M&A: Panning for Gold

The industry must sift through the small pharmas and biotechs that are powering the engine of drug discovery. But searching for the right partner company can be like...
Sep 01, 2007

Pharma dealmaking is:
(a) going like a house afire
(b) grinding to a halt
(c) both of the above

There's a solid case to be made for choosing A. The market for deals has been robust through the first half of 2007. A Cowen research report counted 10 public deals done by July 2007, compared with 14 for all of 2006. Another data source, Irving Levin Associates, cites 455 public and private healthcare deals in the first six months of 2007, a 12 percent decrease from the same period last year—but an 18 percent rise in deal value.

On the other hand, if you chose C or even B, that's also hard to dispute. In August, as this issue went to press, the US subprime mortgage crisis was shaking confidence, torturing Wall Street, tightening credit, and sapping the steam for alliances and M&A. "On the train to New York in the morning, you can feel it," says Clarke Futch, managing director of Cowen Healthcare Royalty Partners. "It's palpable in the air."

Credit crunch or not, though, both small biotechs and big pharmas need the deal stream to keep on flowing. It's easier to imagine them developing new, creative ways to finance deals than to picture them turning away from a process that, on the one hand, gives biotechs and small pharmas the capital to innovate and, on the other hand, gives Big Pharma a way to replenish slow-moving pipelines and to fight back against the revenue losses it face because of patent expirations.

"The coming of generics, and the associated revenue losses, is a striking deal driver," says Walter Flamenbaum, MD, a partner for Paul Capital Healthcare. "Companies are making deals for both short-term revenue producers and long-term pipeline enhancers. If you look at AstraZeneca's two purchases of Cambridge Antibody Technology and MedImmune, you can get a sense of buying for long-term capabilities as well as hard revenues."

As for the credit kerfuffle, "my sense is that this will work out," says Jonathan Gertler, MD, managing director and head of biopharma investment banking at Leerink Swann. "The recent volatility will raise some of the valuations and quality bars, but there's no question the pipeline for deal flow is extraordinarily robust."

With that in mind, we asked a group of savvy investors, analysts, venture capitalists, and others to share their thoughts on the trends shaping the deal market today and to identify the companies they think are the ones to watch.


First the trends:

Midsize is big Mega-mergers are the big moneymakers for top Wall Street bankers—but these days, consolidation is on hold while the industry cleans up its act.

"Everybody is trying to reengineer cost structures and prepare for the dip in the pipeline," says John Connaughton, Bain Capital's managing director. "But in a year or two from now, once that's cleared up, there should be more robust M&A activity."

Instead, the action right now is taking place among the midsize companies. The largest M&A event of 2007 (so far) is AstraZeneca's snagging MedImmune in a $15.6 billion deal. Consolidation of the generics industry continued when Mylan secured Merck KGaA's generics unit in a deal valued at $6.7 billion. More recently, Schering-Plough CEO Fred Hassan announced that the company will buy Akzo Nobel's Organon in a deal worth $14.4 billion, through which SP doubles its Phase III pipeline.

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