16 | ACQUISITIONS MONTHLY | June 2010 aqm-e.com

SECTOR REPORTSFOCUS ON BIOTECH

Bleary outlookfor biotech

Big pharmaceutical companies and smaller innovators are looking to collaborate fruitfully as thedownturn rapidly changes biotech's business model. Deborah Cust reports

June 2010 | ACQUISITIONS MONTHLY | 17aqm-e.com

As scientists marvel at thecreation of Cynthia, theworld’s first syntheticlife form, financiers aredespairing at the peren-

nial funding issues besetting devel-opers of pioneering biotech drugs.The historic biotech model is underthreat as a dearth of available fund-ing and the bleak outlook for IPOsmeans businesses previously relianton such sources of capital seek freshsolutions.

“Europe has more problems thanthe US in that it created far toomany biotech companies” saysSimon Turton, managing director atprivate equity firm Warburg Pincus,pointing to government supportprogrammes that have led to "theestablishment of a large number offirms with talent and technologydissipated rather than concentrat-ed.”

The situation is different in the more cash-driven US, says GilBar-Nahum, senior vice president atJefferies. “In the US, a biotech firmmight raise US$50m-US$60mbecause the market is open and theyknow they will have need of it in thefuture so they behave proactively,whereas in Europe firms have a ten-

dency to raise money when theyneed it and are more reactive.”

At the same time the large drug companies are desperate fornew products and looking to getinvolved in the development processat an earlier stage. Historically,biotechs have tended to take com-pounds through phase II trialsbefore out-licensing the product to abig pharmaceutical group to con-duct the expensive phase III tri-alling.

That has now changed says JamesGubbins, partner at law firm Morri-son & Foerster. “Biotech firms aremore likely to work on promisingpre-clinical trials but nothingbeyond phase I," he says. "You could not IPO many of the companies now because they are far too early stage. Investors arelooking for nearer term revenue and this has driven activity in thesector down an M&A path ratherthan IPO.”

For many M&A will be the onlyexit route. So the sector increasinglylooks as if it will replicate technolo-gy sector models where businessestend to get bought rather than float. “Many will need to work out what the get-out is before they

get into the market, which is not abad strategy,” says Paul Claydon,another Morrison & Foerster partner.

Claydon adds: “There has not beena nastier place to be recently than anAIM-listed biotech company as thereis no cash available. There have beenattempted mergers and take pri-vates in order to tide firms over untilcash is available but unless the par-ticular company has a clear USP it istough.”

Clearly for a significant number,the current market will prove to bejust too challenging. But, in whatwas perhaps a watershed for the UKmarket, the directors of autism spe-cialist Neuropharm recently woundthe company up with £6m of cashstill on its books. Failed takeovertalks, product disappointments andthe costs associated with both day today operation and its AIM-listing leftthe management with nowhere togo.

Others could follow this brutal liq-uidation route. 44% of those sur-veyed by Deloitte recently believedthat up to two fifths of existingbiotech businesses will not exist infive years time as a result of thedownturn.

SECTOR REPORTS

FOCUS ON BIOTECH

TOP 20 GLOBAL BIOTECH DEALS 1 JAN 2008 - 20 MAY 2010

Ranking valueRank date Status Target Target advisers Acquirer Acquirer advisers (US$m)

21/07/2008 C Genentech Inc Goldman Sachs & Co Roche Holding AG Greenhill & Co, LLC 46694.84

06/10/2008 C ImClone Systems Inc JP Morgan/Morgan Stanley/Citi Eli Lilly & Co UBS Investment Bank/Deutsche Bank AG 6076.01

22/07/2009 C Medarex Inc Goldman Sachs & Co Bristol-Myers Squibb Co JP Morgan 1924.56

07/04/2008 C LifeCell Corp Merrill Lynch Kinetic Concepts Inc JP Morgan 1717.09

21/05/2009 C Cougar Biotechnology Inc Bank of America Merrill Lynch Johnson & Johnson – 947.45

02/07/2009 C Elan Corp PLC Citi Johnson & Johnson – 885.00

12/10/2009 C Proteolix Inc Onyx Pharmaceuticals Inc Lazard 851.00

27/07/2009 C Shantha Biotechnics Pvt Ltd Bryan Garnier & Co Sanofi Pasteur SA – 783.59

04/02/2008 C Whatman PLC Goldman Sachs & Co/Numis GE Healthcare Life Sciences UBS Investment Bank 756.40

