Biotech And Pharma Outspend All Other Sectors
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Rarely have we seen a month in the health care merger and acquisition market where the financial results were as lopsided as May’s. Based on figures currently available, the four sectors of the health care technology segment account for 99.5% of the $8.06 billion spent on transactions during the month, with just one-half of one percent of the total amount going to the nine sectors of the health care services segment. Narrowing our focus further, two sectors combined, Biotechnology and Pharmaceuticals, account for $7.53 billion, or 93% of all health care M&A dollars. If such a trend were to continue indefinitely, we might feel compelled to rebrand this newsletter with a new moniker, The Biopharma M&A Monthly.
Biotechnology produced 16 deals in May worth a combined total of $5.3 billion, and while Pharmaceuticals also posted 16 deals, their combined value was just $2.2 billion. For reasons noted below, the biotech industry is in a buyer’s market for the near term. Let’s first take a look at the M&A activity for May. There were 12 buyers: Boehringer Ingelheim GmbH, NeoStem (AMEX: NBS), Novartis AG (NYSE: NVS) and Takeda Pharmaceutical Co. (T: 4502) each announced two deals. In only four of the 16 deals, or just 25% of the total, was the buyer another biotech; fully three-quarters of the buyers were big pharma companies.
Five of the deals involved the outright acquisition of a company or division thereof; four involved licensing agreements; and seven involved collaboration agreements to develop new drugs. Among the sellers, Exelixis (NASDAQ: EXEL) announced two licensing deals. And, to no one’s surprise, fully one-half of the deals targeted businesses that are actively engaged in the therapeutic area of cancer. In fact, the top three biotech deals of May, in terms of price paid, all involve oncology.
In the largest deal of May, Austria’s EBEWE Pharma is selling its injectable generic cancer drug business to Novartis for about $1.3 billion. Novartis is pursuing this acquisition for three reasons: to diversify away from its brand-name drugs, to enlarge its oncology franchise and to strengthen its Sandoz generic unit. Excluded from this deal is EBEWE’s injectable neurological products business. The deal is being financed from NVS’ existing cash reserves and cash flow. Novartis also announced a smaller cancer transaction in May. In a deal worth up to $68.0 million, CombinatoRx (NASDAQ: CRXX) is entering into an oncology collaboration with NVS that utilizes CRXX’s proprietary Chalice analyzer software to discover compounds that can be used to treat cancer. Under terms of this deal, NVS is to make a $4.0 million upfront payment, at least two annual research support payments of $3.0 million each and up to $58.0 million in certain milestone payments.
As part of a larger agreement with Sanofi-Aventis (NYSE: SNY), Exelixis is licensing XL 147 and XL 765, two phase I cancer drug candidates, and initiating a broad collaboration for discovering inhibitors of phosphoinoditide-3 kinase (PI3K). Activation of the PI3K pathway is common in tumor formation, and exploiting it may give rise to novel cancer treatments. The entire transaction is valued at $1.161 billion. Under terms of the deal, SNY is to pay $141.0 million in upfront fees, $21.0 million in research funding over three years and over $1.0 billion in milestone payments. Royalties on sales are also contemplated in the deal. In effect, this transaction adds a set of drug candidates to SNY’s development pipeline in the hope that revenue from successfully developed and commercialized drugs will offset the loss of revenue from its existing drugs going off patent.
In the month’s third-largest biotech deal, Johnson & Johnson (NYSE: JNJ) is paying $43.00 per share, or $970.0 million, to acquire Cougar Biotechnology (NASDAQ: CGRB). Based in Los Angeles, Cougar is a development-stage biopharma that acquires and develops cancer therapeutics. This bid to expand JNJ’s biotech oncology portfolio offers CGRB shareholders a 16% premium to the stock’s prior-day price. CGRB’s areas of therapeutic interest include not only prostate cancer, but breast cancer and multiple myeloma. CGRB will become part of JNJ’s Ortho Biotech Oncology Research and Development, a unit of Center Research & Development. A drug similar to CGRB’s abiraterone acetate for prostate cancer is being developed by Medivation (NASDAQ: MDVN); it also blocks testosterone receptors. So this may boil down to an old-fashioned horse race.
It is with the fourth-largest transaction that we come to a biopharma as the buyer. In a deal worth up to $540.0 million, Celgene (NASDAQ: CELG) is entering into a strategic global oncology alliance with GlobeImmune to discover, develop and commercialize multiple product candidates based on targeted molecular immunology. Under terms of the deal, CELG will make a $40.0 million upfront payment, which includes equity. It is also committed to making up to $500.0 million in development, regulatory and commercial milestone payments. Further, CELG receives an exclusive option to all GlobeImmune’s oncology programs, including GI-400, a Tarmogen technology-based product currently in phase II pancreatic cancer studies. GlobeImmune is to conduct early development of the candidates, while CELG will have the option to obtain an exclusive worldwide license to develop and commercialize these immunotherapy product candidates.
In a transaction that is worth as much as $370.0 million, Oxford BioTherapeutics (OBT) is crafting an alliance with GlaxoSmithKline (NYSE: GSK) to discover and develop new therapeutic antibodies for primary, metastatic and recurring forms of cancer. Glaxo is making an undisclosed upfront payment and up to $370.0 million in milestone payments. Under terms of the agreement, Glaxo will develop drugs against selected targets identified by OBT. OBT will also develop one antibody through to clinical proof of concept, at which point GSK will have an option to license it. This deal thus expands GSK’s oncology franchise. For OBT’s part, the alliance furnishes it with monetary resources that in a more financially flush time would have come from its venture capital backers.
