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Insight & Intelligence : Sep 11, 2013
As Big Deals Resurface, Who’s Next to the Altar?
Amgen-Onyx, Perrigo-Elan warm an M&A space that had been chilled by an IPO revival.!--h2>
Amgen’s planned acquisition of Onyx Pharmaceuticals was a reminder of how quiet the M&A market had been over the past year and a half, and an indication of how busy it has become in recent weeks.
At $10.4 billion, Amgen’s acquisition of Onyx is only the year’s second eight-figure M&A deal, the first being Thermo Fisher Scientific’s planned purchase of Life Technologies for $13.6 billion plus $2.2 billion in assumed debt. Biopharma went through all of last year without a single deal of $10 billion or more, unless you count Pfizer’s $11.85 billion sell-off of its infant nutrition business to Nestle.
Amgen-Onyx is also the largest deal to date in the second half of 2013. This period, according to a GEN spot check of recent announcements, saw four acquisitions in the four days after Labor Day, following nine mergers and acquisitions last month. It remains to be seen whether the flurry of deal making in recent days will generate enough momentum to reverse a decrease last year.
Between January and July, the number of biopharma, diagnostics, tool/tech, and supply/service deals dipped compared to the first seven months of 2012, to 155 from 160, even as the volume of deals whose values were disclosed rose 17%, to $61.6 billion from $52.5 billion, according to Burrill & Co. The number of undisclosed deals fell year-over-year to 41 from 55.
Based on disclosed deals alone, August 2013 appears to be a roughly $20-billion deal month, not only due to Amgen-Onyx, but also Boca Pharmacal’s $225 million sale to Endo Health Solutions’ Qualitest generics subsidiary and (notably) Perrigo’s planned $8.6 billion acquisition of Elan. Perrigo-Elan became the third deal so far this year in the $5–10 billion range, compared to two in all of 2012. (The other two are Valeant Pharmaceuticals’ $8.7 billion purchase of Bausch+Lomb, and Actavis’ planned $8.5 billion purchase of Warner Chilcott.)
Such megadeals are exceptions in an industry where most deals run into millions. Yet a closer look at deals whose values were disclosed this year also shows more smaller-value transactions during 2013. Between January and July, the number of deals from $100 million to $999 million dipped slightly to 40 from 42 a year earlier, while those from $10 million to $99 million climbed to 45 from 36.
Wall Street Effect
Two key reasons why 2013 has been a mostly quiet year for deals until lately: Over the past year, the stock markets have performed strongly, lifting stock prices. Even more important for biopharma, the market for initial public offerings of stock is at its strongest since 2000, with 29 companies having successful IPOs from January to July this year, compared with 11 the same period last year. (There were 16 successful IPOs for all of 2012.)
“There’s an inverse correlation between IPOs and M&A, which is not surprising,” said Eric Schmidt, Ph.D., managing director and senior research analyst with Cowen & Co. “When companies can go public, and have the option, they tend to want to stay independent and choose that option. They get a good value as a publicly traded company in a public market. It makes finding a negotiated M&A price more difficult.”
An inverse relationship also exists between M&A deals and stock-market performance, Dr. Schmidt said, adding that Amgen-Onyx is an example of the one or two very high profile acquisitions that can surface even in strong market years.
“There’s always going to be interest on the part of larger companies like Amgen to acquire smaller companies like Onyx. These larger companies have a perpetual need for more products and higher revenue growth. The question is can they find the right asset at the right price?” Dr. Schmidt said.
Potential M&A Targets
A Cowen report published in July included Onyx among 10 potential biotech acquisition targets—a list of mostly long-rumored names that included Achillion Pharmaceuticals, Acorda Therapeutics, Ariad Pharmaceuticals, Auxilium Pharmaceuticals, BioMarin Pharmaceutical, Cadence Pharmaceuticals, Dynavax Technologies, Incyte, and Medivation.
