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Everything you wanted to know about the year's most important deals-and what to watch for in the future
Doing deals has become Big Pharma's lifeline, and that fact is more evident in 2008 than ever before. With patents on megablockbusters falling like dominoes, and in-house R&D no match for vanishing sales, industry giants are reaching into their deep pockets to bridge the growth gap. This has drugmakers rolling the dice on more products that are in early-stage development.
"The proportion of revenues of products sold last year from partnered products is up to half or more," says Lulu Pickering, biotech program director at Decision Resources. "So deals are running the gamut from Phase II to pre-discovery, with a lot of pressure going toward early-stage products, technologies, and targets."
These M&As, licensing deals, and other strategic alliances are proliferating as drugmakers try to meet a growing range of challenges, from adding revenues or filling pipelines, to entering new markets or exiting therapeutic areas, to diversifying or streamlining a business model.
"Given the amount of uncertainty in the industry, no company knows what will be the most successful business model. We are seeing more experimentation, trying out more strategies—products, diagnostics, services," says Jeff Greene, partner and transaction executive at Ernst & Young. "You need M&A to accomplish this."
Yet for a variety of reasons, pharma has put the brakes on its M&A activity this year. For the first three quarters of 2008, the volume of M&As was $28.9 billion, a dramatic decrease from last year's total of $79.5 billion, according to Young & Partners. Q308, at $6.2 billion, was especially slow. M&As done by biotechs are up, however: $4.2 billion for the first three quarters, compared to last year's total, $3.97 billion. The number of deals is also on track: 16 and 21, respectively.
Says Young & Partner president Peter Young: "The need to acquire biotech companies has not slowed down because the business logic is still strong, and Big Pharma has the cash. The slowdown in pharma acquisitions, however, comes as many companies focus on cost-cutting and other deals—alliances, biotech acquisitions, in-licensing, and operational improvements on the ethical pharma side. The generic consolidations and Japanese pharma's efforts to break into the US markets are the only things fueling the current level." (See "The Top 15 Deals of 2008".)
Top 15 Deals of 2008
With that in mind, here are the highlights of the year in deals. Warning: Every deal mentioned, with the exception of Roche/Genentech, has been agreed to by both parties, but many of them have yet to close—and some may not survive the FTC and other hurdles to approval.
GlaxoSmithKline likely set some kind of record during a recent eight-week a spree. Starting in late August, the British drug giant inked, among other deals, a $1.5 billion collaboration with the privately owned Cellzome, whose technology is used to identify small molecule inhibitors of specific kinase targets in inflammatory diseases; an $820 million collaboration with Valeant to develop its Phase III epilepsy drug; a $553 million licensing deal for Affiris's experimental Alzheimer's vaccines; a $210 million acquisition of BMS's Egyptian drug business; and a $57 million buyout of Genelabs, developer of hepatitis C technology.
In October, after reporting third quarter earnings that beat analyst estimates, GSK CEO Andrew Witty told the Financial Times that he was reducing stock buybacks and using those savings for acquisitions. "We're not reserving capital for a rainy day that may, or may not come," says Witty. "Opportunities are surfacing with some frequency on the small to medium scale."
And GSK isn't even the year's top shopper. According to Datamonitor, the firm was outpaced in M&A activity by both Pfizer and Roche, and tied with Johnson & Johnson.
In its self-proclaimed drive to become the leader in personalized medicine, formerly mild-mannered Roche emerged this year as the leader in the hostile-takeover category. The new bully on the biotech block, the Swiss drug and diagnostics maker forced medical-device maven Ventana to knuckle under in January, albeit for $3.4 billion. Six months later, the firm offered $43.7 billion for the 41 percent of Genentech that it doesn't already own. But the San Francisco–based firm is not surrendering without a fight—or at least a bigger paycheck. (For more, see "Deal or No Deal".)
Deal or No Deal
At press time, global painkiller producer Alpharma announced that rather than girding for a threatened proxy battle, it would accept King Pharmaceuticals' $1.6 billion buyout bid, after twice rebuffing specialty drugmaker's previous offers.
