Biotech investors large and small are increasingly focused on mergers and acquisitions as the best way to realize value from their holdings.
All signs point to increased M&A
Biotech investors large and small are increasingly focused on mergers and acquisitions as the best way to realize value from their holdings.
Many VCs now have a portion of their portfolios invested in low-burn-rate "build-to-sell" entities — essentially research projects. These investors are also wary of collaborations that might encumber too much of a company's assets and reduce the number of potential acquirers.
Activist investors in the US and Europe believe profitable biotechs can maximize shareholder value (in the short-run, at least) by selling to revenue-hungry pharma companies rather than by pursuing highrisk R&D.
These are some of the reasons why:
- Pharma acquirers prefer an alliance over an outright acquisition in order to mitigate risk
- The recent wave of megamergers has reduced the pool of potential acquirers
- Many of these companies are facing a variety of challenging capital allocation decisions, including:
- Whether to pursue acquisitions in other areas (e.g., to gain access to emerging markets)
- How best to reprioritize internal R&D portfolios
- The best means to provide shareholders the returns they seek through dividends and stock buybacks in a period of very low price-earnings ratios
US and European M&As, 2006–10
Source: Ernst & Young, Windhover Information, MedTRACK and company websitesChart excludes transactions where deal terms were not publicly disclosed. The 2010 totals also exclude Sanofi/Genzyme, becausethe parties did not agree on terms until 2011, and Grifols/Talecris, because the transaction was subject to continuing antitrustreview risk in 2010.
Strategic alliances: sharing risk
Acquirers are looking for strategic alliances over acquisitions to share the risk.
While alliance activity remained strong in 2010, the average up-front license fee fell significantly relative to prior years. This is indicative of the desire of buyers and licensees to share development risk with their partners and "pay for performance" through milestones.
US and European strategic alliances remain strong based on biobucks ...
Source: Ernst & Young, Windhover Information, MedTRACK and company websitesChart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed.
... while up-front payments declined sharply
Source: Ernst & Young, Windhover Information, MedTRACK and company websites
Medtech as a model?
Some have speculated that the "build-to-sell" company approach is moving biotech toward the longtime model of the medtech industry, where companies are formed around technologies that fit a market need and slot easily into the product portfolios of an identified group of potential acquirers.
Under this model, very few companies ever attempt an IPO. While the parallels exist, it is unlikely that this will become the predominant model for biotech because of the extended R&D time frames for breakthrough therapies and the more rigorous product approval process for drugs.
Increasing hostility?
A surprising number of deals in the recent past have started as hostile transactions, despite the interest investors have in reaping a return through a trade sale.
The conventional wisdom has been that hostile takeovers don't work well in an industry in which the target's scientists are among its most valuable assets.
It appears that suitors in certain situations are willing to take the risk of offending and losing the target's employees in an effort to secure the deal.
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