Acorda has had sales success and plans to add indications to its multiple sclerosis drug Ampyra; Ariad’s leukemia drug Iclusig has been projected to reach $2.5 billion in annual sales; Auxilium expects approval later this year for a new indication (Peyronie’s disease) for adult Dupuytren’s contracture treatment Xiaflex, whose year-over-year sales rose 15% from January to June; and BioMarin has a pipeline of drugs plus sales in orphan drugs like Naglazyme, which made $257 million last year.
Cadence last month raised its sales forecast range for its IV acetaminophen Ofirmev, since its drug class is expected to see greater use in surgery; Incyte’s pipeline and solid launch of Jakafi for myelofibrosis has wowed investors, with Phase III data for a new indication (polycythemia vera) expected next year; and Medivation successfully launched Xtandi for metastatic castration-resistant prostate cancer.
Two targets lost investor luster in recent weeks: The FDA placed Achillion’s hepatitis C candidate sovaprevir on clinical hold after liver enzyme levels associated with significantly higher-than-anticipated exposures to the drug were seen in a Phase I study of the drug combined with ritonavir-boosted atazanavir. Also, Dynavax saw its share price drop more than half since May, after receiving an FDA complete response letter seeking more safety data on adult hepatitis B vaccine candidate Heplisav.
Onyx emerged as the apple of Amgen’s eye after launching its first wholly owned product, Kyprolis®. The multiple myeloma drug racked up $125 million in net sales for the first six months of this year, nearly double 2012’s $64 million. Kyprolis was the fourth best-selling new drug launched last year, according to GEN’s “Top 20 Best-Selling Drugs Approved and Launched During 2012,” published April 8.
Eun K. Yung, Ph.D., an equity analyst with Jefferies, predicted in an August 26 note to investors that sales of the drug would zoom to $499 million in 2014, and $1.728 billion by 2018. A consensus of analysts cited by Bloomberg anticipates more than $3 billion in sales by 2021.
“You can say with some certainty that if Kyprolis didn’t exist, Amgen wouldn’t be interested in Onyx,” Dr. Schmidt said.
Anticipating Long-Term Developments
Justin Collishaw, a Frost & Sullivan industry analyst, said that investors should look longer term, since the hepatitis market is expected to grow beyond hepatitis C, encompassing drugs developed for other forms of the virus, where Achillion’s knowhow can prove valuable to a buyer.
“By 2020, I would say hep G is going to be at least a $10-billion market, so a company like Achillion has, I think, extreme attractiveness, and they have a [range] of wholly owned products with no partnerships in place, so they can be comfortable about their results,” said Collishaw. “All [Achilion] would have to do is get a small slice of that pie, and they would get a higher valuation than what they’re trading at today.”
Another potential M&A target, Collishaw said, is Theravance, which develops small molecule drugs for respiratory disease, bacterial infections, and central nervous system pain. Its sole marketed product is Vibativ for MRSA-caused nosocomial pneumonia. One sign of big biopharma interest in Theravance: In May, Elan agreed in principle to pay $1 billion for a 21% royalty participation interest in potential future payments related to four respiratory programs in which Theravance is partnering with GlaxoSmithKline. The programs are Relvar™ or Breo™ Ellipta™ (approved that month by the FDA for COPD); Anoro™ Ellipta™; bifunctional muscarinic antagonist-beta2 agonist monotherapy (GSK961081/MABA '081); and vilanterol monotherapy.
Elan shareholders, already sour on Royalty Pharma’s hostile bid for their company, rejected the deal the following month.
BioMarin and Medivation also turned up last month in a Jim Cramer list of takeover targets that included Seattle Genetics. He cited the company’s antibody-drug conjugate licensing agreements with 12 biopharmas—including giants such as AbbVie, Bayer, Genentech, GlaxoSmithKline, and Pfizer—that have generated more than $225 million for the company.
As more biotechs go public in a market now smiling on biopharma, the takeover target lists of analysts can be expected to lengthen in the short term. The long term is harder to figure out, though investors seeking clues might look less to the Wall Street herd and more to basic criteria, such as success in finding niches to dominate with first-in-class drugs, building pipelines, collaborating with others, and translating years of research and trials into millions or billions in sales.
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