Pharma pays up for scarce assets

SAN FRANCISCO Tue Jan 10, 2012 6:13pm EST

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SAN FRANCISCO (Reuters) - When it comes to healthcare deals, the new motto may be "too expensive to fail."

Drug companies have been forced to pay massive premiums on acquisitions as the selection of target companies with viable prospects narrows and the need to fill out their portfolio of medicines intensifies, industry executives and bankers said at the JPMorgan Healthcare Conference this week in San Francisco.

Bristol-Myers Squibb Co's (BMY.N) deal to buy Inhibitex INHX.O at a 163 percent premium may be the most extreme example to date, but they are not likely to be alone as other global pharmaceutical makers compete for a small number of companies.

"There's always been a steady wave of health care M&A. The only difference now is there is a panicky quality to deals as companies appear to be playing musical chairs and they are grabbing at things to avoid being left alone when the music stops," said an investment banker, who declined to be named because he was not authorized to speak to the media.

Inhibitex's lead product is INX-189, an oral hepatitis C drug in Phase II or mid-stage development. It still must go through additional clinical testing and regulatory hurdles before it can be offered to patients. In other words, Bristol paid a hefty price tag for a drug candidate that may never see the light of day.

MKM Partners analyst Jon LeCroy said the firm views "the valuation of this deal as quite aggressive considering the historical failure rates of Phase II assets (18-28 percent)."

"While hepatitis C is an exciting space right now, we think paying $2.5 billion in cash for Phase II assets seems excessive," LeCroy said in a research report.

The deal comes on the heels of Gilead Sciences Inc's (GILD.O) $11 billion acquisition in November of Pharmasset Inc VRUS.O, which has its own promising hepatitis C therapies in development. That deal was at an 89 percent premium.

Charles Bancroft, Chief Financial Officer of Bristol-Myers, said the company had little choice but to pay up for Inhibitex.

"It was a very competitive bidding process," Bancroft said, without elaborating on other suitors.

The deal, however, met the company's criteria for acquiring products that address an unmet medical need, he said.

RISING PREMIUMS

Over the past five years, the average takeover premium for biotechnology firms has been 44 percent, above the average premium across all industries of 26 percent, according to data from Thomson Reuters.

Worldwide, the healthcare industry broadly attracted a higher premium than any other industry over the past two years, the data showed. Last year, the average premium for any health care deal was 35.2 percent, compared with an average premium of 30.0 percent across all industries, Thomson Reuters data showed.

Buyers in this industry may need to accept those rates will go higher, even if that means raising the risks as well.

"These deals (Inhibitex and Pharmasset) inflate valuations across the board and make prices in some sub-sectors astronomical," said a second healthcare banker, who also declined to be named because he was not authorized to speak to the media. "The Bristol deal may turn out to be a prescient move, but the backlash that could be felt if this Phase II drug fails will make it a cautionary M&A tale."

Novartis (NOVN.VX) Chief Executive Officer Joseph Jimenez, when asked about the Inhibitex and Pharmasset deals, said "I'm amazed at the prices."

Jimenez said Novartis has looked at all the hepatitis C assets out there and has its own drug in development. Novartis would consider partnering to develop another hepatitis C drug, but "we don't think we necessarily need to own one," he said.

The high-profile hepatitis C deals could push other top players like Merck (MRK.N) to go after companies such as Idenix IDIX.O, Achillion (ACHN.O) or Vertex Pharmaceuticals (VRTX.O), said another health care investment banker who declined to be named because he was not authorized to speak to the media.

"Achillion, in particular, has three drugs where it is unpartnered, which makes it a cleaner acquisition target," the banker said.

Ben Weintraub, director of research for Wolters Kluwer inThought, said the prices Bristol and Gilead were willing to pay for experimental drugs shows that Vertex, with a product on the market, is significantly undervalued.

Weintraub noted that Vertex's stock has fallen about 50 percent since the successful launch of its Incivek treatment. He said Johnson & Johnson (JNJ.N) would be obvious buyer of Vertex given their partnership on the antiviral Incivek, but added that Abbott Laboratories (ABT.N) may also be looking to boost its hepatitis C business.

Other areas likely to attract keen takeover attention include oncology specializations such as ovarian cancer, pancreatic cancer and hematology, bankers said.

Emerging markets would get more interest as companies need local representation and local branding to succeed in those markets, bankers and executives said.

Pfizer Inc (PFE.N) Chief Executive Ian Read told investors at the JP Morgan conference that the company would consider small deals in China, India and Turkey if the prices were attractive.

"Companies are taking bets earlier and earlier to beat competitors to the punch. That brings risk and requires a leap of faith - which is something shareholders tend to frown upon. At the same time, a 'sure bet' is hard to find when you're talking about research and development of drugs," said one investment banker, who declined to be named because he was not authorized to speak to the media.

(Additional reporting by Deena Beasley in San Francisco and Toni Clarke in Boston; Editing by Michele Gershberg and Tim Dobbyn)

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