Biotechnology mergers and acquisitions
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NATURE BIOTECHNOLOGY VOLUME 16 SUPPLEMENT 1998 61 FINANCE community?” and, more importantly, if they can go public, “How can public companies sustain investor confidence and build value?” The pharmaceutical industry has recently provided the financial community with a business model based on mergers and acqui- sitions that has received widespread support. While the biotechnology industry does not have the same reasons for entering into merg- er and acquisition activity, public market investors are demanding risk-diversification strategies from biopharmaceutical compa- nies. Investors are concentrating their hold- ings in companies with “critical mass,” requiring them to pursue M&A as a requisite to future financing and liquidity. The state of the investor- biotechnology union Today, there are approximately 300 public and 1,000 private biopharmaceutical compa- nies in the US alone. In Europe, there are 32 public companies and 260 private compa- nies. Since 1991, over $29 billion has been raised by the industry to fund research from public market investors. So far, however, only a dozen companies have crossed the billion- dollar market value threshold, and even fewer have generated profits from product sales. What can we say about the way the market views biotechnology’s potential to produce more of these blockbuster billion-dollar drugs? In 1997, 16 biopharmaceutical com- panies went public, raising approximately $500 million, and gaining an average of 14.9% during the year, compared to the S&P 500 index price appreciation of 31.7%. In contrast, 27 biopharmaceutical companies completed follow-on offerings, raising $1.4 billion, typically for later-stage products. From these data, it has become clear that companies with late-stage clinical stories or products nearing market launch such as During the last two decades, the biotechnology revolution has result- ed in phenomenal advances in the understanding and treatment of many diseases. While replacement proteins such as erythropoietin and tissue plasminogen activator were the first products to validate the promise of the biotechnology indus- try, the industry now uses everything from monoclonal antibodies to small molecules to create blockbuster products for the biophar- maceutical industry. To date, this industry has produced 75 commercialized products, and 35 more are slated for FDA approval in 1998. Both the breadth and the depth of the approaches that biotechnology has produced are possible because of the inestimable amount of capital that has poured into this sector over the last 20 years. However, there are two seem- ingly contradictory trends in the financial markets at present that, we believe, biotech- nology companies must successfully reconcile if they are to continue to raise money. On the one hand, public investors are becoming more savvy about the risks associat- ed with biotechnology, and are demanding more performance for their investment dol- lars. At the same time, a new, scientifically educated class of venture capitalists has emerged whose enthusiasm for biotechnology has spawned an unprecedented amount of venture capital investment in this industry. While there are more companies than ever being funded as startups, the bar has been raised for what investors are willing to pay when taking these companies public. Since venture capitalists typically need to take these startups public to raise additional capital and to recoup their investments, the questions before the biotechnology industry are, “How can small private companies make the transition to the initial public offering without disappointing the venture capital MedImmune (Gaithersburg, MD), COR (S. San Francisco, CA), and Aviron (Mountain View, CA) are get- ting the lion’s share of the funding. Earlier stage and “platform” technol- ogy companies such as Corixa (Seattle, WA), Hyseq (Sunnyvale, CA), and Progenitor (Columbus, OH) generally are not being favorably perceived by the market because investors are skeptical that the product technologies or approaches offered by these types of compa- nies will generate near-term revenues or be sufficient to attract the premier pharmaceuti- cal partners. As a result, most of these compa- nies are trading below their IPO prices. There appears to be no shortage of ven- ture capital flowing into the biopharmaceuti- cal sector, with $950 million invested in 1997, a 46% increase over 1996. Most of this was directed toward novel technologies and tools that can capitalize on the genomics revolu- tion’s promise to reduce the time, expense, and risk of conventional drug discovery. 1 Venture capitalists are pushing biotechnolo- gy with the tools of information technology: miniaturization, speed, software, and instru- mentation. Yet most of these companies will not reach the scale and integration required to be publicly funded. Sustaining investor expectations With the failure of most companies to deliver products to the clinic, or even to reach the critical mass necessary for public funding, investors are reexamining the basic premise of biotechnology’s attraction for the finan- cial community: Biotechnology has always promised that it could develop new products that are financially meaningful and that it could reduce the risks and expenses associat- ed with such product development. In the case of billion-dollar biotechnology drugs, this has proven to be true, but for the vast majority of companies, drug development has been as predictable as playing roulette. Think back for a moment to the experiences of Synergen (Boulder, CO), ImmuLogic (Waltham, MA), AutoImmune (Lexington, MA), and countless others that have battled the odds. With more than 100 public compa- nies in early human trials, how is the investor Biotechnology mergers and acquisitions Consolidation strategies from within biotechnology are necessary to preserve the future financing of the industry. Farah H. Champsi Farah H. Champsi is managing director and head of life sciences investment banking at BancAmerica Robertson Stephens, 555 California Street, San Francisco CA 94104. The views and opinions are those of the author and do not necessarily reflect the views and opinions of BancAmerica Robertson Stephens. While there are more companies than ever being funded as startups, the bar has been raised for what investors are willing to pay when taking these companies public. © 1999 Nature America Inc. • http://biotech.nature.com © 1999 Nature America Inc. • http://biotech.nature.com
Transcript of Biotechnology mergers and acquisitions
NATURE BIOTECHNOLOGY VOLUME 16 SUPPLEMENT 1998 61
FINANCE
community?” and, more importantly, if theycan go public, “How can public companiessustain investor confidence and build value?”
