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May 1, 2011 (Vol. 31, No. 9)

Q1 2011 Closes with a Sense of Optimism

After Quiet Start, Flurry of M&A Activity Got the Life Science Industry Ball Rolling

  • The Patent Cliff

    Large pharma firms and investors alike have long known of the approaching patent cliff, but until recently it seems that both held out hope that internal development efforts would produce enough successful therapeutics to offset the impending hit from generics. Although there have been some internal pipeline successes, there have also been high-profile setbacks throughout the industry.

    Now, 5 of the world’s 10 best selling drugs will face U.S. generic competition by 2012 including Pfizer’s Lipitor and Eli Lilly’s antipsychotic Zyprexa, both expected to go generic in 2011. Drugmakers have started to take steps to address this patent cliff through consolidation and cost cutting. However, continued acquisition of promising therapeutics and discovery capabilities will need to be a significant part of the equation, as large pharma looks for future drivers of revenue growth.

    Biotech M&A activity should continue its upswing through 2011, as drugmakers work to position themselves for future growth. Cash-rich biotech and pharma companies looking to build on existing franchises, fill in pipeline gaps, address multibillion-dollar patent cliffs, or expand into new therapeutic areas are natural acquirers of both public and private biotech companies.

    Biotechs with pipeline candidates that have positive late-stage clinical data or approved products will command premium valuations in exchange for greater visibility, reduced risk, and higher certainty of financial return. Deals involving earlier-stage pipelines will likely include structured payments, allowing sellers to participate in future upside through milestones and contingent payments, while spreading out the risk for buyers. Pharma firms still prefer to add earlier-stage programs through less costly, at least initially, collaborations.

    As 2011 progresses, we expect the biotech sector will continue to benefit from growing investor confidence and the improving financing environment. Despite the threat of increased government involvement in healthcare and geopolitical instability, investors will continue to seek and reward those companies with late-stage assets that present risk-mitigated opportunities. Partnering and M&A momentum will continue, with cash-rich biotech and pharma companies selectively competing for promising therapeutic assets.

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