Reviewing Five Years of Big Pharma's Biotech Acquisitions

A review of the past five years' significant ($100mm or greater) pharma-biotech acquisitions among the industry's largest players illustrates Big Pharma's diverging M&A strategies, and why there's more to come. We examine who's buying and how much has been spent, and take a look at who has succeeded in getting value (and pipeline) for money.

A review of the past five years’ significant pharma-biotech acquisitions illustrates Big Pharma’s diverging M&A strategies, and why there’s more to come.

By Christopher Morrison

That the pace of pharmaceutical R&D externalization, and its price, have increased over the past few years is by now obvious. (See "The Heyday of Biotech Dealmaking," IN VIVO, April 2007 (Also see "The Heyday of Biotech Dealmaking" - In Vivo, 1 Apr, 2007.).)

But even as biotech’s already upper hand rises still higher, public investors seem generally unwilling to ascribe much of a premium to biotech’s attractiveness as M&A material. Pharmaceutical companies on the other hand, particularly the industry’s largest firms, have little choice but to lavish those same companies with impressive takeout premiums. Thus the valuation paradox: both public and private biotech companies are now assigned two simultaneous yet disparate values--as stand-alone enterprises and as pharmaceutical company fertilizer. That valuation gulf has affected everything from start-up business models, venture-funding strategies, and early-stage dealmaking to the biotech IPO market and shareholder activism in well-established industry bellwethers.

If the causes of that gulf were evident five years ago, the symptoms were not. In fact, as late as 2003 there was little rush toward pharma-biotech M&A. Those deals that did get done often weren’t very competitive, despite the wishful thinking of biotech bankers and a handful of CEOs. Here we’ll review the data from all biotech acquisitions made by the industry’s 20 largest drug companies since January 2003, valued at greater than $100 million.

One of the early deals in our window, Johnson & Johnson ’s acquisition of Scios Inc. in early 2003 for $2.4 billion, sets the scene as it was then: J&J had little competition to outbid for Scios, despite the biotech’s possession of a then-promising marketed congestive heart failure drug nesiritide (Natrecor). [See Deal] (See "Behind Scios-J&J: No Groundswell for M&A," IN VIVO, March 2003 (Also see "Behind Scios-J&J: No Groundswell for M&A" - In Vivo, 1 Mar, 2003.).) Fast-forward nearly five years, and the valuation gulf’s symptoms are more obvious. The most recent deal to make the cut, AstraZeneca PLC ’s late April MedImmune Inc. acquisition, exhibits many of the signs: a pharmaceutical company eager to build its pipeline and biologics capabilities, a seemingly undervalued biotech, and a few sharp pokes from activist shareholders leading to a quick and competitive bidding process resulting in a monster takeout premium. [See Deal] (See Sidebar: AZ Spends Big on MedImmune.)

In between there is plenty of diversity. Of the 33 deals that fit our criteria, drug companies acquired 14 private and 19 public firms. Fourteen of the deals were takeouts of existing partners. Roughly half were driven by platform technologies of some sort—the vast majority some species of large-molecule program, like RNA interference and next-generation antibodies. Serial acquirers Johnson & Johnson and Pfizer Inc. have been joined by AstraZeneca as the most active participants in M&A, whereas a few notable firms remain steadfastly on the sidelines, including Sanofi-Aventis , Wyeth, and Bristol-Myers Squibb Co. (See Exhibit 1.) AZ’s MedImmune deal bumped it toward the top of the total acquisition value tables as well, falling just short of Bayer AG , whose takeout of Schering AG to form Bayer Schering Pharma AG (a division of Bayer HealthCare LLC) led all pharma-biotech deals of the past five years. (See Exhibit 2.) [See Deal]

