Biotech firms evolve from targets to acquirers

NEW YORK Wed May 8, 2013 7:28am EDT

Henry Gosebruch, managing director of healthcare mergers and acquisitions for JPMorgan Chase & Co, speaks during the 2013 Reuters Health Summit in New York, May 6, 2013. REUTERS/Shannon Stapleton

Henry Gosebruch, managing director of healthcare mergers and acquisitions for JPMorgan Chase & Co, speaks during the 2013 Reuters Health Summit in New York, May 6, 2013.

Credit: Reuters/Shannon Stapleton

NEW YORK (Reuters) - Biotechnology companies that just a short time ago were viewed as takeover targets are now more likely to be buyers themselves after seeing their valuations soar on promising new drugs.

The stock valuations of companies like Regeneron Pharmaceuticals Inc (REGN.O), Gilead Sciences Inc (GILD.O), Celgene Corp (CELG.O) and Biogen Idec Inc (BIIB.O) have skyrocketed in the past year or two alone, making it difficult for large pharmaceutical companies to buy them and leaving a trail of dead deals.

"For a pharmaceutical company to make an acquisition at this point paying double or triple what it could have paid a year or two ago ... I think that has killed a lot of transactions that we have seen where discussions either started or pharma thought about approaching or maybe even did approach," said Henry Gosebruch, managing director of healthcare M&A at JPMorgan Chase (JPM.N). He spoke at the Reuters Health Summit in New York.

In some cases, a major drugmaker will identify a biotechnology target and watch it for years to determine the right time to make an offer. It may have balked at paying a high premium early on, and by the time it is ready to do a deal, the biotech company has become even more expensive, Gosebruch said.

"I could think about four or five of those stories," he said.

For example, shares of Regeneron have risen more than 50 percent year-to-date, to the $260 range, on spectacular sales of its Eylea treatment for macular degeneration, the leading cause of blindness in the elderly.

Biotech stock valuations are skyrocketing even on the release of positive data around a drug. Biogen Idec's stock has more than quadrupled over the past four years over promising data surrounding its Tecfidera drug for multiple sclerosis, which was approved just this year.

With interest rates low and financing easily available, biotechnology companies realize they do not need to be bought in order to bankroll their clinical trials and marketing efforts, said Ercument Tokat, a partner and healthcare banker at New York-based investment bank Centerview Partners.

"In the last few years what has changed quite dramatically is that mid-cap and large-cap biotechs have turned into acquirers," Tokat said. "Most of the time in the past, if you were single-product biotech with a phase 3 drug, you were really waiting to be bought."

Biotech investors have also reacted positively when companies announced acquisitions, emboldening more industry CEOs to grow through M&A, bankers said.

For example, Gilead paid about $11 billion in 2011 to acquire Pharmasset for its experimental Hepatitis C drug. Since that acquisition, Gilead's stock has jumped more than 185 percent and is trading slightly above $53.

Similarly, since buying Abraxis BioScience for its breast cancer drug Abraxane in June 2010, Celgene has seen its stock almost triple in value. It currently trades around $122 per share.

"On the pharma side, it is a trickier question because a lot of Big Pharma investors are there for the dividend or buyback, there for the value, they're there for steady cash flow and may be less willing to support risky transactions," Gosebruch said.

The rich valuations of biotechnology companies are not just staving off potential acquirers, but also activist investors who in the past have sought to shake up the operations of underperforming companies and attract takeovers by Big Pharma.

"These stocks have doubled or tripled ... it is hard to make the case they've been underperforming," Tokat said.

Healthcare bankers expect a continued flow of smaller deals for both publicly traded and privately held drugmakers in the $1 billion to $5 billion range.

"There are hundreds of private companies that could be good targets for big pharma," Gosebruch said.

Pharmaceutical companies, which have survived the worst of the patent cliffs and spent the last few years on cutting costs, are now looking externally for growth, but the days of huge pharma mergers are unlikely to make a comeback in the near future, bankers said.

"The stars are not fully aligned," Gosebruch said. "The overall confidence in the world is improving but it's got a long way to go. The combination of valuations and a little bit of uncertainty are holding things back."

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(Additional reporting by Bill Berkrot and Ransdell Pierson in New York, editing by Soyoung Kim, Michele Gershberg and Matthew Lewis)