Pharma-Biotech M&A Prices Nearly Triple

August 16, 2006

Pharmaceutical Executive

Volume 0, Issue 0

Biotechs find sales more profitable than IPOs.

Innovative drug companies are paying nearly triple what they were in 2004 to acquire biotech companies, as the pressure to fill ailing pipelines drives an increasing number of mega-deals.

Biotech executives are now finding that selling out to pharma is more lucrative than going public.

The median deal value last year was $170 million, up from $57 million in 2004 and $80 million in 2003, according to a report from management consulting firm Bain & Company.

Last year's high-profile M&A activity included the merger of Invitrogen and Dynal (a $386 million deal), Valeant and Xcel, and Pfizer and Idun (both $280 million).

Moreover, drug candidates from licensing and acquisition deals are driving more than 50 percent of pipelines, according to the report. Take the oncology market: More than half of Phase I and II products, and two-thirds of Phase III products, are being developed as part of a collaborative agreement between companies.

"Big Pharma needs to care a lot, because licensing and acquisition has clearly become the deciding factor in value creation," said Nils Behnke, author of the biotech deal-making study and a partner in Bain's global healthcare practice. "If you want quality, you need to buy early."

The best investments often come from buying early-stage compounds, but these products also pose the most risk. Therefore, deals between pharma and biotech companies often include multiple early-stage compounds, or access to the technology that will enable a raft of new product development.

Yet it's hard for investors to know whether prices for these early-stage portfolios are artificially inflated, noted Jason Napodano, senior pharmaceutical analyst at Zacks Investment Research.

The vast majority of these biotech firms are private, with less stringent financial reporting requirements. Moreover, there's a sense among pharma companies that if they don't jump at a deal, a competitor will--and they're willing to move forward at any price.

"They're loaded with cash and they're desperate for products" Napodano said. "They can pay whatever they want, and the street won't really know if they overpaid or underpaid."

Biotech companies, on the other hand, are riding high on the trend.

During the past two years, acquisitions were valued at a median of 3.5 times the pre-sale capital investment; IPOs, in comparison, only brought in a median of two times the pre-IPO investment.

And biotechs are also at the center of more bidding wars. "Multiple bids are a dream come true" for a biotech, Napodano said.

Behnke cautioned that many of these deals look bigger than they are, because only a minimum amount of cash is being put down up-front.

Moreover, while they are big deals for biotech, they remain a drop in the bucket for high-earning pharma companies.

But Behnke noted that the current trend is not likely to ebb any time soon. "Most people would want to bet their money on the trend continuing," he said.