The pharmaceutical industry has recentlyprovided the financial community with abusiness model based on mergers and acqui-sitions that has received widespread support.While the biotechnology industry does nothave the same reasons for entering into merg-er and acquisition activity, public marketinvestors are demanding risk-diversificationstrategies from biopharmaceutical compa-nies. Investors are concentrating their hold-ings in companies with “critical mass,”requiring them to pursue M&A as a requisiteto future financing and liquidity.
The state of the investor-biotechnology unionToday, there are approximately 300 publicand 1,000 private biopharmaceutical compa-nies in the US alone. In Europe, there are 32public companies and 260 private compa-nies. Since 1991, over $29 billion has beenraised by the industry to fund research frompublic market investors. So far, however, onlya dozen companies have crossed the billion-dollar market value threshold, and even fewerhave generated profits from product sales.
What can we say about the way the marketviews biotechnology’s potential to producemore of these blockbuster billion-dollardrugs? In 1997, 16 biopharmaceutical com-panies went public, raising approximately$500 million, and gaining an average of14.9% during the year, compared to the S&P500 index price appreciation of 31.7%. Incontrast, 27 biopharmaceutical companiescompleted follow-on offerings, raising $1.4billion, typically for later-stage products.
From these data, it has become clear thatcompanies with late-stage clinical stories orproducts nearing market launch such as
During the last two decades, thebiotechnology revolution has result-ed in phenomenal advances in theunderstanding and treatment ofmany diseases. While replacementproteins such as erythropoietin andtissue plasminogen activator werethe first products to validate thepromise of the biotechnology indus-try, the industry now uses everything frommonoclonal antibodies to small molecules tocreate blockbuster products for the biophar-maceutical industry. To date, this industry hasproduced 75 commercialized products, and35 more are slated for FDA approval in 1998.
Both the breadth and the depth of theapproaches that biotechnology has producedare possible because of the inestimable amountof capital that has poured into this sector overthe last 20 years. However, there are two seem-ingly contradictory trends in the financialmarkets at present that, we believe, biotech-nology companies must successfully reconcileif they are to continue to raise money.
On the one hand, public investors arebecoming more savvy about the risks associat-ed with biotechnology, and are demandingmore performance for their investment dol-lars. At the same time, a new, scientificallyeducated class of venture capitalists hasemerged whose enthusiasm for biotechnologyhas spawned an unprecedented amount ofventure capital investment in this industry.While there are more companies than everbeing funded as startups, the bar has beenraised for what investors are willing to paywhen taking these companies public.
Since venture capitalists typically need totake these startups public to raise additionalcapital and to recoup their investments, thequestions before the biotechnology industryare, “How can small private companies makethe transition to the initial public offeringwithout disappointing the venture capital
MedImmune (Gaithersburg, MD),COR (S. San Francisco, CA), andAviron (Mountain View, CA) are get-ting the lion’s share of the funding.Earlier stage and “platform” technol-ogy companies such as Corixa(Seattle, WA), Hyseq (Sunnyvale,CA), and Progenitor (Columbus,OH) generally are not being favorably
perceived by the market because investors areskeptical that the product technologies orapproaches offered by these types of compa-nies will generate near-term revenues or besufficient to attract the premier pharmaceuti-cal partners. As a result, most of these compa-nies are trading below their IPO prices.
