Step back and look at the trend in biopharma M&A and you'll find significantly less money than you would have seen on the table last year.
It wasn't supposed to work out this way. When the economy hit the skids in 2008, analysts assumed we had entered a period of fire sales, with more companies on the block fetching smaller sums. But just the opposite happened, with some big-money deals capturing the headlines. Now that the buyout binge has largely run its course, says Deloitte Recap's senior biotech analyst Chris Dokomajilar, the industry is catching its breath, working through the consolidation period while selectively picking off companies that can be easily bagged and bolted on to a big organization.
So far this year Deloitte Recap tracked $142 billion spent on acquisitions in the life sciences field. That's likely to play out at the end of the year with another annual drop when you compare it to the $245 billion in acquisitions for all of last year. Add in shrinking streams of venture capital and a first-half pattern of squeezed milestones on the licensing side of the deal table, and the pinch turns painful.
- Top 5 dealmakers in licensing and joint venture for the first half of 2012
Scanning the biggest M&A deals of the year, Amylin, Gen-Probe, and Human Genome Sciences all figured in the multibillion-dollar framework. But they fell well short of a bigger set of deals in 2011, when Nycomed, Pharmasset and Cephalon all came in much higher.
So in this kind of climate, what kind of biotechs look most appealing to buyers?
That would be a developer with a Phase II asset that's cleared the proof-of-concept hurdle, says Dokomajilar, when the buyer is looking at a significantly de-risked approach to late-stage trial work. Drugs for infectious diseases in particular appear attractive right now. And cancer is likely to continue to remain one of the most active disease targets in the industry.
For infectious diseases, a billion-dollar deal looks the most appetizing, though Dokomajilar adds that a lot of smaller biotechs are shooting for the $300 million to $400 million deal mark, depending on the amount of venture cash that has been invested and the amount of time investors have waited for a cash-out.
For venture players, returns can be good, but typically don't get close to the 10x goal line most like to boast about.
"7x is doable over a longer time," says Dokomajilar. "Not 3 to 5 years. Usually 7 to 10 years."
One potential silver lining:
"The past few years brought a tremendous amount of liquidity," says Dokomajilar, counting $215 billion in "committed" dollars, upfront and equity payments offering investors a chance to cash out. But when you remember that a lot of those investor groups are required to reinvest a portion of their cash in this industry, a lot of that money should be flowing back in. That, however, clearly hasn't happened yet.
"We're seeing a lot of generics manufacturers being added in, which is surprising to me," says the Deloitte Recap analyst. "When you see Watson acquiring Actavis, Merck and all the big pharma companies have been acquiring generics companies, whether to preempt patent cliffs, for product protection, or to get a hand in the game where they will be selling generics of their own products."
- Top dealmakers by $$, Q1-Q3 2012
- Top buyers by activity, Q1-Q3 2012