October’s health care merger and acquisition market was clearly dominated by the Biotechnology sector. In posting 19 deals worth a combined $5.2 billion, this one sector accounted for 23% of the deal volume and 69% of the total dollar volume. The deals with the larger price tags generally involve licensing deals or drug development alliances, while those with smaller prices involve outright acquisitions.

This distribution of prices and deal structures is the result of the current credit crunch, or so it seems to us. Few buyers seem willing to pay the billion-dollar prices that the outright acquisition of a mature biotech would demand, so they explore other agreements that limit their control, but also limit their financial risk. Some of the small biotechs have come on the market because their cash is running out fast. With no products on the market to generate revenue, they have depended on the kindness of others, generally venture capital firms. While it is clear that the VC taps are still open for promising biotechs (see page 8), the pressure in the pipes isn’t what it used to be. And that has led to a number of small biotechs coming to the M&A market earlier than they had planned.

Bucking the general pattern toward frugal alliances and licensing deals, October’s largest biotech deal is a straightforward trend, Onyx Pharmaceuticals (NASDAQ: ONXX) is buying Proteolix, a company with a drug candidate for treating patients with relapsed and refractory multiple myeloma. ONXX develops and commercializes oral anticancer therapies designed to prevent cancer cell proliferation and angiogenesis while Proteolix is developing cancer drugs that work by blocking the effect of a protein complex that helps tumor cells survive and grow. This deal unites two companies focused on cancer therapeutics, enlarging ONXX’s drug development pipeline. Under terms of the deal, Onyx will make an upfront payment of $276.0 million and commits to making development and regulatory milestone payments up to $535.0 million, for a total deal value of $811.0 million. ONXX hopes to conserve cash by immediately committing to only one-third of the purchase price. Proteolix’s lead candidate, carfilzomib, is a proteasome inhibitor in mid-stage clinical trials for patients with relapsed and refractory multiple myeloma; it may also have applications for the treatment of breast cancer in conjunction with chemotherapy. It is estimated that sales of carfilzomib, if it reaches market, could bring in as much as $1.0 billion, placing it in blockbuster territory. So ONXX is getting something of a bargain on this transaction. ONXX raised $310.0 million in a securities offering in August, the proceeds of which should cover the upfront payment for this deal.

In the second largest deal, California’s Medivation (NASDAQ: MDVN) is granting a license to Astellas Pharma (T: 4503), Japan’s second largest pharmaceutical company, for an experimental prostate cancer drug, MDV3100. The deal is worth up to $765.0 million: Astellas will make an upfront payment of $110.0 million, and is committed to making as much as $655.0 million in development, regulatory and commercialization milestone payments.

Under the terms of this agreement, the two companies will jointly commercialize the drug in the United States, while Astellas will have responsibility for it outside of the country. Astellas hopes that the profits from this drug will be able to offset losses due to looming patent expiration on several of its own drugs.

Netherlands-based Prosensa is entering into an alliance with GlaxoSmithKline (NYSE: GSK) to develop and commercialize RNA-based therapeutics for Duchene Muscular Dystrophy (DMD). The alliance includes four RNA-based products to treat specific, but different, subpopulations of DMD patients. Under terms of the deal, GSK will make a $25.0 million upfront payment and up to $655.0 million in milestone payments if all four compounds are successfully developed. This deal gives GSK an exclusive worldwide license to develop and commercialize Prosensa’s lead compound, PRO051, intended to treat DMD by skipping exon 51 of the dystrophin gene. A phase 3 trial is projected to begin in 2010. The deal also gives GSK exclusive options to license three more RNA-based compounds targeting DMD exons.

SuperGen (NASDAQ: SUPG) is entering into a collaboration agreement with Glaxo to develop epigenetic treatments for cancer. Epigenetic targets regulate genes with mechanisms other than changes to the underlying DNA sequences. Under terms of the deal, GSK will pay $5.0 million upfront, including a $3.0 million equity investment in SUPG. It will also make up to $375.0 million in milestone payments. According to the outlines of the deal, SUPG is to develop drug candidates through to early clinical proof of concept, then GSK has the right to develop them further and market the resulting drugs on a global basis. This agreement gives GSK access to a novel kind of therapeutics for one of the most intensely fought over therapeutic areas; epigenetic processes are believed to play a central role in the development and progression of most cancers.