Despite the protestations from some licensing and R&D executives within the pharma ranks that internal pipelines are turning around, biotech’s dealmaking advantage shows few signs of abating in the near future. This edge should sustain the valuation gulf that has kept biotech bankers extremely busy. (See Exhibit 3.) Those existing licensing deals stacked in favor of biotech partners may lead to acquisitions, much like the takeouts of Icos Corp. by Eli Lilly & Co. and Abgenix Inc. (now Amgen Fremont Inc.) by Amgen Inc. [See Deal] [See Deal] (See "Share the Wealth: No Thanks," IN VIVO, December 2006 (Also see "Share the Wealth? No Thanks" - In Vivo, 1 Dec, 2006.) and Co-Promotes: A Marketplace Reality, But Do They Make Sense?" IN VIVO, April 2007 (Also see "Co-Promotes: A Marketplace Reality, But Do They Make Sense?" - In Vivo, 1 Apr, 2007.).) Future licensing may be eschewed in favor of less complicated (or in the long-term, less expensive) acquisitions. Those pharma that have thus far avoided consolidation may find themselves in a buy-or-be-bought scenario; indeed a couple—namely Wyeth and Bristol—generally find themselves on the receiving end of much analyst speculation in that regard. Bristol in particular has lately behaved more and more like a biotech anyway—licensing out promising late-stage assets to Pfizer and AstraZeneca to monetize its impressive development track record. [See Deal] [See Deal] (See "Pfizer Deal Highlights Bristol’s Biotech Swagger," this issue (Also see "Pfizer Deal Highlights Bristol's Biotech Swagger" - In Vivo, 1 May, 2007.).)

With M&A remaining on the boil, biotechs may present pharma with a dilemma in their haste to put themselves up for sale. Several pharmaceutical business development executives have remarked to IN VIVO in the past few months about the unyielding flow of auctions and acquisition offers their companies have had to field. The upshot of this glut is that pharma companies might find it more difficult to get proactive deals done, relying instead on opportunism and quick reviews of those companies eager to sell.

