Ernst & Young predicts more biotech mega-deals

By Ben Hirschler

LONDON, May 20 (Reuters) - Big pharmaceutical companies' hunger for new products will drive further large-scale acquisitions in the biotech sector, following a record year in 2007, according to a report on Tuesday.

Ernst & Young predicted in its annual global biotechnology survey that the convergence of biotech and pharma industries would continue unabated in 2008 and beyond.

"One or more mega acquisitions of mature biotechnology companies along the lines witnessed with MedImmune -- and nearly seen with Biogen Idec (BIIB.O) in 2007 -- is likely," the consultancy group said.

MedImmune was bought by AstraZeneca Plc (AZN.L) for $15.6 billion last year. Biogen, which has a market value of nearly $19 billion, was also on the block but failed to sell.

The role of mega-deals in the biotech sector has been disputed. Some investors, such as billionaire activist Carl Icahn, believe they can unlock substantial value. But others say smaller deals make more sense for drugmakers.

In practice, the sector is likely to see a combination of both big and small deals.

"The bulk of the action, whether in the form of strategic alliances or M&As, will occur between pharmaceutical/mature biotech companies and innovative emerging companies," Ernst & Young said.

"The negotiating power in these situations remains with the emerging company, so expect to see a continuation of high deal valuations."

Large companies, faced with the prospect of losing $67 billion in annual drug revenues between 2007 and 2012 as patents expire, are increasingly turning to the biotech sector for new products with which to refill their pipelines.

Last year was a record year for biotech mergers, acquisitions and strategic alliances. In the United States, the total potential value of deals announced during the year was close to $60 billion, while in Europe it totalled around $34 billion.

For young biotech firms which have yet to make a profit, such deals are a financial lifeline -- especially at a time when the credit crunch means raising funds from public equity markets is difficult.

Overall, 2007 remained a healthy year for biotech fund-raising, with companies in the Americas and Europe raising more than $29.9 billion -- a new peak, with the exception of the outlier year of 2000 when record funds flooded the sector in the wake of the mapping of the human genome, Ernst & Young said.

Recently, however, public equity markets have become much less receptive to risky biotech offerings, leading many firms to cancel IPOs and producing a worldwide slide in the industry's market capitalisation.

(editing by Elizabeth Fullerton)