What about the prospects for deal activity this year?
Rieger: In-licensors and out-licensors are both positive about the outlook for 2013. Significantly, in-licensors continue their interest
in early stage [pre-clinical Phase I] assets, for which there is an oversupply in comparison to what is available at later
stages. This is particularly true in oncology. Oncology is generating a lot of interest because of the quality of the science
and the potential that at least some of these candidates may offer a new mechanism of action compared to existing therapies.
However, despite the inventory of attractive assets, investors remain skittish, with some choosing to remain on the sidelines
until the technology matures.
When in-licensors were asked about the likelihood that Phase III deals would move forward, some two-thirds of those polled
replied with a flat yes, while the opposite was true for out-licensors: little more than a quarter agreed. This disparity
was also a highlight of our survey last year; it can be interpreted a number of ways. Differing views about valuations is
certainly one, as is the desire of many out-licensors to find a way to develop that asset on their own. Another is the assumption
that an asset at Phase III is already sufficiently "de-risked" and therefore can be considered as a full buyout candidate
rather than as a licensing partner—the record shows that companies are still willing to pay a premium to acquire full rights
to a good drug at this level.
In fact, the big integrated drug makers are sitting on a lot of cash; they have money to spend. If you look back at the premium
that companies paid on an acquisition in the 1990s, it was typically about 30 to 35 percent of the acquired firm's market
cap. Data I referenced from last year indicates that ratio is now around the 70 percent range. That's a dramatic shift in
what Big Pharma is willing to pay for a late stage asset.
In my travels to the biotech companies, I hear a consistent message from them: despite the positive buzz about pipelines,
Big Pharma is still skittish about investing too early, at pre-clinical Phase I; they would rather wait for the asset to progress
and be "de risked," at which point they will pay for the greater level of certainty about the asset's commercial prospects.
The problem is that there are fewer of these final-stage assets available.
This is the likely reason for another finding of the survey: two thirds of executives from the in-licensing and out-licensing
side expect an upturn in preclinical and Phase I deals this year. For projects in Phase II, the expectations are a bit less
optimistic, but still clearly on the positive side. As an observation, I'd say most Big Pharma companies will admit to gaps
in their development pipelines; with the increased competition in the de-risked asset class, they will need to spread the
net a bit further. Nevertheless, I see no evidence that Big Pharma is ready to turn off the faucet on the more expensive Phase
III deals. If the opportunity is right, they will pounce and pay up. The bottom line is that we are back to a period where
any asset with potential is going to attract the interest it deserves among buyers, who are willing to go the full M&A route
as well as licensing.