Exhibit 3
Pharmaceutical Appetites: Dealmaking Scorecard

Big Pharma	Major Biotech Acquisitions	Verdict/Integration
J&J	J&J acquired 3-D Pharmaceuticals in January 2003 for $130 million; followed shortly by the Scios acquisition in February 2003 for $2.4 billion. In 2005 bought two private companies, TransForm (March 2005, $230 million) and Peninsula (April 2005, $245 million).	Scios’ Natrecor has proved a bust for J&J; the company was intended to remain semi-autonomous within the J&J family, though largely dismantled along with the relics of Alza (March 2001, $13.1 billion). No TransForm product has emerged from J&J; an NDA for Peninsula’s doripenem antibiotic has been filed with the FDA; the rest of that company was spun off into Cerexa, which was acquired by Forest Labs for $494 million only a year later, in December 2006.
Pfizer	Pfizer bought Esperion in December 2003, for $1.25 billion, largely for that company’s lead Apo-a-1 hypercholesterolemia drug. Two acquisitions in 2005: private platform play Idun ($280 million in February) and its anti-infectives partner Vicuron ($1.9 billion in June). Bought two private companies in 2006, the CNS focused Rinat ($500 million in April) and vaccine technology play PowderMed ($225 million in October).	Pfizer’s progress with Esperion’s pipeline was largely obscured by its hopes for torcetrapib, which failed in 2006. Apo-a-1 remained in Phase II trials, though Pfizer’s cutbacks in Michigan (home to the Esperion HQ) lend credence to the scuttlebutt that the rest of Esperion will be spun out some time this year. PowderMed, the company’s first foray into the vaccine space, may lead to further deals there. Its Rinat acquisition—which broke private deal price records—was centered around that firm’s lead Alzheimer’s project, which remains preclinical.
GSK	GSK bought ID Biomedical in September 2005 for $1.4 billion; in December 2006 it acquired privately held Domantis for $454 million.	GSK’s ID Biomedical acquisition boosted its vaccines capabilities and was of little surprise to observers. The takeout of Domantis moves GSK into uncharted territory; the biotech will merge with GSK’s biopharmaceutical research division and continue operations at its Cambridge, UK, headquarters.
Novartis	Novartis bought the remaining 58% of Chiron that it didn’t already own in September 2005, for $5.1 billion. In June 2006 it acquired the anti-infectives play NeuTec for $568 million.	Novartis culled the vast majority of Chiron’s seemingly underperforming senior management shortly after the close of the acquisition and the renaming of the outfit Novartis Vaccines and Diagnostics. Privately held NeuTec comprised only 23 employees—which Novartis agreed to keep on for two years. Mycograb, the company’s lead product, was held up by EU regulators in November 2006 over concerns about the drug’s safety and manufacturing quality.
Roche	Roche bought the Glycoprotein technology play GlycArt for $182 million in July 2005.	Roche has not announced any progress in applying GlycArt’s glycosylation technology to its own pipeline of monoclonal antibodies. The Swiss firm has generally avoided acquisitions, though it suggested at the January 2007 JP Morgan conference that it might consider adding another “hub,” akin to its Chugai and Genentech affiliates. The bar for such a transaction is high, however, as management indicated such a move would come in place of increased dividends or share repurchases.
AZ	AstraZeneca bought private UK biotech KuDOS in December 2005 for $210 million, and spent more than $1 billion in May 2006 to buy Cambridge Antibody. The pharma has done two acquisitions thus far in 2007, bringing in anti-infective play Arrow Therapeutics for $150 million in February, and MedImmune in April. (See Sidebar.)	AstraZeneca’s dealmaking activity has picked up significantly in recent years, capped by the blockbuster MedImmune deal. Its two big moves—MedImmune and Cambridge Antibody Technology—are largely a reflection of its need to play catch-up in large molecules. Nobody can say the company hasn’t been decisive in that regard, though results are not yet visible.
Merck & Co.	Merck bought the HDAC technology play Aton in February 2004 for $145 million. In 2006 the firm bought two more platform companies: yeast-based biologics firm GlycoFi (with whom it had an existing partnership) for $400 million in May and RNAi play Sirna Therapeutics for $1.1 billion in October.	Merck’s three acquisitions have significantly boosted its large-molecule capabilities. Though expensive, Sirna puts Merck at the forefront of RNAi therapeutics and like Aton, it should fit in well with its Rosetta Inpharmatics technology.
Abbott	Abbott bought cardiovascular drug specialist Kos for $3.7 billion in November 2006.	Abbott’s acquisition of Kos has shored up its cardiovascular drugs business, in particular bringing in the pharmaceutical-grade vitamin Niaspan, a move that seems prescient given Niaspan’s HDL-raising results and Pfizer’s problems with torcetrapib. Abbott has already announced layoffs in its combined Kos/legacy sales force as part of a cost cutting drive.
Lilly	Lilly bought Applied Molecular Evolution for $400 million in November 2003. More recently, it bought Cialis-partner Icos Corp. for $2.2 billion in October 2006 and the privately held insomnia drug specialist Hypnion for $315 million in March 2007.	Lilly’s dissatisfaction with the cost of its Cialis joint venture with Icos led to its acquisition of the biotech partner in 2006. There has been no word on Lilly’s plans to integrate Hypnion, whose Phase II insomnia drug could be first-in-class. The WSJ reported that Lilly was in on the bidding for MedImmune, suggesting the pharma—which has been relatively quiet on the business development front—is in the market for pipeline filler and technologies.
Amgen	Amgen bought the roughly 79% of Tularik it did not already own through previous deals in March 2004 for $1.3 billion. It added Abgenix in December 2005 for $2.2 billion, and Avidia, a private biologics firm, for $290 million plus $90 million earn-outs in September 2006.	The Tularik deal was an important part of Amgen’s entry into small molecules, but it’s tricky to see, in Amgen’s current pipeline, what value came from the deal. One Phase II PPAR modulator from Tularik was out-licensed in January 2007. Buying Abgenix was about getting full rights to panitumumab (Vectibix); given disappointing trial data for that drug, it looks like Amgen overpaid.
S-P	Schering-Plough bought Organon BioSciences, the health care division of Dutch conglomerate Akso Nobel, in March 2007 for $14.4 billion.	The quietly rebounding Schering-Plough’s decision to spend big on Organon will be deemed a success if Organon’s handful of Phase III drugs hold up under regulatory scrutiny. Asenapine, its schizophrenia/bipolar drug in pivotal trials, was recently returned to Organon by partner Pfizer. Schering-Plough also lands Organon’s biologics manufacturing capabilities and animal health business.
Bayer	Bayer Healthcare’s White Knight bid for Schering AG in March 2006 scuppered a hostile takeover by Merck KGAA. The deal, ultimately costing Bayer $20.4 billion, is the largest in our sample and creates the specialty drug firm Bayer Schering Pharma.	By moving in on Schering, Bayer has succeeded in making itself relevant again on a global scale. Integration is ongoing, with cost cutting in the US and Europe going through in early 2007. A specialty force to be reckoned with.
Solvay	Solvay bought privately held French biopharma Fournier in March 2005 for $2.1 billion.	Buying Fournier provided Solvay with the earnings boost it needed to bridge the gap before its own late-stage candidates—including Phase III schizophrenia candidate bifeprunox—reach the market. Solvay got a good price—little over half what Fournier’s family owners had initially put the business up for. But in exchange it promised to maintain most of Fournier’s France-based management and sites.
Genentech	Genentech bought out Xolair partner Tanox for $905 million in November 2006, though the deal has not yet closed as of press time.	Genentech, loathe to acquire anyone, made its first acquisition in its 30-year history when it bought out Tanox to gain more control of Xolair.
Merck KGAA	Merck KGAA bought Serono SA though the acquisition of the Bertarelli family’s controlling stake in the Swiss biotech in September 2006, in a deal valued at $12.9 billion.	Merck’s surprise deal with the Bertarellis has made it more of a global player, though the company has yet to elucidate its R&D and business development strategies going forward. Serono’s US and EU headquarters in Boston and Geneva have been kept as a base for the new firm, Merck-Serono Biopharmaceuticals.
SOURCE: Windhover’s Strategic Transactions Database

