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

Executive Summary

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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Late-Stage Dealmaking Takes Off

Some VCs insist that only 25%-30% of device investments find a successful exit -- significantly better than the 10% of biotech deals, but still far from a sure thing. As a result, over the past year or so, there has been a marked increase in interest in late-stage dealmaking -- investments made at Series C or later or via alternative vehicles such as PIPE deals and SPACs.

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.

Terra Infirma: Pharma Dealmaking 2001

With Big Pharma still trying to figure out how to create productive businesses from their mega-mergers, most of the year's high-value M&A saw biotechs buying late-stage or marketed products. But these biotechs are also, with the risk of development failure ever clearer, actively in-licensing and acquiring products and product-creating technologies in order to diversify what are often single-product portfolios. Unlike many Big Pharmas, these companies have been willing to improve existing chemical entities, often exploiting drug delivery and other pharmaceutical sciences. Meanwhile, large companies focused on late-stage in-licensing, in part because they couldn't afford acquisitions--given the valuation disparities between large companies and small ones with valuable late-stage products. Nonetheless, while more affordable than acquisitions, the high price of these deals has transferred the majority of the regulatory and commercial risk to the licensee. As for the early-stage side of the biotech industry: platform companies have not been able to sell their discovery technologies at anything like the prices they expected; as a result, many of them have merged in an effort to create product-focused discovery operations.

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