As if to rival Glaxo’s prodigious buying spree, Sanofi-Aventis (NYSE: SNY) announced three deals in the biotech sector during October. The company is paying as much as $538.3 million in upfront and milestone payments to acquire Fovea Pharmaceuticals, SA, a biopharma that specializes in diseases of the eye with three drugs in early-stage and mid-stage trials. This acquisition brings SNY into a new therapeutic area; the assets include three drug candidates and a technology platform. Investors in Fovea include Sofinnova Partners, Abingworth Management, Forbion Capital Partners, The Wellcome Trust, GIMV, Credit Agricole Private Equity and Vesalius BioCapital; they have raised $64.5 million in financing since 2005, and are most likely realizing a handsome return on investment from this deal.

Sanofi also entered into a licensing deal with Merrimack Pharmaceuticals, which is granting a license to develop MM-121, a human monoclonal antibody targeting solid tumors currently in phase 1 clinical trials. The total price is $530.0 million, including an upfront payment, along with development, regulatory and sales milestone payments. Royalties on sales of products are also stipulated. This transaction expands SNY’s pipeline of cancer drug candidates. Under terms of the deal, Merrimack will develop MM-121 through phase 2 proof of concept for each indication and SNY will be responsible for subsequent development. Some analysts opine that the price of this deal is high because most of the interesting biotechs in this field have already done exclusive deals or been acquired. The implicit claim, based on Econ 101, is that this limits supply and raises the asking price for what is left.

Wellstat Therapeutics Corp. is entering into a license agreement with Sanofi-Aventis to develop, manufacture and commercialize PN2034, an oral insulin sensitizer for treating Type II diabetes. The drug candidate is currently in phase 2 trials to reverse insulin resistance in the liver of diabetes patients. Under terms of the deal, SNY is committed to make up to $350.0 million in upfront and milestone payments. This license expands SNY’s development pipeline for metabolic drugs.

Vanda Pharmaceuticals (NASDAQ: VNDA), a biotech based in Rockville, Maryland, is granting an exclusive license to Novartis AG (NYSE: NVS) for commercializing and developing Fanapt, a schizophrenia drug. The drug is a mixed dopamine D2/serotonin 5HT2A receptor antagonist. Novartis sold the program to Vanda when it was still a private company; VNDA brought the drug through clinical trials, and in May 2009 it was approved for use in adults by the FDA. The license covers commercialization in the United States and Canada. Under terms of the deal, NVS will make an upfront payment of $200.0 million, and has committed up to $265.0 million in development and commercialization milestones. Royalties are also contemplated in the agreement. VNDA retains rights to develop and commercialize the drug outside the U.S. and Canada. Cowen and Company provided VNDA with financial advice on this deal.

Novartis was involved in another deal during October. England’s Heptares Therapeutics Ltd., a privately held biotech, is entering into an option agreement with Novartis Option Fund to use its proprietary technology to generate novel drugs against a G-protein-coupled receptor (GPCR) target of interest to NVS. Under terms of the deal, NVS will make upfront and milestone payments of up to $200.0 million. This deal gives NVS access to Heptares’ StaR technology, which is used to generate small molecule drugs against currently difficult or intractable GPCR targets in several disease areas. The technology enables the engineering of stabilized GPCRs, which would otherwise be refractory to structural studies and biochemical screening. Novartis is an existing investor in Heptares, having contributed £7.0 million to a syndicated fundraising in February 2009.

SurModix (NASDAQ: SRDX) is signing a license and development agreement with Roche Holding (VX: ROG) to develop and commercialize a sustained drug delivery formulation of Lucentis, a vascular endothelial growth factor. Under terms of the deal, Roche is paying a $3.5 million license fee and will pay up to $200.0 million in fees and milestone payments for developing and commercializing multiple products. The license involves SRDX’s proprietary biodegradable microparticles drug delivery system. This agreement provides Roche and its Genentech subsidiary with opportunities to develop additional compounds for treating ophthalmic diseases.

San Diego-based Gen-Probe (NASDAQ: GPRO), a biotech involved in molecular diagnostic testing products, is paying up to $85.0 million to acquire Prodesse, a Wisconsin-based leader in molecular testing for influenza and other infectious diseases. Prodesse currently sells three products in the U.S. and two in Europe. Under terms of the deal, GPRO will pay $60.0 million in cash and make up to an additional $25.0 million on achieving certain financial and regulatory milestones in 2010 and 2011.

Arigene (KOSDAQ: 067850), a manufacturer and marketer of medical equipment based in Korea, is entering the biotech field with its purchase of Trimeris (NASDAQ: TRMS), a biopharma engaged in commercializing a class of fusion inhibitors for antiviral drug treatments. Arigene plans to launch a tender offer of $3.60 per share, for a total deal value of $81.0 million. This yields a price to revenue multiple of 4.3x and a price to EBITDA multiple of 6.8x. The bid offers TRMS shareholders a 40% premium to the stock’s prior-day price. HCube Advisors, Inc. provided financial advice to Arigene.

