We begin our evaluation of third-quarter activity with the Mark Twain quotation, “The report of my death has been exaggerated,” as it may appropriately characterize the trends noted in our second-quarter sector assessment. No Chicken Little, we now say in retrospect, the sky is not falling. In fact, following the private financing swoon and simultaneous surge in M&A activity that characterized the second quarter, third-quarter activity was generally back on track within historical norms.
For the quarter, the number of life-science related venture financings jumped nearly 60% over the second quarter. In aggregate, approximately $1.2 billion was raised. At the same time, the average deal size, which had jumped nearly 50% in the second quarter, also returned to its norm.
The quarter also witnessed the return of supersized specialty pharma deals, most notably the $60-million Prestwick Pharmaceuticals Series C financing and the $91-million Esprit Pharmaceuticals Series B financing. The number of completed deals was fairly evenly divided between biopharmaceutical and medical device financings.
Likewise, M&A activity reverted to a more normal level in the third-quarter, with the number of announced M&A transactions dropping 22% from the second-quarter’s record levels. Most notable was the visibility of cross-border transactions, including the battle between Genzyme (www.genzyme.com) and Millennium (www.mlnm.com) for Canada’s AnorMED (www.anormed.com), Mylan’s (www.mylan.com) $738-million bid to acquire a controlling stake in Indian generic manufacturer Matrix Laboratories (www.matrixlabsindia.com), and Hospira’s (www.hospira.com) $2-billion offer for Australia’s Mayne Pharma(www.maynepharma.com). That such deals are happening despite a weaker dollar, apparently underscores the importance of an expanded global reach to U.S. acquirors. While transaction volume for the quarter declined, by historical standards M&A acitvity continued at brisk pace.
If any area were to provide a crystal ball on upcoming sector activity, IPO activity for the quarter may be it. A legitimate argument can be constructed to suggest that the sharp decline in second-quarter private financing activity arose in reaction to an apparent stall in new issue activity. With only two companies filing to go public in the first quarter, activity in the private sector apparently went into near hibernation. Such alarmist sentiment proved unfounded despite this dearth in filings, with the carry over from prior quarters resulting in six completed IPOs and fears of the public markets falling off a precipice were allayed.
We now face the situation where despite a sizeable current deal backlog, market interest in new life science issues may be on the wane—witnessed by only three issues, not including Cleveland Biotech(www.clevebio.com), debuting last quarter. Given the economy’s current state of flux, the persistance of turmoil in the Middle East, and uncertain mid-term elections, the private funding climate may parallel the current change in seasons—at least near term.
Then again, as we witnessed last quarter, a trend does not three months (necessarily) make.
Benjamin J. Conway is managing director at Johnston Blakely & Company, an investment bank offering private equity placement and merger- and acquisition-related financial advisory services exclusively to companies in the life science sector. Web: www.johnstonblakely.com. Phone: (978) 526-4014.