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$1-5bn seen optimal for biotech M&A

Zurich, June 14, 2011

Biotech deals in the $1 billion to $5 billion range are likely to be a sweet spot for drug companies looking to bolster their pipelines through M&A in an increasingly tough environment, Ernst & Young said.

Big pharma companies are likely to be the main buyers, but they may face competition from larger biotech firms for attractive targets, Glen Giovannetti, global biotechnology leader at the consultancy told Reuters.

"There are not many targets above $10 billion," Giovannetti said. "I think there is an interesting space between $10 and $20 billion, which is a pretty sizeable deal, but it's different than $20 billion and above," he said.

"I think you could see some (deals) between $10 and $20 billion although there aren't many targets in that space. I think you will see a lot more in the $1-$5 billion range," Giovannetti said.

Britain's Shire, which is worth $17.2 billion, has long been rumoured to be one acquisition target.

Pharma and biotech companies alike are looking to shore up revenue streams and boost their product offerings as they battle healthcare reforms on both sides of the Atlantic, tougher regulatory approval processes, patent expiries on top-selling drugs and less productive pipelines.

The Ernst & Young's "Beyond Borders" global biotechnology report 2011 highlighted that biotech groups are having to produce even more effective drugs with fewer resources as they face increased competition for financing.

The report also showed there was a widening gap regarding which companies were getting funding.

"Investment in the industry is increasingly finding its way to a select group of generally more established companies. As a result, earlier stage companies will need to find creative solutions for how to support their R&D," Gautam Jaggi, managing editor of the report said.

Bridging the gap

Biotech companies that had managed to get one product to market were likely to be interested in snapping up rivals with late-stage treatments to bridge their own production gaps and as part of an effort to diversify, Giovannetti said.

There has been speculation that Swiss biotech group Actelion , itself recently the subject of intense takeover rumours, could be interested in going for smaller peer Basilea to expand its pipeline.

Companies that were strong in the area of personalised medicine or boasted treatments that were significantly better than other rival medicines could also become prey, Giovannetti said.

"Payers, whether they be private or government payers, are not going to be as willing to pay premium prices for a non-differentiated product now, especially when you have some of the best medicines of all time available or soon to be available in generic form," he said.

Exit strategy

Venture capitalists were increasingly viewing M&A as their main exit strategy as the initial public offering market remained shaky, Giovannetti said.

The four private equity firms that owned Swiss drugmaker Nycomed recently sold out to Japan's Takeda instead of waiting for a flotation further out where they would initially have had to retain significant stakes.

Giovannetti also said Japanese companies were likely to remain active buyers, possibly opting for more consolidation within Japan, or following the lead of companies like Takeda and Astellas and expanding outside their domestic market.

Contingent value rights, or CVRs, as seen in deals like Celgene's buy of Abraxis and Sanofi's acquisition of Genzyme, are likely to remain a feature of M&A deals, the Ernst & Young report said.

CVRs are one way of ensuring a company manages to get paid for what is in its pipeline, but not yet on the market, while it also allows the buyer to offset some of the potential risk. – Reuters




Tags: Ernst & Young | merger | pharma | M&A | zurich | biotech | Drug companies |

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