M&A Activity Likely to Stay Hot in 2012 Though Blockbusters May Be Fewer

Over the past three years, the most obvious blockbuster mergers, the proverbial low-hanging fruit, have been picked. Yet merger and acquisition activity should continue in 2012 as biopharma giants continue to fill holes in their product pipelines by pursuing deals with smaller companies.

While a handful of potentially viable mega mergers could yet emerge in the biopharma space, drug developers seem to now be looking beyond acquiring companies that can safeguard from loss of revenues due to patent cliffs to those that can fill their depleted pipelines and bolster long-term revenue streams. More deals to purchase companies in the development stage are expected rather than firms already generating revenues.

Overall most believe that M&A activity in 2012 will be high. On December 21, G. Steven Burrill, CEO of Burrill & Company, predicted another busy year for M&A activity. Six days earlier, Goldman Sachs also issued a report suggesting M&A will remain a key focus of the biopharma industry.

“Large pharmaceutical companies will continue to break down the distinctions between pharmaceutical, biotech, generic, biosimilars, and diagnostics companies by acquiring companies across the spectrum,” Burrill predicted. “They will need to compete with larger biotechs, who will become more aggressive buyers of innovative companies.

“Nontraditional life science companies will also move deeper into the space. Look for a major tech company establishing itself in the bioinformatics space through an acquisition. Several mid-cap life science companies are likely targets for acquisition in 2012. That will heat up activity in the sector.”

Potential Targets

Goldman Sachs identified several companies as being most likely candidates to be taken over this year:

• Dendreon: In September it laid off 25% of its workforce following slower-than-expected sales of its prostate cancer treatment Provenge. Despite its status as the first immunotherapy approved in the U.S. to treat prostate cancer, Provenge was hurt by its $93,000 price and reimbursement issues.
• Human Genome Sciences: It also saw slower-than-expected sales for Benlysta, the first new treatment for lupus in more than a half-century. After peaking at $30 a share in April, the company shares have tumbled 75% to $7.01 as of December 28. The company now says its first profitable year will be 2014 after initially expecting 2013 to see profits.
• Incyte: Last month the firm won approval from FDA for its first drug, Jakafi, the only approved treatment in the U.S. for the blood cancer myelofibrosis.
• InterMune: Its share price fell after German officials concluded its drug for treating idiopathic pulmonary fibrosis offered no additional benefit to patients.
• Momenta Pharmaceuticals: On December 22, the company signed a deal with Baxter to help develop up to six biosimilars in return for $33 million cash up front and more than $400 million in milestone payments.
• Onyx Pharmaceuticals: Earlier this month the firm disclosed that it was denied accelerated review by FDA for carfilzomib, a multiple myeloma treatment. Before the FDA disclosure, a news report had Onyx exploring options including a possible sale.
• Seattle Genetics: In August the firm won FDA approval for Adcetris as a treatment for anaplastic large cell lymphoma after failure of at least one chemotherapy regimen and as a treatment for Hodgkin lymphoma after failure of at least two prior chemo regimens.
• Vertex Pharmaceuticals: In May the company achieved FDA sanction for Incivek, a hepatitis C treatment. In December it received the agency’s approval for accelerated review of a drug for cystic fibrosis. But the company’s share price has fallen by half since reaching a 52-week high in May, as investors worry that rivals will soon bring their own hep-C drugs to market.

Other companies cited in months of recent news reports include Bristol-Myers Squibb, whose market capitalization of $59.8 billion has fluctuated in recent years to as low as $40 billion. Pharma giants like BMS with market caps closer to $50 billion are in the second stratum compared with top-tier giants that have a market cap of $100 billion or more.

“That smaller subset of pharma companies could be potential acquisition targets, because it’s all about complementary infrastructure and cutting costs where it’s duplicative,” explained Eugene Rozelman, principal at Canaccord Genuity. “It’s not absurd to think that Bristol is a potential target.”

He added that BMS’ product portfolio is better managed than those of many larger rivals and thus didn’t face steep patent cliffs as some other pharma companies. BMS has been acquiring promising products or entire companies through its so-called “string of pearls” strategy.

Forest Laboratories, which focuses on primary care, is another potential target, as well as Acorda Therapeutics, which has the MS treatment Ampyra. Rozelman notes that Ampyra’s infrastructure in treating central nervous system diseases could be a good fit for either pharma or specialty pharma.

Impetus for Activity

Many of the same factors that resulted in 2011’s acquisitions will drive M&A activity this year. For example, last year Sanofi capped a months-long, publicly speculated courtship of Genzyme with a $20.1 million offer. The deal was completed in April, and in October Sanofi reported that Genzyme would serve as the new company’s rare disease and multiple sclerosis unit.

“This was a very complementary deal for both in regard to geographic presence,” Rozelman pointed out. “Sanofi historically lacked scale in the U.S., so it used partners like Bristol-Myers Squibb to distribute products like Plavix and Avapro. More importantly, this deal with Genzyme allowed Sanofi to really shift its mix from its patent-challenged blockbuster drugs to key growth platforms.”

Alan Carr, Needham & Co. biotech analyst, has pegged increased M&A activity in 2012 to two factors: efforts to reduce red tape for drug developers pursuing FDA review and an overall improved outlook on the market. “If the regulatory environment improves, which we believe may gradually occur, increased M&A activity could follow,” Carr wrote in a December 23 note to investors.

Volatility overseas, however, will continue to dampen U.S. markets. Additionally, efforts to cut red tape are unlikely to go as far as industry wants. So the drivers of increased M&A activity in 2012 most likely won’t be Wall Street or some sort of kinder, gentler FDA.

More than likely, mergers and acquisitions in 2012 will be driven by the same factors that have stoked activity in recent years—pharma’s desire for revenues given patent expiries, their need to bolster R&D pipelines, and their paradigm shift into the world of biologic development. Biotech drug developers, particularly the larger companies, will also compete on the M&A stage as they try to diversify their disease and technology focus.