Category Archives: acquisitions

Cancer Immunotherapies Attracting Interest

I’ve always been a bit skeptical of cancer immunotherapies, particularly the use of patients’ own immune system to target tumors. Just look at CancerVax, Cell Genesys, Favrille, and Genitope. One of the major obstacles has been eliciting a strong enough immune response to adequately treat the cancer. Another is identifying the right molecular targets to attack only the tumor cells. Nonetheless, cancer immunotherapies appear to be attracting interest according to Trading Markets.

The FDA approved Dendreon’s cancer vaccine, Provenge, last year for the treatment of prostate cancer. Dendreon’s market cap is now over $4.5 billion. More recently, Amgen acquired BioVex for its oncolytic virus, OncoVex, currently in Phase 3 trials to treat metastatic melanoma and head and neck cancer. Amgen agreed to pay up to $1 billion for BioVex depending on sales milestones. Immunocellular Therapeutics just raised $8.1 million in a PIPE to complete a Phase 2 trial for its dendritic cell vaccine, ICT-107, to treat gliobastoma.

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Genzyme Acquisition

Sanofi-Aventis (SNY) offered to buy Genzyme (GENZ) for $69 per share last year; GENZ wants $89 a share. The main reason for the discrepancy in valuation is Campath, an experimental multiple sclerosis drug. GENZ believes Campath can generate as much as $3.5B in sales, while SNY is forecasting less than $1B.

I believe SNY will eventually get a deal done for a number of reasons. Mainly, SNY has a huge revenue hole to fill due to upcoming patent expirations. The French drug maker is also very interested in GENZ’s biologics technology. Many of SNY’s competitors, such as Pfizer, Merck, etc., have already made biologics acquisitions in recent years.

So what is the probability that SNY and GENZ will close the deal? If the two companies fail to reach an agreement, one could argue that the price of GENZ shares will fall to approximately $53, the price prior to SNY’s announced acquisition intentions. It’s difficult to say exactly what the price will be if the two companies do reach an agreement. Let’s assume that SNY will be willing to pay $79 (half way between $69 offered by SNY and $89 that GENZ is asking for). I actually think it will be more like $75 + $4 with CVRs, but I’m not accounting for CVRs just to keep the math simple. GENZ is now trading at about $73.5 a share. Based on these assumptions, the market is forecasting a 79% probability that SNY will acquire GENZ for $79 and a little over 93% that the acquisition price will be $75 (see calculations below).

(79% x $79) + (21% x $53) = $73.5

(93% x $75) + (7% x $53) = $73.5

These probabilities seem pretty reasonable considering how close to an agreement the two companies are. Keep in mind that these numbers should be taken with a grain of salt. The probability calculations are simple but flawed; there’s no chance that the final price will be greater than $89 and the numbers break down if you assume the acquisition price is less than the current share price. Nonetheless, the probabilities provide you with an idea of what the markets might be thinking.

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BioPharma Acquisition Spree Continues

Bristol-Myers Squibb recently announced its acquisition of Medarex for $2.1 billion (at $16 per share, about a 90% premium over its previous close). As I mentioned over three years ago, analysts had been speculating about Medarex’s acquisition after Amgen acquired Abgenix in 2005. Why did Bristol-Myers finally pull the trigger after all this time? I suspect that after Bristol-Myers was outbid by Lilly for control of ImClone, BMS wanted to reinforce its biologics franchise. That and the fact that Medarex shares have taken a beating since August of last year. Bristol-Myers and others have been signaling that they would take advantage of low valuations to make acquisitions. I believe that this buying spree will continue for the near-term as the fundamentals haven’t changed yet: relatively low valuations and cash-rich buyers facing generic competition and limited R&D productivity.

A Case for Preclinical Biopharma Companies

Despite the talk about how later-stage companies are being more favored, Jeff Himawan from Essex Woodlands Health Ventures made a very good case for preclinical stage biopharmaceutical investments at the recent LARTA Life Sciences Venture Forum. Concert Pharmaceuticals recently announced a partnership with GSK for three preclinical programs potentially worth over $1 billion in milestone and option payments. The lead compound, CTP-518, is a novel HIV protease inhibitor expected to enter Phase I trials the second half of 2009. Chroma Therapeutics also entered into a partnership with GSK for four discovery and development programs to identify small molecule therapeutics, including a macrophage-targeted HDAC inhibitor program for inflammatory disorders such as rheumatoid arthritis. The partnership is also potentially worth more than $1 billion. Last year, Daiichi Sankyo acquired U3 Pharma AG for $235 million. U3’s lead program, which is partnered with Amgen, is a fully-human HER-3 monoclonal antibody that will start clinical trials by the end of the year. Obviously, investing in preclinical programs are risky, but with most investors focusing on later-stage opportunities, there might be some good bargains at the early-stage.