Securities Ltd

07/12/2009 C Gloucester Pharmaceuticals Inc JP Morgan Celgene Corp – 640.00

23/12/2009 C Corthera Inc Credit Suisse Group Novartis AG – 620.00

14/09/2009 C ESBATech AG Morgan Stanley Alcon Inc – 589.00

03/07/2008 C Jerini AG Credit Suisse Group Maia Elfte Deutsche Bank AG/Morgan Stanley 529.65

09/06/2008 C Third Wave Technologies Inc Merrill Lynch/XMS Capital Hologic Inc Goldman Sachs & Co 525.57

Partners LLC

25/07/2008 C Acambis PLC Goldman Sachs & Co/JP Morgan Sanofi Pasteur SA Morgan Stanley 518.68

Cazenove/Piper Jaffray Cos

15/04/2009 C BiPar Sciences Inc Sanofi-Aventis SA – 500.00

28/09/2009 C Crucell NV Barclays Capital Jhc Nederland BV – 443.82

10/03/2010 C Facet Biotech Corp Centerview Partners LLC Abbott Laboratories – 443.24

16/09/2009 C Axygen Biosciences Deutsche Bank AG Corning Inc Lincoln International 400.00

02/11/2009 C Athenix Corp Bayer CropScience AG – 400.00

24/11/2008 C Omrix Biopharmaceuticals Inc UBS Investment Bank Johnson & Johnson – 387.35Source: Thomson Reuters C=Completed, P=Pending, U=Unconditional

“Accessingcapital hasproveddifficult andthis haschangedinvestmentstyle. We areseeing project-based dealswheredevelopmentprogrammesare beingmanaged onthe basis of avirtualcompanywhereeverything iscontracted outand funds aremetered in asmilestones arehit.” Stephen Bunting

18 | ACQUISITIONS MONTHLY | June 2010 aqm-e.com

SECTOR REPORTS

FOCUS ON BIOTECH

What's more executives workingin the industry are even more pessimistic, believing as many astwo thirds will go in that time. Athird of all respondents predicted anoutflow of scientists from smallercompanies to larger, cash-rich play-ers.

An IPO is unlikely to be the ulti-mate objective of a biotech develop-er in the future. Companiescurrently attracting funding do soon a project basis, and keep head-count low by outsourcing muchwork.

“They would have no plans todevelop an infrastructure with aview to an IPO” says Morrison &Foerster’s Gubbins. “Big pharmawant development they can push topipeline with lower costs and lowerrisk.” That suggests that being takenover by larger pharma should be thegoal of many.

Stephen Bunting, managing partner at life sciences investor Abingworth, agrees. “Accessing capital has proved difficult and thishas changed investment style. Weare seeing project-based deals wheredevelopment programmes are beingmanaged on the basis of a virtualcompany where everything is con-

tracted out and funds are metered inas milestones are hit.”

Bunting adds: “There is currentlyquite a lot of interest in start-ups andearly stage which may be surprisinggiven the current environment.With early stage, there is generally alimited amount of capital required atthe outset. You can add significantvalue without the need for raisingmajor amounts of capital.”

The downturn has provided agreat opportunity for smaller companies to look at how they can reduce costs or improve the efficiency of larger and less agile customers. The large pharma-ceutical companies are under moreand more cost pressure and aretherefore increasingly looking atboth consolidation and new out-sourcing models.

There has been a degree of consol-idation, often driven by necessityrather than desire, although that isunlikely to lead to the wide scalerationalisation that the sector needs. For biotechs, much dependson relative valuations. Those discus-sions can prove hard, given the diffi-culty valuing both the companiesand their drug development portfo-lios.

“There is a fine line between find-ing a good strategic partner and lim-iting your exit options. If thecompany has a truly innovativeproduct and has maintained attractive commercial rights, either in the form of a profit share or geographically, big pharmawill still have interest," says Jefferies' Bar-Nahum. "If it's simply aroyalty stream, it's more of a finan-cial equation and is typically lessinteresting from a buyout perspec-tive”.

Significant uncertainties surroundregulation and legislation in the sec-tor at the moment. Regulators orpayers, such as governments andinsurer, are harder on reimburse-ment now says Warburg Pincus’ Tur-ton. The ‘me too’ type products willfind it harder to be reimbursed butfor the cutting edge-type products itwill be easier and these will be at aneven greater premium. For those,there will continue to be realdemand.

“The FDA are of course also get-ting tougher but we still believethey will back innovative projectsthat address unmet needs or thatreduce health care costs,” saysAbingworth’s Bunting.

James Gubbins

Mike Kingston

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