Aceras BioMedical, LLC, an affiliate of Rodman & Renshaw Capital Group (NASDAQ: RODM), is selling Huxley Pharmaceuticals to BioMarin Pharmaceutical (NASDAQ: BMRN) for approximately $58.5 million. Established in August 2008, Huxley has a focus on therapeutic products for rare diseases of the nervous system. Under terms of the deal, BMRN will pay $15.0 million upfront, $7.5 million in certain regulatory milestone payments and up to $36.0 million in development and sales milestone payments. At the time of this announcement, Aceras owned 95% of Huxley’s stock. Huxley’s focus on rare diseases makes it a natural fit with BMRN’s expertise in ultra-orphan drug development. Huxley has rights to a proprietary treatment, 3,4-diaminopyridine (3,4-DAP), for Lambert Easton Myastheic Syndrome, a rare autoimmune disease with primary symptoms of muscle weakness. BioMarin expects peak sales of the drug in Europe at $100.0 million per year, so the purchase price seems like a bargain.

Cephalon (NASDAQ: CEPH) is paying $30.0 million for an option to buy BioAssets Development Corp., a Massachusetts-based biopharma engaged in novel spine indications for emerging and marketed biologic drugs. This deal gives CEPH an estate of intellectual property and scientific expertise that will allow it to evaluate its own program involving an antibody tumor necrosis factor inhibitor. The therapy is currently being investigated for the treatment of sciatica, a neuropathic inflammatory disease. An additional payment is to be made once the option is exercised.

OXiGENE (NASDAQ: OXGN) is paying $22.2 million to buy VaxGen (OTCBB: VXGN), a biopharma that owns a state-of-the-art biopharma manufacturing facility in South San Francisco. Under terms of the deal, OXGN will issue 15.6 million shares of stock; VXGN shareholders are to receive 0.4719 shares of OXGN common for each share of VXGN they hold. Upon closing, former VXGN shareholders will own 20% of the combined company. This deal brings with it VXGN’s $33.0 million in cash, which will help promote and advance the buyer’s therapeutic programs. Houlihan Lokey is providing a fairness opinion for OXGN on this deal; Aquilo Partners is providing VXGN with a fairness opinion, as well.

YM Biosciences (AMEX: YMI) is acquiring Australia’s Cytopia (ASX: CYT), a clinical-stage drug development company with a portfolio of promising cancer-related products, in a merger worth $10.5 million. This acquisition enhances the buyer’s cancer-related product pipeline, with some complementary drug candidates. Under terms of the deal, YMI will issue 7.2 million shares; each share of CYT stock to be exchanged for 0.0852 common shares of YMI. The purchase price is based on the volume-weighted average price (VWAP) of YMI shares for a recent 20 trading day period, and incorporates a 30% premium to CYT’s recent VWAP. After the transaction is completed, CYT shareholders will own about 11% of the combined company. Bloom Burton & Co. assisted YMI with certain elements of the transaction.

A Billion Here, A Billion There

Reuters recently featured an online article about a major slump in Biotechnology M&A that could have been written by Chicken Little, claiming that activity fell by 84.6% to $8.4 billion in the first three quarters of 2009. We returned to our databases so we could verify this claim and put it in context.

We compared the nine-month periods from January 1 through September 30 for the years 2005 through 2009. Our figures revealed the following: 2005 posted 88 deals worth $16.9 billion, 2006 posted 82 deals worth $23.2 billion, 2007 posted 98 deals worth $32.1 billion, 2008 posted 109 deals worth $79.4 billion and 2009 posted 131 deals worth $29.5 billion.
The big spike in dollar volume in 2008 was due in large part to the Roche’s $46.8 billion acquisition of Genentech. Eliminate that mega-deal, and the dollar amount falls back to $32.2 billion, nearly level with the 2007 figure. Even based on the raw figures, the dollar amount spent in 2009 has fallen by just 63%; if we take the Roche-Genentech deal out of the mix, the decline is just 8%. Then there is the little matter of the absolute dollar value that the Reuters article cited, just $8.4 billion (we wonder whether this figure omits the contigent parts of the payments). Their source, a big box data aggregator, underestimated the value of the market by a factor of 2.5x. That seems a serious disconnect with the market, but does illustrate the maxim that you get what your pay for.