2011 Dealmakers Outlook - Pharmaceutical Executive


2011 Dealmakers Outlook
Call it spit and risk—hitting it

Pharmaceutical Executive

WL: Is the growing concern about risk having any impact on the valuations attached to deals?

Bonifant: Our survey finds that deal terms are trending down a bit due to a higher perception of risk. The risks include the escalating costs of clinical trials, crowded therapeutic categories and the space you have to launch, and the payer push-back on reimbursement.

Todd Davis, Cowen Healthcare Royalty Partners: The cost of capital for Big Pharma is going up. This is particularly true if you are dependent on a single product for a double-digit percentage of your profits while a patent cliff is looming. Clinical benefit in a therapeutic segment where differentiation around medical need can be demonstrated is a driving factor in valuation because the biggest risk is not getting access to patients due to price. What is it going to take to get reimbursed? This is the fundamental question in asset valuation today.

Robert DeBenedetto, SFJ Pharma: Another factor shaping valuation is the emphasis on targeted therapies; at least in theory, if the eligible patient population goes down, the value of the asset will go down too. But you have to balance that in the expectation that in some cases a targeted therapy will command a price premium because of superior efficacy. In addition, if the survey findings ring true, the budding interest in early-stage deals will by itself build higher valuations due to increased competition for the best candidates, while the valuations for the Phase II and beyond compounds will decrease due to less demand.

WL: Market dynamics do count. Is it a problem that the industry appears to be embracing the same approach to licensing? Like the "lemmings off the cliff" analogy, could we all be pursuing the same opportunities to the detriment of optimal returns?

Bonifant: Companies have different priorities even if the criteria in evaluating targets and opportunities are similar. That tends to keep things fluid. Another element is reputation: companies like Genentech or Shire have been able to establish themselves as "first to play" in specific therapeutic areas and thus people will tend to follow their lead.

Randy Guggenheimer, Young & Partners: The industry tends to talk to the same experts. It is not surprising that companies will form similar conclusions. On the science side, discoveries are made, the papers are written, everyone reads them, and judgments are made as to whether these open a new commercial pathway. Companies also know that valuations are determined in part by what Wall Street likes. People have to pay attention because if Wall Street is already fired up then the deal will be seen as attractive.

Gwen Melincoff, Shire: When we acquired TKT in 2005—a very good deal for the record books —the initial reaction from Wall Street was negative; it drove our share price down as the analysts did not understand the rationale for Shire wanting to be in the orphan drug space. Once we went out and explained how this acquisition fit our overall business plan the situation turned around completely. This reveals the importance of clearly communicating the ways in which your strategy differentiates you against the competition—and, actually, the orphan space is hot.

WL: With this initial discussion around the Campbell survey as background, can we now focus on your assessment of the most important drivers of action on the licensing and deal-making front this year?

Stephen Simes, Biosante: The industry is obsessed with managing risk, perhaps overly so. The desire to avoid it has never been higher. Companies are sitting on huge stockpiles of cash that they won't invest or will invest reluctantly. The US tax structure discourages repatriation of overseas profits but the larger explanation may be because the planning cycle is so unpredictable. Companies are retrenching in many areas that are seen as critical to future innovation, as evidenced by Pfizer's decision to trim upwards of $2 billion from its annual R&D budget. This has implications for jobs and economic growth here in the US but also in other markets that favor the biopharmaceuticals sector as an industrial policy priority.

Davis: A key driver is the dawning awareness that the US is no longer going to subsidize the rest of the world in paying for pharmaceutical R&D. The domestic pricing environment going forward is likely to be much more like Europe. Anticipation of that is a key element why concerns about risk have increased. Likewise, the global consensus around IP is eroding and the impact of some changes could reduce the effective life of a patent by five years or more. Valuations would have nowhere to go but down.

Beth Fordham-Meier, Targacept: IP is vital to maintaining a credible planning cycle in an industry with such long-term payouts. Yet the trend in public policy is not to extend the period of exclusivity for small molecules and even to reduce exclusivity for new drug technologies like biosimilars. The Obama Administration thinks this will offer large savings to purchasers, but the rationale is wrong: Companies will be reluctant to invest in innovative new products for patients if the period of market exclusivity isn't sufficient to offset the cost and risk. So the savings the Administration is banking on may never be realized because the new products on which the calculation is based may not come to market.


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