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March 01, 2009 (Vol. 29, No. 5)

Impact of Risk Mitigation on Deal Market

Volatile Economy and Need for New Products and Cash Flow Has Created a Buyer’s Paradise

  • Availability of Ready Cash

    Financially, many pharmaceutical companies are well positioned to focus on acquisitions. At the close of the 3Q 2008, the combined cash on hand among the top six pharmaceutical companies was over $70 billion, with Pfizer alone having over $26 billion available.

    In contrast to pharmaceutical companies, many biotech companies, both public and private, have insufficient cash on hand and limited access to additional capital.  Drops in both market capitalization and ready cash demonstrate the financial difficulties facing public biotech companies. 

    At the end of November, over 37% of public biotech companies had less than one year of available cash. The biotech market has also seen a significant drop in follow-on public offerings to raise money for existing public companies. In 2006 and 2007 respectively, biotech companies raised $5.77 and $6.31 billion through follow-on public offerings, but in 2008 only $1.73 billion was raised. 

    Privately held biotech companies face similar capital depletion and limited access to markets. Venture capital investment in emerging biotech companies remained relatively strong in 2008, with $4.2 billion, just short of the $4.4 billion raised in 2007. Many experts expect venture capital investments to slow in 2009.  Furthermore, the IPO market for emerging biotech companies was basically nonexistent in 2008. In 2007, 28 biotech companies successfully completed their IPOs, whereas only one occurred in 2008. Additionally, the credit crunch has limited the availability of debt financing for all biotech companies, as the amount of financing raised in 2008 by biotech companies was less than half of that in 2007.

    Pharmaceutical companies will undoubtedly benefit from the difficulties facing biotechnology companies in 2009 as valuations will likely be depressed, and consequently, the number of significant corporate transactions may increase.  Fewer of those transactions may be structured as acquisitions, than may otherwise be expected when considering generally lower valuations. Despite the incentives to acquire products and technologies and reduced valuations of acquisition targets, risk mitigation will be a significant factor for pharmaceutical companies in 2009.

Posted 3/5/2009 by President

Doesn't it appear that Pfizer wasted their cash advantage with the Wyeth deal? Paid way too much. Reduced their opportunities to buy biotech.


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