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Dealmaking for the Revolution

Executive Summary

If there was one lesson from the bi-polar year of dealmaking in 2000 it was that dealmaking leverage lies with those with the power to either keep and profit from the status quo or remake it. Investors' understanding of Big Pharma's growth troubles encouraged near bio-hysteria among investors for genomics start-ups-but the interest had little staying power, particularly given the relative paucity of drug company discovery alliances. Much better performances came from smaller companies with later-stage products, in-licensing prices for which have now reached almost unsupportable levels. Diagnostics start-ups have likewise been hot as investors recognize that the nearest-term potential of genomics and proteomics technologies lies in disease markers as well as markers for drug function. But medical device dealmaking has been quiet. Start-ups have by and large been unable to show significant growth or the ability to substantially reshape medical device segments--leading to both quiescent acquisition markets and apathetic investors.

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In Context: Aventis-Genta after Bristol-ImClone

Bristol-Myers Squibb's licensing arrangement for ImClone's Erbitux--both its upfront cash value and its subsequent level of disappointment--continues to define the industry's late-stage dealmaking. Genta's development and marketing alliance with Aventis for Genta's phase III anti-cancer chemosensitizer, Genasense, is no exception: the deal is both bigger, and smaller, than it might once have been had BMS and ImClone not stirred up the dealmaking pot. The Genta product was one of the only remaining unpartnered, important late-stage cancer projects available from a biotech company. It commanded a hefty price --at $135 million in upfront and near-term assured cash terms, and another $345 million in milestones. Before ImClone, Aventis says, it could have gotten this deal for less money. But if the ImClone transaction hadn't gone suddenly south (the FDA in December refused to accept ImClone's BLA submission for Erbitux), Aventis might also have had to pay far more.

The Search for Certainty: Trends in Early- and Late-Stage Dealmaking

The industry's decade long search for novel drugs with novel mechanisms of action has increased the risk of drug discovery; meanwhile, new technologies have not significantly improved productivity. One result: enormous pressure to find late-stage products, and extraordinary prices for them, best exemplified by Bristol's $2 billion purchase of rights to ImClone's cancer antibody. And while these prices don't necessarily reflect the values of the particular drug, but far more important defensive issues, they nonetheless raise the pricing umbrella for all late-stage transactions, forcing buyers, in the short-term, to figure new ways of amortizing these increasingly costly investments. Meanwhile, the industry has seen a sharp decline in the number of early-stage transactions, reflecting the fact that such deals have not improved new-product productivity but have in fact increased R&D risk, or at least not decreased it. A number of relatively young biology companies are therefore exploiting valuation disparities to buy older chemistry firms in order to create integrated discovery platforms, on the model of Vertex and Millennium. These newer acquisitive biotechs hope to leverage the platform and sign the same kind of high-value deals the older firms have, but to do so far sooner in their corporate lives. Meanwhile, companies founded around predictive technologies aim to provide the R&D (and potentially marketplace) risk reduction Big Pharma wants in return for collaborations that give them the discovery assets they don't have. But apart from a few high value deals, Big Pharma hasn't yet bit. A few companies aim to amortize the risk of their R&D investment by broadening their goals from small molecule therapeutics to less traditional areas, including diagnostics.

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