Finance: Q&A with Annette Grimaldi

Pharma companies are paying bigger dollars for riskier compounds—so much more that it's now more lucrative for a small company to sell than to go public. Here, Annette Grimaldi, head of investment banking in the life sciences group at Jeffries and Company, discusses how the past year has shaped up—and what might be next on the horizon.

Q. How did the landscape for deals change in 2006?

A. There seems to be a greater appreciation for earlier-stage companies and compounds than there has been in the past. There used to be very much of a bias against early-stage—preclinical and anything before Phase II. But in 2006, there were a number of acquisitions of companies, both public and private, where the pipelines were preclinical and yet the valuations that they got from Big Pharma were attractive.

Q. Do you think that's going to continue?

A. I do—but whether the trend will be as stark as it was this past year, I don't know. One of the reasons it was such a notable trend is because you normally think of alternatives for private companies in terms of the IPO market, and the IPO market in 2006 was pretty tough and the valuations were modest. Some of these takeout prices were well in excess of what these companies could have gotten by going public, and a lot of them couldn't even have gone public because they were considered too early-stage.

There's going to continue to be an appetite for acquisitions on the part of the larger companies. Whether there's going to be such a large gap between IPO and takeout valuations, I don't know, but that was certainly notable last year.

Q. How has this new way of working changed the way Big Pharma behaves?

A. I remember reading a couple of articles this year about pharmaceutical companies actually reaching out and talking to the venture-capital community because, of course, the venture guys are the ones who fund these private companies. And the pharma companies wanted to be made aware of interesting things in private-company portfolios early on.

That's a first for them. Previously private companies would do the outreach, through their normal business-development efforts when they were looking for partners or to sell themselves, or Big Pharma, through its business development people.

Q. Do you see any emerging partnership structures or deal terms?

A. It does seem that some of the early-stage deals that have been announced have big bio-dollars.

In other words, when companies put out a press release about the size of the collaboration, they may say it's a $300 million collaboration. But a lot of that money is back-end loaded, so it might have a $20 or $30 million upfront, then substantial milestones down the road. In this way, there is some management of risk by having the pharma companies take a relatively modest risk upfront and then putting up the additional dollars if things are going well.

One example of a structural innovation was the deal with Cytokinetics and Amgen, which gave Amgen an option to partner on some of Cytokinetics' products. It looked like a nice deal for both sides: It gives Amgen an early, preferred look into their pipeline, and it's nice validation for Cytokinetics, with some upfront payments.

Q. What other recent deals have been truly innovative?

A. There continues to be quite an active business with companies like Paul Capital or Symphony Capital [which offers services like structured equity capital and clinical trials management]. That type of financing is an alternative that companies continue to explore. In certain circumstances, it seems to be a way for start-ups and other companies to monetize programs that perhaps aren't core to their central focus.

Q. What are you seeing happening as far as the buying/partnering trend?

A. In the category of "wait until the drug is out there, see how it goes, and then buy it back," you had the Lilly–ICOS transaction and the Genentech–Tanox transaction—deals where there were long-standing relationships between two companies, and the decision to acquire was based on capturing a greater share of the economics.

The M&A market will continue to provide a nice valuation floor for private companies, and it's also going to continue to encourage the financial backers of these private companies to not automatically default to an IPO exit, but to think about a strategic exit as well, which is a mindset change from years past. That could be a permanent change.