BioPharma Acquisition Spree Continues

Bristol-Myers Squibb recently announced its acquisition of Medarex for $2.1 billion (at $16 per share, about a 90% premium over its previous close). As I mentioned over three years ago, analysts had been speculating about Medarex's acquisition after Amgen acquired Abgenix in 2005. Why did Bristol-Myers finally pull the trigger after all this time? I suspect that after Bristol-Myers was outbid by Lilly for control of ImClone, BMS wanted to reinforce its biologics franchise. That and the fact that Medarex shares have taken a beating since August of last year. Bristol-Myers and others have been signaling that they would take advantage of low valuations to make acquisitions. I believe that this buying spree will continue for the near-term as the fundamentals haven't changed yet: relatively low valuations and cash-rich buyers facing generic competition and limited R&D productivity.

A Case for Preclinical Biopharma Companies

Despite the talk about how later-stage companies are being more favored, Jeff Himawan from Essex Woodlands Health Ventures made a very good case for preclinical stage biopharmaceutical investments at the recent LARTA Life Sciences Venture Forum. Concert Pharmaceuticals recently announced a partnership with GSK for three preclinical programs potentially worth over $1 billion in milestone and option payments. The lead compound, CTP-518, is a novel HIV protease inhibitor expected to enter Phase I trials the second half of 2009. Chroma Therapeutics also entered into a partnership with GSK for four discovery and development programs to identify small molecule therapeutics, including a macrophage-targeted HDAC inhibitor program for inflammatory disorders such as rheumatoid arthritis. The partnership is also potentially worth more than $1 billion. Last year, Daiichi Sankyo acquired U3 Pharma AG for $235 million. U3's lead program, which is partnered with Amgen, is a fully-human HER-3 monoclonal antibody that will start clinical trials by the end of the year. Obviously, investing in preclinical programs are risky, but with most investors focusing on later-stage opportunities, there might be some good bargains at the early-stage.

Allergan: Going, Going...

Allergan (AGN) stock spiked recently on speculation that GlaxoSmithKline (GSK) would acquire the specialty pharmaceuticals company. I've thought for a long time that GSK would make a play for AGN. Allergan's valuation is significantly lower than before given the current market conditions. Ophthalmology assets have been very popular, e.g. Alcon and AMO acquisitions. The companies already have a strategic partnership. Assuming that GSK has even made an offer for AGN, the big question is price - AGN CEO, David Pyott, has always maintained that he's not interested in selling the company, but everyone has a price. Price will greatly depend on whether GSK believes Botox for migraine will receive FDA approval. Botox would be a great addition to GSK's migraine franchise. Botox for overactive bladder, if it gets approved, would benefit GSK's urology franchise. If GSK believes that the economy will recover soon and that AGN's aesthetic business will eventually rebound, the timing may be right for an acquisition. I could be wrong, but I don't believe there are any other potential suitors for AGN, so I don't think there will be any competitive bids. J&J already bought Mentor, Novartis acquired Alcon, Abbott purchased AMO, and Pfizer is busy with Wyeth. Again, it all comes down to price. Wachovia analyst, Larry Biegelsen, thinks that Allergan shares are worth $60 or more. I wonder if AGN's board thinks the same; they could easily reject GSK's offer if it's not high enough.

Disclaimer: I own Allergan stock; I have owned the stock for a number of years. Investment decisions based on potential acquisitions are highly speculative and risky. There is absolutely no evidence that GSK has made an offer to acquire AGN.

With Adversity Comes Opportunity

As mentioned in a previous post, the financing environment for pre-revenue life science companies is challenging. The IPO window is closed, and venture capitalists have become more stingy about deploying capital. Unfortunately, some start-ups will be unable to find financing and will fold. According to BIO, ten biotech companies have already gone bankrupt since November of last year. About a third of publicly traded biotech firms have less than 6 months of cash on their balance sheets. I hate to encourage taking advantage of others misfortune, but for those who survive and have cash, opportunities to pick up valuable assets for very little may abound. Keep an eye on bankruptcy filings. Unfortunately, the DowJones Bankruptcy Review requires a subscription, but the WSJ Bankruptcy Beat might be viable a free alternative.

The Impact of Big Pharma Consolidation on VC

M&A deal flow has generally declined given the current economic conditions, but not so for the drug industry. Analysts have been predicting for a while that the drug industry would consolidate; big pharma companies are cash-rich, have shrinking pipelines, and face an oncoming "generic" cliff. Merck recently announced a merger with Schering-Plough -- the deal may be complicated by J&J. Earlier this year, Pfizer announced its plans to acquire Wyeth. And the Roche acquisition of Genentech looks like it may finally come to a close. With all of these mega-deals occurring, some VC's have raised concerns about whether any smaller, venture-baked deals will take place. Integration of large companies is painful, but I doubt that good business development people will let valuable assets fall into the hands of competitors just because their company is busy with a merger.