There appears to be no shortage of ven-ture capital flowing into the biopharmaceuti-cal sector, with $950 million invested in 1997,a 46% increase over 1996. Most of this wasdirected toward novel technologies and toolsthat can capitalize on the genomics revolu-tion’s promise to reduce the time, expense,and risk of conventional drug discovery.1
Venture capitalists are pushing biotechnolo-gy with the tools of information technology:miniaturization, speed, software, and instru-mentation. Yet most of these companies willnot reach the scale and integration requiredto be publicly funded.
Sustaining investor expectationsWith the failure of most companies to deliverproducts to the clinic, or even to reach thecritical mass necessary for public funding,investors are reexamining the basic premiseof biotechnology’s attraction for the finan-cial community: Biotechnology has alwayspromised that it could develop new productsthat are financially meaningful and that itcould reduce the risks and expenses associat-ed with such product development.
In the case of billion-dollar biotechnologydrugs, this has proven to be true, but for thevast majority of companies, drug developmenthas been as predictable as playing roulette.Think back for a moment to the experiences ofSynergen (Boulder, CO), ImmuLogic(Waltham, MA), AutoImmune (Lexington,MA), and countless others that have battledthe odds. With more than 100 public compa-nies in early human trials, how is the investor
Biotechnology mergers and acquisitionsConsolidation strategies from within biotechnology are necessary to preserve the future financing of the industry.
Farah H. Champsi
Farah H. Champsi is managing director andhead of life sciences investment banking atBancAmerica Robertson Stephens, 555California Street, San Francisco CA 94104. Theviews and opinions are those of the author anddo not necessarily reflect the views and opinionsof BancAmerica Robertson Stephens.
While there are more companies thanever being funded as startups, the bar has been raised for what investorsare willing to pay when taking thesecompanies public.
© 1999 Nature America Inc. • http://biotech.nature.com©
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to decide which will deliver on biotechnolo-gy’s promise? All these companies have marketvalues of less than $300 million and all areusing technologies such as antibodies, smallmolecules, peptides, gene therapy, or vaccinesagainst HIV, cancer, and inflammatory andcardiovascular diseases. Most investors cannotdifferentiate between most of these compa-nies, and consequently, they ignore them untilmeaningful phase III data are available.
Furthermore, it is not clear whether thepath for a biopharmaceutical company todayis getting easier, now that the focus of drugtherapy has shifted away from treating symp-toms to understanding the genetic basis ofdisease. Many of the new companies inbiotechnology are advancing the tools andtechniques required to conduct gene-baseddrug discovery. But it is far more difficult todevelop therapeutics based on genomics thanon conventional approaches. The challenge oflinking diseases to gene targets, then linkinggene targets to therapeutic targets, and thenvalidating therapeutic targets for final selec-tion as clinical candidates requires whole newapproaches to drug discovery. Yet there is noquestion that genetics is the key to unravelingtherapeutics to many underserved diseases.
How, then, will the industry sustain itselfand ensure the support of its public investors,when it appears that the more we learn, theless we can predict about the challenges ofdrug discovery and development?
Product mergers and acquisitionsGiven the burgeoning number of startupsand the diminishing amount of public dol-lars, the future of the industry will depend onthe survival of the fittest. Only those compa-nies that can deliver on the goals of return oninvestment, diversification of risk, and devel-opment of critical mass to realize meaningfulfinancial upside will remain.
It is inevitable that the total number ofpublic companies will diminish. Undoubtedly,some of this will occur through outright fail-ures. However, a more favorable outcome forthe industry can be achieved through anindustry-wide acceptance of the need for con-solidation and the strategic negotiation ofbiotech-to-biotech mergers and acquisitions.Such historical impediments to M&A activityas demands for inflated prices, wounded egos,geographic barriers, and increased burn rateshould be discarded in favor of building long-term value and reducing risk.
So far, product-based and clinical trial stagecompanies have been reluctant to conductmergers and acquisitions, primarily because ofconcerns about diluting their focus or riskingequity dilution to acquire products that haveuncertain potential. However, we believe thesecompanies are precisely the ones that need touse mergers and acquisitions strategies for riskdiversification through development of com-
plementary products and technologies. Successstories that have taken the initiative in thisregard include Alkermes (Cambridge, MA)and Chiron (Emeryville, CA), and morerecently, younger companies such as Allelix’s(Mississauga, Canada) 1997 acquisition of pri-vately held Trophix (S. Plainfield, NJ) to gainaccess to more neuroscience product candi-dates, and Triangle’s (Durham, NC) purchaseof Avid (Philadelphia, PA) later in that year toget additional anti-HIV compounds. In 1998,Neurocrine (San Diego, CA) announced thepurchase of private Northwest Neurologic(Portland, OR) to gain additional central ner-vous system technology.
