Dealmaking Roundtable - Pharmaceutical Executive


Dealmaking Roundtable
With recovery from the 2009 recession now underway, good deals are back on the drawing board. The challenge will be to paint over legacy risks and fill the canvas with the right mix of assets at the best price for long term shareholder gains

Pharmaceutical Executive

William Looney: Forward-looking forecasts like the Campbell Alliance Dealmakers Intentions Survey indicate that the market for licensing and M&A investment is beginning to improve after a slowdown in 2009. What factors are driving this trend? And, given the importance of long lead times in this industry - is a recovery sustainable?

Dennis Purcell, Aisling Capital: Overall, the sector weathered the recession relatively well. Predictions in early 2009 that up to two-thirds of small biotechs would end up insolvent by year-end proved untrue. Companies did a remarkable job in conserving cash through the financing drought, and as a result the runway for future growth has been extended. However, larger structural challenges remain in play. We need a revival in the equity markets, and the venture capital community has to come back to the table, especially as the hedge funds that helped support biotech in the past have mainly dropped out. The key issue for 2010 is that biotech companies are going to have to return to the financing arena; if the market doesn't respond, we face the prospect of a "double dip"—another round of winnowing that will expose all but the most promising players to a cash crunch. This will negatively impact the sector overall, and lead to fewer opportunities for productive collaborations.

Ben Bonifant, Campbell Alliance: Our survey shows that the volume of deals picked up significantly in the last quarter of 2009, and that momentum is extending into this year as well. The impact of recession and the reluctance to lend has resulted in a more selective approach, however, with the greatest optimism centered on the potential for transactions around the in-licensing of products in Phase II of the development cycle. Conversely, we are seeing reluctance to engage in riskier transactions involving Phase III products, where the cost of failure is higher. Overall, I'd say the theme for 2010 is a flight to quality, at a stage where the value proposition to the payer community can still be shaped, involving therapeutic classes—like oncology and CNS—that serve an unmet medical need.

Wael Fayad, Forest Labs: The patent cliff facing the industry intensifies the search for new products to fill the gap, and thus we expect an upswing in licensing and M&A deals this year. Deal activity and value will follow the highest quality assets, not necessarily those only in late-stage development. Companies are looking for more certainty. To assure that, you need to spread the risks linked to the time and cost of obtaining market authorization across more assets that you license or acquire after they have been sufficiently "de-risked." This can be an extremely cost-effective way to build a pipeline.

Mary Tanner, Peter J. Solomon Co.: I'd describe the financial landscape as "bipolar." We have to reconcile the desire for recovery with the hard fact that the real cost of capital is often going to be higher than the potential rate of return on your investment. And most of the Big Pharma stocks are still trading at historic lows. I am not convinced that an upturn in dealmaking is sustainable until we have some normalization of the financial landscape, as it is the cost of money and the poor measurability of risks to investors that really drives the calculation around opportunity.

Barbara Ryan, Deutsche Bank: Deal activity has to continue as a consequence of the move by Big Pharma to externalize the traditional R&D function. This is an industry that on its own has a better than 50 percent failure rate for compounds in Phase III. The big companies with cash have to look farther afield—the challenge is sifting and finding that strong Phase III licensing candidate, as pickings are slim everywhere right now.


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