culture intact, something Roche might well undertake to prevent defections of key personnel. What DNA cannot do, however, is appeal to some outside group, either strategic or financial, to buy out Roche’s share in DNA. Roche’s approach letter to DNA made it clear it would "not consider any sale or other disposition of Roche’s Genentech stock." Who’s going to want to buy out Roche’s share for $55 billion plus a premium to satisfy Roche, much less finance it? Roche will finance the deal through a combination of funds on hand and debt financing, and feels confident that it can secure the necessary debt financing (lucky them).

Greenhill & Co. is serving as financial advisor to Roche. The three independent directors on DNA’s board are considering the proposal, as yet to be accepted.

Roche made two other small biotech deals in North America during July. It is paying $189.3 million to acquire Arius Research (TSE: ARI). Based in Toronto, Arius is a biotech focused on cancer antibodies; its FunctionFirst technology is used to select and identify antibodies. This deal strengthens Roche’s portfolio of cancer treatments. ARI has established a portfolio of more than 500 antibody candidates against the most prevalent cancers, such as breast, colorectal, lung and prostate, as well as melanoma, ovarian and pancreatic. One of the programs, CD63, which covers breast and prostate cancers, is licensed to Genentech. Roche’s offer represents a 14.5% premium over ARI’s prior-day price. Roche is also paying $125.0 million for Mirus Bio Corp. Based in Madison, Wisconsin, Mirus is a biotech focused on RNAi, or gene silencing, as a means of fighting disease. Last year, Roche signed a deal with Alnylam (NASDAQ: ALNY) giving it access to that company’s RNAi technology, which involves blocking disease-causing proteins. The current deal enhances Roche’s biotech efforts with an additional technology, bringing it closer to creating fully enabled RNAi therapeutics. Mirus’ transfection reagents business is to be divested and function as a stand-alone business.

In what might be considered something of a copycat deal, given its timing right after the Roche-Genentech deal, Bristol-Myers Squibb (NYSE: BMY) made an unsolicited offer to buy the 83% of ImClone Systems (NASDAQ: IMCL) it does not already own for $60.00 a share, or $4.5 billion. While this represents a 30% premium to IMCL’s prior-day price, the stock surged 40% on the announcement of the offer, erasing the premium. Since BMY owns only 17% of IMCL, it does not have the kind of leverage over IMCL that Roche has over Genentech. Also, Roche is not facing maverick investor Carl Icahn, who sits on IMCL’s board. We expect some horse-trading to ensue, and will include the deal in our database when something firmer emerges. Too bad, though, Sam Waksal didn’t wait around for BMY’s offer; after being sentenced to 87 months in prison, he is expected to be released this month.

In the second-largest biotechnology deal of July, GlaxoSmithKline is paying as much as $3.28 billion in a drug development deal with Actelion (SWX: ATLN) to license rights to almorexant. The drug belongs to a class of orexin antagonists, which block receptors for brain chemicals that maintain wakefulness and regulate the sleep-wake cycle. Under terms of the deal, GSK will make CHF 150 million in an upfront payment. It has also committed to CHF 415 million in milestone payments for the drug’s development to treat insomnia and up to CHF 2.375 billion related to the drug’s development for other indications. This co-development and co-commercialization agreement excludes Japan; otherwise, it is believed to give the partners a seven-year lead over the nearest competitor in insomnia and related indications. Launch of the drug for insomnia is forecast for 2011. From ATLN’s perspective, it diversifies away from dependence on its blockbuster Tracleer heart drug.

In a much smaller deal, GSK is committing $25.0 million to a stem cell technology agreement with The Harvard Stem Cell Institute for the development of new medicines. As part of this deal, GSK has agreed to support research at Harvard University and four Harvard-affiliated hospitals to try to find cures for cancer, obesity, diabetes, as well as neurological, cardiac and musculoskeletal diseases.

The month’s third-largest biotech deal has Novartis (NYSE: NVS) paying approximately $881.0 million (CHF 907.0 million) to acquire the 90.3% it does not already own of Speedel (SWX: SPPN), a biopharma that is developing therapies based on renin inhibition for cardiovascular and metabolic diseases. This deal represents a 94% premium to the stock’s prior-day price. It gives NVS full control over the blood pressure drug Tekturna, just on the market, which management hopes will become a replacement for NVS’s Diovan medication, which faces generic competition in 2012. Structured as a two-step deal, NVS first paid CHF 130 per share for a further 51.7% share from five large shareholders. In the next step, it will buy the remaining shares in a mandatory public offering at the same price.

Denmark’s Nycomed SCA is paying Immunomedics (NASDAQ: IMMU) up to $620.0 million to license worldwide rights to veltuzumab, a drug based on an anti-CD20 monoclonal antibody for autoimmune diseases and subcutaneous application. This deal covers veltuzumab in all non-oncology applications, and Nycomed will develop the drug primarily for the treatment of rheumatoid arthritis. As a drug that is injected, rather than infused, veltuzumab may offer a competitive advantage in terms of convenience and safety over drugs for the same indication that must be infused.

sanofi-aventis is paying about $547.8 million to buy Acambis plc (LSE: ACM), a developer of vaccines to prevent and treat infectious diseases. This bid offers ACM shareholders a 64% premium over the stock’s prior-day price, and gives the buyer access to the target’s vaccine technology. Though it generated 2007 revenue of just $18.9 million, ACM recently secured a $425.0 million, 10-year smallpox vaccine contract with the U.S. government.

Shire (NASDAQ: SHPGY) is paying about $515.0 million to acquire Jerini AG (FSE: JI4). Jerini is a biotech based in Berlin that is developing FIRAZYR, a first-in-class orphan drug for the symptomatic treatment of acute attacks of hereditary angioedema. Other assets included in the deal are Jerini Ophthalmic and JPT Peptide Technologies GmbH. This bid, valued at 1.4x revenue, offers shareholders a premium of 199% over the volume-weighted average stock price for the past three months. It gives the buyer access to a promising compound for its portfolio of treatments for rare disorders. Upon completion of this deal, SHPGY will evaluate Jerini’s other programs and divisions. Based on current estimates, peak annual global sales of FIRAZYR are expected to be between $350.0 million and $400.0 million. Not a blockbuster, mind you, but very respectable at this price.

Maxygen (NASDAQ: MAXY) is selling its hemophilia program assets to Bayer AG (DE: BAYG) for $120.0 million, consisting of $90.0 million in an upfront payment, and $30.0 million in milestone payments. As a result of this deal, BAYG gains MAXY’s leading drug candidate, MAXY-VII, along with a license to use the company’s underlying gene-targeting technology. MAXY-VII is expected to enter early-stage clinical trials in the third quarter.

It is with the tenth-largest deal that we reach an American buyer. Eli Lilly & Co. (NYSE: LLY) is acquiring SGX Pharmaceuticals (NASDAQ: SGXP) for $3.00 per share, or about $64.0 million. Based in San Diego, SGXP is a biotech focused on therapeutics for unmet medical needs in oncology. This acquisition, valued at 1.6x revenue, allows LLY to integrate SGXP’s structure-guided drug delivery platform into its own drug discovery efforts. The two have partnered since 2003 on a variety of projects that require SGXP’s x-ray crystallography technology.
 

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