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Wall Street BioBeat : 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
  • Eugene Rozelman

After recording the strongest January in years, the equity capital markets turned in a volatile performance for Q1 2011, with the Dow and S&P ending the quarter up 6.4% and 5.4%, respectively. Investors managed to shake off worries over antigovernment protests in Egypt and are digesting the turmoil and uncertainty stemming from the unrest in the Middle East and the natural disaster that struck Japan.
After a somewhat quiet start to the year for biotech, momentum for the sector began to accelerate as sanofi-aventis and Genzyme finally reached an agreement in February, approximately seven months after Sanofi made its initial bid of $69 per Genzyme share. The final terms have Genzyme shareholders receiving $74 per share in cash and one contingent value right per share, which entitles them to additional cash payments based on milestones related to specific Genzyme programs.
The Nasdaq biotech index ended Q1 up 7.3%, and we continued to see healthy financing activity for the sector. Public biotech companies raised over $5 billion in Q1, more than twice what was raised by the sector during the same period last year. Amarin kicked off the year on a strong note, raising $105 million through a public equity follow-on offering, after reporting that it met pivotal Phase III endpoints, with highly statistically significant reduction in triglycerides in its Marine study, in late November of last year.
Several other biotechs managed to complete sizable public equity follow-on offerings of $100 million or more, including Nektar ($225 million), Pharmasset ($176 million), Seattle Genetics ($178 million), and Exelixis ($190 million). These five financings, including Amarin’s $105 million deal, equal the number of public equity follow-on financings of $100 million or more completed by biotech companies in all of 2010.
The biotech IPO class of 2010 continued to perform, trading up 11.4% during Q1. Standout performers from the class included Aveo Pharmaceuticals, which was up 48.0% at the end of Q1 from its IPO price. Aveo’s tivozanib is currently in Phase III development to treat patients with advanced renal cell carcinoma. This strong aftermarket performance bodes well for private biotechs currently in the IPO queue or contemplating tapping the public markets this year.
Although not robust, new issue activity continued in Q1, as four biotech companies managed to successfully price their offerings and make their public equity market debut. However, biotechs seeking to go public today still face a significant liquidity discount. The private biotechs that are most likely to attract sufficient public institutional investor support include those companies with late-stage assets, de-risked development pipelines, and VCs that have the dry powder and appetite to potentially participate in the IPO.
Thus far, the performance of biotech IPOs priced in Q1 has been mixed, but investors continue to show interest in high-quality opportunities, as deals are getting done. Several promising private biotechs are waiting in the wings, looking for signs of stability and enthusiasm from the capital markets..

An Eye on Therapeutics

Closing of the Sanofi-Genzyme deal brought added investor attention to the biotech sector and stoked speculation about which other biotech giants are on the menu for 2011. As Q1 progressed, we saw that acquirers had more than just biotech behemoths in their crosshairs. Large-cap biotechs joined big pharma in the hunt for promising therapeutics, as Amgen paid $1 billion—including up to $575 million in milestones—to acquire BioVex, the maker of a late-stage cancer vaccine that has shown positive results in treating solid tumors.

The deal-making continued as Gilead Sciences paid $375 million in cash plus $225 million in potential milestones to acquire Calistoga Pharmaceuticals, a privately held biotech company focused on cancer and inflammatory diseases. Daiichi Sankyo announced that it will acquire Plexxikon for $805 million up front plus up to $130 million in near-term milestone payments associated with the approval of PLX4032, an oral drug in Phase III testing for the treatment of metastatic melanoma in patients with the BRAF mutation.

Specialty pharma companies also got into the mix. Canadian drugmaker Valeant Pharmaceuticals made an unsolicited bid to buy Cephalon for approximately $5.7 billion. Forest Laboratories announced that it will acquire Clinical Data for $1.2 billion. Additionally, Cephalon was active as well, making several bids including an offer of $225 million up-front for private biotech Gemin X Pharmaceuticals to obtain access to drug candidate obatoclax for small-cell lung cancer with Phase II data.

Q1 also saw a healthy level of licensing activity, as both biotech and pharma firms consummated deals with meaningful up-front and milestone payments. Human Genome Sciences and FivePrime Therapeutics announced a development and commercialization agreement for cancer candidate FP-1039, worth $50 million up front, up to $445 million in milestones, and a tiered, double-digit royalty on sales. Astellas and Aveo Pharmaceuticals entered into a worldwide agreement to develop and commercialize tivozanib for a broad range of cancers outside of Asia. Aveo received $125 million up front and $1.3 billion in potential milestone payments, along with a 50% share of profits.

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.