For years, biotechs have been fetching ever-higher prices from Big Pharma, but that trend was thrown into reverse this year as the credit markets seized up amid the Wall Street meltdown. Investors flew from high-risk biotech stocks, reversing the dynamic from a sellers' to a buyers' market. The financing raised this year by these entrepreneurial spirits plunged to $8.2 billion through September, down more than half from $17.9 billion in 2007—the lowest tally in a decade, according to Burrill & Company. In October, Rodman & Renshaw announced that 113 biotechs, or one-third of the publicly traded shops it tracks, had less than a year's worth of cash. At least five biotechs went belly up.
Meanwhile, Big Pharma is perched on piles of cash. Pfizer has $26.2 billion; Novartis, $16.2 billion; and Lilly, $5.2 billion—or it did until it took on debt to buy ImClone. Although more than a third of this wad is hiding from taxes in off-shore reserves, that still leaves a lot of liquidity to grease the wheels of consumption.
"With biotechs running out of money, everyone expects a huge amount of acquisition activity over the next months or even years," says Lulu Pickering.
The only problem for drugmakers may be when to schedule the shopping spree for the best fire-sale prices. "The challenge is to decide when the bottom in the biotech industry will hit. There may be increased turmoil over the next 18 months, so we may not see a big rise in transactions yet," says Jeff Greene.
Only biotech powerhouses like Genzyme, Biogen Idec, Gilead, and Cephalon maintain their high valuations as potential takeover targets. But their profits are likely to turn them into buyers, too. In November, Genzyme continued its acquisitive ways with a $1.4 billion milestone alliance with Osiris, whose adult stem cell platform is on course to deliver the first ever FDA approved treatment, Prochymal, currently entering Phase III in several categories. "Genzyme's strategy of using acquisitions to fuel long-term growth is proving to be where the entire sector is moving," says Deutsche Bank biotech analyst Jenn Chao.
Also grabbing headlines was the new Japanese wave of global M&A. Even before the market's collapse, foreign drug companies were taking advantage of the weak dollar by snatching up US shops. "Half of the top deals involved Japanese companies because Japan was hit a little later by all the financial turmoil," says Jeff Greene.
Facing no growth, price cuts, and increased competition at home, four of the nation's five biggest drugmakers executed some of the year's most ambitious deals, spending a total of more than $20 billion over the past 12 months on US-based biotechs. Last December, Eisai bought oncology biotech MGI Pharmaceutical for $3.9 billion. Three months later, Takeda upped the ante with its $8.8 billion takeover of Millennium, maker of cancer blockbuster Velcade—in cold, hard, yen-leveraged cash. "It's a deal that would have been impossible from any US player," wrote In Vivo blogger Derek Lowe. In September, Shionogi paid $1.4 billion for Sciele's cardiovascular and diabetes portfolio.
Declaring itself a global threat, Daiichi Sankyo chose instead to go its own way, furthering its diversification strategy with a 64 percent stake in Indian generics giant Ranbaxy for up to $4.6 billion, in June.
Other top 15 market-expansion deals were aimed at grabbing US and European consumers, too. In July, Fresenius, a German firm that sells products and services to hospitals and home healthcare groups, paid $3.7 billion for Los Angeles–based APP Pharmaceuticals, the developer of the first ever nanotech cancer drug, Abraxane. At press time, biotech Celgene, which resurrected thalidomide as the cancer treatment Revlimid, announced its first big acquisition: a $2.9 billion buyout of Pharmion, which sells Revlimid in Europe.
Biotechs with even a single approved drug can still demand pretty exorbitant prices if a company's need for fast revenue is sufficiently desperate. Exhibit A: Millennium.
Exhibit B: ImClone. Crafty activist-investor Carl Icahn scored again in 2008; after Bristol-Myers Squibb offered $4.5 billion for the oncology biotech, Icahn strung BMS CEO Jim Cornelius along by courting one or more secret bidders in a very public effort to trigger a bidding war. No slouch at such ploys, Cornelius refused to up his bid, and in October, the press-dubbed "mystery suitor" was revealed to be Lilly's new chief, John Lechleiter, who inked the deal for $6.5 billion.
Most analysts agreed that Lilly was overpaying (and then some) for the biotech, which markets only one product, Erbitux, with BMS, and is developing some uncertain Erbitux follow-ons. "That price indicates that Lilly is almost desperate for revenue," says Michael Russo of the Bruckner Group. "It could have bought a whole bunch of smaller biotechs with promising products rather than putting so much faith in a single pipeline."
