150 Deals Announced Worth $93.7 Billion
In a year otherwise fraught with financial volatility, the Biotechnology industry outperformed many other sectors in the economy. Take stock prices, for example. Biotech heavy hitters Genentech (NYSE: DNA) and Amgen (NASDAQ: AMGN) both ended the year up by approximately 24%. Vertex Pharmaceuticals (NASDAQ: VRTX) climbed 31%, Celgene Corp. (NASDAQ: CELG) 20% and Gilead Sciences (NASDAQ: GILD) 11%. To be sure, other smaller biotechs took a hit, but the overall Dow biotech index was up 4% for 2008, which makes the industry look like a rock star amid the financial carnage that shook the markets up in 2008.
Where the Biotechnology industry really outshined the rest was in the merger and acquisition market. In terms of deal volume, it came in second with 150 deals after Medical Devices, which posted 166. But in terms of dollar volume, this single sector posted $93.7 billion, or more than two-fifths of all health care M&A dollars committed in 2008.
The top 40 biotechnology deals of 2008, listed in the table on page 11 of the January issue of The Health Care M&A Monthly, present a cross-section of this acquisition activity. Three observations may be made immediately. First is that the majority of buyers in this cohort are foreign, with three of four buyers headquartered outside of the United States. With the dollar relatively low against the euro, pound, Swiss franc and yen for most of the year, a window of opportunity was opened for foreign buyers who previously thought the U.S. market too expensive.
Second is that the majority of buyers are, indeed, the big pharma companies, with GlaxoSmithKline (NYSE: GSK) taking a very active interest in developing its biotechnology expertise through acquisitions. Only a handful of the large buyers are themselves biotech concerns.
Third is that 25 of the top 40 transactions, or 63%, involve licensing or collaboration agreements; by contrast, only 15 of these deals involved the outright acquisition of an entire company. These licensing and collaboration agreements are typically structured with a small upfront payment and/or licensing fee, and backloaded with much larger milestone or contingent payments to be made on reaching certain development, regulatory, commercialization or sales levels. In essence, the buyers have not paid $93.7 billion all at once, but they have committed themselves to paying that amount over time. It is a formula that seems especially well suited to the current chilly financial climate (and is illustrated by several of the biotech deals starting on page 12 of the January issue of The Health Care M&A Monthly).
Biotechnology recorded 13 billion-dollar deals worth a combined total of $76.2 billion. Among that group, 11 of the buyers were big pharma companies and two were themselves biotechs. GlaxoSmithKline announced three deals, Takeda Pharmaceutical Co. (T: 4502) announced three and Roche announced two. Naturally—given the size of the transactions they undertook—all of the buyers were publicly traded corporations.

Biotech Highlights For 2008
In July Roche Holding made an offer of $89.00 per share, or a total $43.7 billion, to acquire the remaining 44.1% of Genentech it does not already own. Perhaps the first biotech to become profitable, South San Francisco-based DNA has several products on the market and generates annualized revenue of $12.7 billion. Roche has several reasons to buy the rest of DNA. One is that 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. Price may be a sticking point, however. DNA stock rose to nearly $98.00 per share after the offer was made, but has since followed stock prices down to a current level of about $87.00. In view of DNA’s performance this year, Roche may have to offer up to $95.00 per share to jumpstart the deal. See our August 2008 issue for further discussion.
In April Japan’s Takeda Pharmaceutical Co. paid approximately $25.00 per share, or $8.8 billion, to acquire Millennium Pharmaceuticals, a Massachusetts-based pharma focused on cancer, inflammatory bowel and other inflammatory diseases. This acquisition proved to be a major step for Takeda in developing its oncology franchise. From a larger perspective, it illustrates how many of the large Japanese pharmaceutical companies are looking beyond the domestic market, which has not been overly promising, to make their investments abroad.
In October Eli Lilly & Co. (NYSE: LLY) paid $6.5 billion, or 10.4x revenue, to acquire ImClone Systems, a New York-based biotech that develops and commercializes a portfolio of treatments for cancer patients. The deal closed in later November. This deal is a prime example of the steps a relatively big pharmaceutical company feels it must take in order to retool itself as a biotechnology concern. The urgency that LLY felt is clearly reflected in the 10.4x revenue multiple that it paid for ImClone’s biotechn expertise and ( it should be said in favor of the high price) for the company’s valuable cancer drugs.
All three deals focus on the U.S. market and on expanding portfolios and pipelines of cancer drugs, which are potentially capable of generating high revenue streams. And as noted earlier, it is the big pharma companies that are leading the biotech M&A market.