For product-based companies facing dif-ficult financing markets, finding mergerpartners or acquisition candidates is a way tobreathe new life into the company. Usingtrades of stock-for-stock to finance thesedeals, especially during times when stocks aredepressed and investors are apathetic, enablescompanies to build long-term value costeffectively. For companies that win the sup-port of investors, the opportunity for a merg-ers and acquisitions activity can be used as acatalyst to raise additional capital more easily,as was demonstrated by Shire Pharmaceuti-cals (Hampshire, UK), which recently com-pleted a successful NASDAQ initial publicoffering based on its acquisition ofPharmavene (Rockville, MD) and RichwoodPharmaceuticals (Florence, KY).
Platform to platformThe second area of biotechnology in whichmergers and acquisitions activity is alreadyproving to be important is in platform com-panies seeking other platforms to enhancetheir value to the pharmaceutical industry.Since most major pharmaceutical companieswant a comprehensive, reproducible solutionto their urgent need for new drug targets, onealternative is to merge these companies inorder to create the value sought by large phar-ma. The ideal biopharmaceutical companywill be able to deliver a lead compound basedon a rational, integrated approach of gene dis-covery and target validation, combining thebest of biology, chemistry, and informatics.
It is clear that the savviest platform compa-nies have already figured out the benefits of thisstrategy. In late 1996, ChiroScience(Cambridge, UK) acquired privately heldDarwin (Seattle, WA), in an effort to marry itschemistry skills with genomics. In 1997,Millennium (Cambridge, MA) picked upChemGenics (Cambridge, MA) to gain fungalbiology and chemistry expertise and Arris (S.San Francisco, CA) merged with Sequana (LaJolla, CA) to integrate genomics with its drugdiscovery capabilities. In addition, we sawother companies such as Incyte (Palo Alto,CA) and Perkin Elmer (Norwalk, CT) rein-vent themselves by moving aggressively into
new technologies to remain competitive inthe genomics area by acquiring Synteni(Fremont, CA) and Molecular Informatics(Santa Fe, NM), respectively. In 1998, thepace has accelerated, with numerous discus-sions underway. Pharmacoepia’s (Princeton,NJ) acquisition of MSI (San Diego, CA), thefirst of several platform mergers that shouldoccur this year, combines its establishedchemistry platform with software capability.
While the true synergies of many of thesetransactions still remain to be realized, it isobvious that investors are generally willing tobe convinced and will applaud these combina-tions, provided they appear to build on corecompetencies, increase revenue potential sig-nificantly, and reduce the risk of failure,because all of these activities are seen as waysto accelerate the path to building large, prof-itable companies.
This message has not been lost on privatebiopharmaceutical companies. In the pastyear, for example, Tularik (S. San Francisco,CA) acquired Amplicon (Stony Brook, NY),PowderJect (Oxford, UK) acquired Auragen(Middleton, WI), and Exelixis (S. SanFrancisco, CA) helped form and acquired apiece of German-based Artemis. Each of thesetransactions was designed to increase thelong-term value of the companies toinvestors. PowderJect is the most recent bene-ficiary of this strategy, with its $300+ milliondeal on Auragen’s technology with GlaxoWellcome (London) announced last month.PowderJect’s stock price increased 61% fol-lowing its announcement that it was collabo-rating on several DNA vaccines with Glaxo.
ConclusionsAs the biotechnology industry moves furtherinto the uncharted territory of drug discovery, itmust make convincing arguments for investorsto follow. While public investors no longer havethe confidence to routinely invest in emerginglife sciences companies, we believe those com-panies that can show the determination to pro-duce either multiple therapeutic product “quiv-ers” or integrated platform solutions for drugdiscovery will still attract funding.
Over the next several years, we believe M&Aactivity will be a crucial strategy for accom-plishing these goals. Since the IPO market willnot accept companies that can not compete atthis level, it will be up to the venture capitalcommunity and hardened institutionalinvestors to instigate mergers and acquisitionsactivity between private biotechnology compa-nies as well as public biotechnology companies.
If these plans are successfully implement-ed, we believe the biopharmaceutical industrycan look forward to success in R&D throughrisk diversification and mainstream accep-tance in the public markets for its pioneeringefforts into new products, genomics, andother novel drug discovery technologies. ///
© 1999 Nature America Inc. • http://biotech.nature.com©
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