It's still a sellers' market for the makers of late-stage compounds, few of which remain. "Pharma's cherry picking of biotechs has driven the valuations higher and higher," says Frost & Sullivan analyst Barath Shankar Subramanian. "Since drugmakers have little R&D that they can really call their own, the demand just keeps going up."
In a sign of how inflated the prices have become, in September both GlaxoSmithKline and Pfizer inked big deals for single products. GSK dished out a record-breaking $3.2 billion for Actelion's first-in-class insomnia drug, almorexant—pending good data from its Phase III trials. Meanwhile, Pfizer paid $775 million in milestones to Medivation for 60 percent of the potential US profits and for total potential foreign sales of Dimebon, which is set to enter Phase III trials this year in Alzheimer's and Huntington diseases.
Overshadowed by big biotech deals, the year's few noteworthy pharma M&As were driven by the growing trend to diversify outside of the high-risk branded drug business.
Novartis, arguably already both the most diversified and successful Big Pharma, acquired a 25 percent share of Alcon, the world's most profitable eye-care company, for $11 billion, with an option to buy an additional 52 percent in 2010 for another $28 billion. Although Novartis CEO Daniel Vasella acknowledged that Alcon makes a strong fit with his own contact lens and ophthalmologic drugs portfolio, he cited consumer healthcare's relative lack of pricing pressure as the deal's biggest bonus: "The margins are higher than our pharma business, and are obviously very attractive."
Meanwhile, the generics business saw some consolidation when Teva, the global leader, bought rival Barr Pharmaceuticals, the world number four, for $7.5 billion.
Spreading the risk around through diversification into generics drove not only the Daiichi/Ranbaxy deal but Sanofi-Aventis' purchase of Zentiva for a revised $2.6 billion after the Czech generics firm snubbed a lower offer.
The main trends that have lately come to define pharma's M&As, licensing deals, and other strategic alliances generally deepened in 2008.
Cancer remains the hot disease, followed closely by CNS; together, these two therapeutic areas attracted more deals than all other diseases combined. In third place is the autoimmune and inflammatory market (monoclonal antibodies in development for oncology not infrequently show benefit in this secondary area). Most of the year's biggest acquisitions, including number one Roche/Genentech (pending), number two Takeda/Millennium, number five Lilly/ImClone, and number six Eisai/MGI, involved biotechs with cancer drugs on the market and more in the works.
In the mean time, pharma is exiting cardiovascular and diabetes R&D. "Both markets are already well served with lots of treatment options, and getting payers to reimburse for a new product would require a major scientific advance," says Lowe.
This year, Pfizer announced its exit from the cardiovascular space after spinning off Espirion, the biotech with an experimental "good" cholesterol-lifting candidate that the drug giant bought for $1.4 billion four years ago when that approach was showing promise.
Playing for the highest stakes, the top drugmakers are deploying all their risk/reward expertise to the deal-making endeavor. From Takeda's all-cash $8.8 billion purchase of Millennium to GSK's multiple-milestone development deals, the agreements are growing increasingly elaborate and diverse. "Pharma is negotiating very complex, sophisticated deals in an attempt to spread the risk around," says Stan Bernard of Bernard Associates. And with biotech financing increasingly hard to find, "we're seeing more flexibility in what sellers are willing to accept," Greene notes. "Pharma is able to offer more stock and less cash."
Big Pharma is also getting more sophisticated in its M&A decision-making, using a team approach that includes not only business development, R&D, and legal, but also regulatory and marketing. Mindful of their poor track record at partnering, the top drugmakers have created strategic alliance management arms to oversee integration and advocate for biotechs. Preserving the shop's autonomy—and keeping top talent with generous retention packages—is the new industry standard, at least officially.
Whether or not Roche (which briefly owned Genentech in 1990) can quell a rush to the exit by the biotech's talent remains to be seen. "We will do everything to preserve the unique, science-driven culture of Genentech, something which made Genentech so successful and something we want to build on," Roche CEO Severin Schwann told the Wall Street Journal when announcing the deal—and he has repeated this pledge with his every public utterance about the deal. Roche's entire US pharma operation is relocating to Genentech headquarters outside San Francisco, and dropping the Roche name in favor of Genentech. Roche's promise of retention bonuses may be more persuasive, though they may not prevent top talent from cashing in stock options and heading for the golf course.