Boehringer Ingelheim announced two biotech deals in May. In the larger of the two, one worth up to $354.0 million, Exelixis is entering into a collaboration agreement with Boehringer to discover, develop and commercialize autoimmune therapies. The consideration consists of $15.0 million in an upfront payment and up to $339.0 million in milestone payments. Under terms of the deal, the two companies are to share responsibility for discovery activities while Boehringer will have sole responsibility for all subsequent preclinical, clinical, regulatory, commercial and manufacturing activities. The collaboration is focused on the discovery of sphingosine-1-phosphate type 1 receptor agonists, which have shown promise in preclinical models of transplant and autoimmune diseases, as well as clinical benefits in multiple sclerosis patients. In the second deal, another collaboration agreement, DeveloGen AG is partnering with Boehringer to develop treatments for diabetes, obesity, metabolic syndrome and other insulin-resistance associated disorders. The addition of DeveloGen’s initial compounds, indicated for type 2 diabetes and obesity, will expand Boehringer’s pipeline of metabolic-oriented drugs. Boehringer is paying €7 million in an upfront payment and making up to €237 million in milestone payments, for a total of nearly $346.0 million.
Celldex Therapeutics (NASDAQ: CLDX) is paying $94.5 million to acquire CuraGen (NASDAQ: CRGN), a biopharma that develops novel therapeutics for treating cancer. This acquisition adds 11 oncology-focused antibodies to CLDA’s immunotherapy platform. One of the antibodies, CR101 for breast cancer and melanoma, is in a phase II study. CRGN is expected to have a cash balance of at least $54.5 million at closing, which reduces the effective purchase price to $40.0 million. CLDX was advised by WBB Securities, LLC while CRGN was advised by Piper Jaffray & Co.
In a bid to further enlarge its oncology franchise, Takeda Pharmaceutical Co. is paying $75.0 million to acquire IDM Pharma (NASDAQ: IDMI), a biopharma that develops cancer products that either destroy cancer cells or prevent tumor recurrence. Priced at $2.64 per share, this deal offers IDMI shareholders a 55% premium to the stock’s prior-day closing price. This gives Takeda IDMI’s Mepact (mifamurtide), the first treatment approved for osteosarcoma in over 20 years. In yet another move to bolster its biotech offerings, Takeda is entering into an agreement to market and distribute Novartis’ Vaxem-Hib, a vaccine for the prevention of infection caused by haemophilus influenza type B (Hib). It is estimated that every year in Japan more than 450 children under the age of five are affected by Hib meningitis. Takeda is paying an upfront fee of about $1.0 million, and will make unspecified milestone and royalty payments. In a small way, this deal provides NVS with entry into the Japanese vaccine market, which is estimated at $640.0 million and is expected to grow.
Near-Term Drivers Of Biotech M&A
The credit crunch continues to have an impact on the Biotech industry, with the lack of capital creating a surfeit of companies that will have to sell themselves or face going out of business. Ernst & Young released a report which included a “survival index” for biotechs. It shows that 162 publicly listed biotechs, or 44% of the total, had less than a year’s worth of cash on hand at end-2008, which is up from 25% from a year earlier. This jump is due in large part to the relative absence of venture capital and private equity funding during the last year. Even though not every cash-strapped small biotech will find a buyer in this shake-out, investors are viewing the biotech industry favorably. The E&Y report also notes that for the first time ever, the U.S. industry reached aggregate profitability in 2008. As the industry, and individual companies, become more profitable, purchase prices should rise. This may induce some buyers to take the plunge sooner than later, while prices are still relatively low.
Other Biotech News
The Federal Trade Commission is taking legal action to block the proposed $3.1 billion acquisition of Talecris Biotherapeutics by Australia’s CSL, Ltd. (ASX: CSL), announced last August. Having seen the number of players in the blood plasma industry shrink from 13 in 1990 to five at present, the FTC wants to prevent further consolidation, which it views as anticompetitive. Talecris, CSL and market leader Baxter International (NYSE: BAX) already control 83% of the U.S. market. The FTC sees that as verging on monopoly, which could limit supply, drive up prices and prevent the entry of new players into the industry. Both CSL and Talecris intend to pursue the merger. Stay tuned for round three.
Amgen (NASDAQ: AMGN) recently exercised its option to obtain an exclusive license to Cytokinetics’ (NASDAQ: CYTK) cardiac contractility program. As stipulated in the original 2007 agreement, AMGN is paying a nonrefundable exercise fee of $50.0 million, and has assumed responsibility for the development and commercialization of CK-1827452 and related compounds. AMGN paid $75.0 million for the original option, and is liable for up to $600.0 million in milestone payments if the drug pans out.
Sanofi-Aventis is committing €200.0 million to convert its factory in Vitry-sur-Seine, France, for use in developing biotechnology products. This investment will create the first cell culture biotechnology platform of the group to produce monoclonal antibodies as early as 2012. As part of its overall plan, SNY plans to open the doors of this facility to small biotechnology companies, with the goal of finding partners for the research and development of new, harder-to-copy biotech products.
Neuropharm Group plc (LSE: NPH), a British biotech specializing in autism, anticipates signing a deal for its lead drug candidate NPL-2008 sometime during the fall of 2009. NPL-2008 aims to treat autism in children and adults by increasing serotonin levels in the brain. The news that NPH was in talks with a third-party pharmaceutical company was enough to send its stock up 38%. NPH is designing a second phase III study which it hopes will be carried out with this new partner.
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