Deal-making in a cold climate
22 December 2008
It is clear that the biotech and Pharma industries are going through a tough time.
In parallel with this, big pharma has been experiencing its own variant of the crisis, and responding with cost-cutting programmes and lay-offs, but remains cash-rich.
This environment would seem to offer big pharma with a rare chance to exert real leverage over prospective biotech partners, and to reverse the trend of rapidly inflating licensing terms with some cheap deals and acquisitions. At the recent Bio-Europe meeting in Germany, there was a good deal of discussion of the opportunity offered by the low market capitalizations in the biotech sector, and one representative of big pharma commented that the increasing complexity of licensing deals was another driver towards M&A as the method of choice for accessing innovative products and technologies.
Interestingly, very little of this seems to be happening. According to a report in to Bloomberg News, there has been a recent increase in M&A activity with 23 acquisitions since July 1 compared with 19 in the first six months of 2008, but these have not been done on the cheap - pharma companies were willing to pay at least twice the market value in more than 50 percent of the announced or completed takeovers of the past year.
And according to an analysis of the acquisitions undertaken by the top 20 pharma companies and registered in the Medtrack database, it is not even clear that there has been an acceleration in M&A activity – the second half of 2008 has seen more deals than the first half, but only back to the levels seen in 2006 and 2007; the first half of 2008 had actually been very quiet compared with the preceding years, so overall 2008 (up to mid December) has registered fewer than 40 deals compared with over 50 in 2007.
In which case, has there been an increase in licensing activities, with biotechs prepared to let their assets go more easily and at lower prices? Again, according to the Medtrack database, the answer seems to be no. Total deals done by the top 20 pharma companies in 2008 (to mid December) were a third down on the 2007 total of 120. And – based on deals for which financial information is available – terms have been going up not down: the reduced number of deals raised almost as much in upfront payments as was paid in 2007.
In conclusion, it seems that the difficult conditions which pharma is facing are driving it to be more discriminating in its deal-making activities, paying higher prices for quality assets rather than looking for bargains. Pharma's appetite for good product opportunities has never been greater, and these continue to attract premium prices provided that they are truly innovative and address real unmet medical need. And continuing the trend of recent years, deals are being done early - clinical proof of concept is no longer essential to most companies.
Quality assets will continue to command good prices, as they are scarce; the imperative for biotech is to manage resources while generating data, and to focus on demonstrating the value of their products to potential partners.