Biotech Companies Brace For Busy M&A Season
Jonathan Matsey
February 12, 2009

Predicting a frenzied pace of biotech mergers and acquisitions in 2009, panelists at a recent industry conference said that managing cash and a pipeline schedule will be key to a succesful exit.

At the recent BIO CEO & Investor Conference in New York, several executives who have sat on both sides of the negotiating table discussed the issue on a panel titled "The Cure for Market Anxiety: M&A."

"Whose anxiety will be cured? Those companies who have the most leverage to negotiate deals," said Michelle Dipp, vice president of corporate development of GlaxoSmithKline PLC subsidiary Sirtris Pharmaceuticals. "Those companies who still have cash - that have a year, year and a half of cash - will do the best deals."

That is not easy in an industry known for extremely high burn rates. But while a creative company can often find ways to boost its balance sheet, an even greater asset is the strength of the clinical pipeline.

Drew Fromkin, chief executive of Clinical Data Inc., said that was key in last year's purchase of venture-backed Adenosine Therapeutics Inc. "We wouldn't have made that deal if it weren't girded with late-stage compounds," he said. "The preclinical pipeline, while excellent, wouldn't have flipped the switch."

An empty pipeline is more of a turn-off than a bank account full of cash, Fromkin said, a problem that he said may cause investors to seek the liquidation of the company. "There are companies sitting out there with cash on the balance sheet but no second or third acts," he said. "In 2000, 2001, in the venture arena, people were asking for their money back - they'd had enough."

Likewise, regulatory hurdles slowing down pipeline progression can radically alter expectations of what makes a good deal. Mark Leuchtenberger, CEO of Targanta Therapeutics Corp., a venture-backed company that went public in October 2007, said the company underwent a serious reconsideration about its future after the Food and Drug Administration said in November 2008 it would require another Phase III clinical trial for the antibiotic oritavancin.

"If your assets change value, the worst thing is to not let go," Leuchtenberger said. "Or else you may be playing musical chairs and not have a seat."

Targanta was in the process of negotiating a partnership deal with Medicines Co. when the FDA review was issued, Leuchtenberger said, and the company changed track and negotiated a sale to Medicines. "Our investors are happy about it, relatively speaking," he said. "Obviously it would have been better to have approval from FDA."

Venture investors were warned by the panelists that acquisition deals increasingly tie returns to performance of the purchased assets over time. "With the earn-outs, venture investors are becoming more comfortable that their returns may not happen for some time," said Glen Giovannetti, global biotechnology leader at Ernst & Young.

Panel participants predicted that not only would more venture firms consolidate their portfolio companies to reduce overhead costs, they estimated the number of public biotechs - currently 350 - would dwindle to between 175 and 275 as companies pick off one another.

Insolvent companies are another source for acquisition targets, but panelists warned that buyers should beware. "A VC recently approached me about learning more about buying assets out of bankruptcy," Giovannetti said. "But just because it's on sale doesn't mean it's a deal."

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