Allergan: Going, Going…

Allergan (AGN) stock spiked recently on speculation that GlaxoSmithKline (GSK) would acquire the specialty pharmaceuticals company. I’ve thought for a long time that GSK would make a play for AGN. Allergan’s valuation is significantly lower than before given the current market conditions. Ophthalmology assets have been very popular, e.g. Alcon and AMO acquisitions. The companies already have a strategic partnership. Assuming that GSK has even made an offer for AGN, the big question is price – AGN CEO, David Pyott, has always maintained that he’s not interested in selling the company, but everyone has a price. Price will greatly depend on whether GSK believes Botox for migraine will receive FDA approval. Botox would be a great addition to GSK’s migraine franchise. Botox for overactive bladder, if it gets approved, would benefit GSK’s urology franchise. If GSK believes that the economy will recover soon and that AGN’s aesthetic business will eventually rebound, the timing may be right for an acquisition. I could be wrong, but I don’t believe there are any other potential suitors for AGN, so I don’t think there will be any competitive bids. J&J already bought Mentor, Novartis acquired Alcon, Abbott purchased AMO, and Pfizer is busy with Wyeth. Again, it all comes down to price. Wachovia analyst, Larry Biegelsen, thinks that Allergan shares are worth $60 or more. I wonder if AGN’s board thinks the same; they could easily reject GSK’s offer if it’s not high enough.

Disclaimer: I own Allergan stock; I have owned the stock for a number of years. Investment decisions based on potential acquisitions are highly speculative and risky. There is absolutely no evidence that GSK has made an offer to acquire AGN.

With Adversity Comes Opportunity

As mentioned in a previous post, the financing environment for pre-revenue life science companies is challenging. The IPO window is closed, and venture capitalists have become more stingy about deploying capital. Unfortunately, some start-ups will be unable to find financing and will fold. According to BIO, ten biotech companies have already gone bankrupt since November of last year. About a third of publicly traded biotech firms have less than 6 months of cash on their balance sheets. I hate to encourage taking advantage of others misfortune, but for those who survive and have cash, opportunities to pick up valuable assets for very little may abound. Keep an eye on bankruptcy filings. Unfortunately, the DowJones Bankruptcy Review requires a subscription, but the WSJ Bankruptcy Beat might be viable a free alternative.

The Impact of Big Pharma Consolidation on VC

M&A deal flow has generally declined given the current economic conditions, but not so for the drug industry. Analysts have been predicting for a while that the drug industry would consolidate; big pharma companies are cash-rich, have shrinking pipelines, and face an oncoming “generic” cliff. Merck recently announced a merger with Schering-Plough — the deal may be complicated by J&J. Earlier this year, Pfizer announced its plans to acquire Wyeth. And the Roche acquisition of Genentech looks like it may finally come to a close. With all of these mega-deals occurring, some VC’s have raised concerns about whether any smaller, venture-baked deals will take place. Integration of large companies is painful, but I doubt that good business development people will let valuable assets fall into the hands of competitors just because their company is busy with a merger.

Biotechnology M&A To Increase?

It should be no surprise that major pharmaceutical companies are struggling to grow as competition, both generic and branded, increases and internal R&D fails to produce new products. But even major biotechnology companies, like Genentech and Amgen, may soon face some of the same challenges their pharmaceutical counterparts are currently dealing with.

To fill a their product pipelines, companies have resorted to licensing compounds from smaller, more innovative drug discovery firms. But the market for licensed compounds is becoming more and more competitive as the demand for pipeline products increases. Licensing deals are occurring earlier in a product’s development life. Drugs in Phase II development are increasingly being licensed, while products in Phase III development are becoming more difficult to find to license. With repatriated cash, major pharmaceutical/biotechnology companies have turned to M&A as a way to get both new products and drug discovery technology.

Major pharmaceutical/biotechnology companies have gone on an acquisition spree, buying up both private and public companies. Amgen started last year with its acquisition of Abgenix for $2.2B, a 54% premium. AstraZeneca recently bought Cambridge Antibody Technologies for $1.3B, a 67% premium. Pfizer purchased privately held Rinat for an estimated several hundred million dollars. Rinat was funded by MPM Capital, Prospect Venture Partners, SV Life Partners, Technology Partners, and Essex Woodlands Health Ventures. Merck recently purchased privately held Abmaxis for $80M and GlycoFi for $400M. The GlycoFi deal is estimated to be one of the largest deals for a privately held biotechnology company. GlycoFi was funded by Polaris Venture Partners, SV Life Sciences, Boston Millenia Partners, Fletcher Spaght Ventures, Peninsula Equity Partners, Village Ventures, and Borealis Ventures. Polaris originally seeded GlycoFi with $400K, and eventually invested $10M over the next 5 years. Polaris’ share of GlycoFi is now estimated to be worth over $100M post acquisition.

Analysts have speculated that Medarex may be the next acquisition. Medarex has transgenic mouse technology similar to that of Abgenix and a number of pipeline products. Potential buyers could be Pfizer, which currently partners with Medarex for a late-stage antibody to treat melanoma and owns approximately a 5% stake. Bristol-Myers Squibb, which currently partners melanoma treatment MDX-010, may be another potential acquirer. Even if Medarex does not get acquired, partnering antibodies should be a lot easier now with competition getting bought up.

Major biotechnology/pharmaceutical companies have shown that they are willing to pay a premium for companies with potential products and platform technologies. Also common these previously mentioned deals was that the acquired firms generally had drug partnerships with their buyers prior to acquisition. If the hurdles for IPOs remain high, biotechnology companies in search of capital will see M&A as a way to access public financing, while acquirers see M&A as a way to fill drying pipelines. Given the current market conditions, trends in M&A will likely continue.