Big Pharma continued its rush to the latest "game changing" technology, RNA interference, which promises to be the next decade's version of monoclonal antibodies. Merck was first on the scene, dropping $1.1 billion two years ago for Sirna Therapeutics; last year, AstraZeneca inked a $400 million milestone deal with Silence Therapeutics while Roche sealed one worth up to $1 billion with Alnylam Pharmaceuticals, which holds most of the patents, making it the king of the gene-silencing kingdom.
In April, GSK got in on the act with a $600 million alliance with Regulus Therapeutics, which is chasing drugs using microRNA, aka RNAi 2.0. Then Alnylam scored again, winning a $1 billion milestone deal with Takeda in May, and announcing in July that Novartis was extending its 2005 development pact worth $700 million. All of the Alnylam alliances are nonexclusive and limited to specific targets in select disease categories; if the critical hurdle of systemic delivery can be overcome, the sky's the limit for this Cambridge, MA–based biotech, with its vast vault of potential targets.
But the explosion of early-stage deals isn't limited to RNAi. "Pharma is now acquiring platforms that lack even a product in order to operate in a certain space with genomics, say, or biomarkers," Pickering says. "The old dogma about not buying technology rather than products is over." The year's biggest such deal was GSK's $1.5 billion alliance with Cellzome, whose technology is used to identify small molecule inhibitors of specific kinase targets in inflammatory diseases.
"Pharma realizes it has not been very successful at keeping talent when it acquires whole biotechs, so more and more companies are focusing on individual assets," competitive intelligence consultant Cliff Kalb says. "To keep the price down, they're buying earlier, even though the risk of failure is greater."
Lilly's ImClone acquisition eclipsed what some experts viewed as a more interesting deal: the sale in August of its early-stage R&D facility to contract research firm Covance for $50 million, plus another $1.6 billion in drug-development contracts over the next decade. By shedding a portion of its drug discovery and outsourcing a portion of its clinical development, Lilly is slicing and dicing its R&D value chain in a way that is new for pharma. "The deal acknowledges Covance's ability to bring drugs to market faster and more efficiently. With this investment, Lilly is solidifying its outsourcing strategy in a way that turns a contractor into a true partner," says Brenda Gleason, president of M2 Health Care Consulting.
Meanwhile, Bristol-Myers Squibb redoubled its divesting efforts, jettisoning its wound-care specialty, ConvaTec, to two private equity firms—Nordic Capital and Avista Capital Partners—for $4.1 billion, having last December sold its medical imaging division for $525 million to yet another private equity firm.
And the divesting is likely to continue, according to BMS' Cornelius. "Assuming there will be capital markets next year, we'll try to take a piece of our nutritional business, Mead Johnson, public in the first quarter. Our guess is it's worth $8 billion," he told Business Week.
Cliff Kalb suggests that Cornelius is angling to make his firm the object of a bidding war between AZ and Pfizer—as he previously did at Lilly with stunning success by pitting J&J against Boston Scientific for Guidant, Lilly's stent maker. "Cornelius is 'cleaning up the balance sheet' by spinning off the non-pharma businesses that are unattractive to pure-play pharmas. And he has recently done separate copartnering deals with both AZ and Pfizer for some potentially very lucrative drugs," Kalb says.
Last year, AstraZeneca signed a $950 million milestone deal with BMS to share the development costs of two late-stage diabetes compounds, while Pfizer inked a nearly identical deal for $1 billion for an anticoagulant and some early-stage obesity and diabetes agents. "If they want to hold onto the products, Cornelius will make Pfizer and AZ fight over BMS," says Kalb
If so, the pharmaceutical industry may finally see its equivalent of Superhero Fight Club, with two drug giants battling over a third, followed by a quaking megamerger. This may be a sign of a new order in M&As. "As the industry begins to contract, we will see both small biotechs and big pharmas start to fail, and they will be rescued or acquired by other companies," says Stan Bernard. Stay tuned.