AZ Spends Big on MedImmune

In a clearly opportunistic deal AstraZeneca is buying MedImmune for a whopping $15.2 billion ($58 per share), net of MedImmune’s existing cash. AZ says the acquisition will add significantly to its pipeline and complement the biologics discovery expertise within its Cambridge Antibody Technology Group PLC unit with development and manufacturing skills and infrastructure. MedImmune also brings AZ for the first time into the vaccines space, an increasingly popular market for Big Pharma; rumors that the vaccines business would be spun off or sold to help pay for the deal were denied by AZ management.

The 53% premium over MedImmune’s pre-"strategic alternatives" announcement price (and 21% above its previous trading day’s close) stunned some AZ investors, who questioned whether so much money was well spent despite not adding to the pharma’s late-stage pipeline. That said, the high price of the deal may have had more to do with its competitive nature. The Wall Street Journal, which first reported that MedImmune was in talks to sell itself imminently, noted there were four bidders for the company, including Lilly.

AZ will land MedImmune’s blockbuster respiratory syncytial virus vaccine (Synagis), which pulled in $1.1 billion of the company’s $1.3 billion total revenues in 2006. But beyond its marketed products—Synagis and the underperforming Flumist intranasal flu vaccine—there isn’t much for investors to get excited about in the near term. MedImmune CEO David Mott noted on a call with analysts to announce the deal that three to five MedImmune projects should hit pivotal trials by 2009-2010. Given AZ’s recent Phase III disappointments, AGI-1067 (an atherosclerosis candidate licensed from AtheroGenics Inc. in December 2005 [See Deal]), tesaglitazar (the oral diabetic Galida), and NXY-059 (a neuroprotectant), observers expect further dealing to shore things up.

All of which won’t come cheap. AZ will finance the MedImmune acquisition with a variety of debt vehicles, leaving the company with long-term debt for the first time since the merger that created AZ, says CFO Jon Symonds. The refinancing plan hasn't been put in place yet, he says, but "clearly we'll want to preserve our financial capacity to take further opportunities as they come. This is not the end of our externalization ambitions."

The company's next move is anyone's guess. After all, AZ went after MedImmune despite its protestations that it wasn't in the market for such a deal, reinforcing the view that Big Pharma in some cases doesn't know what it wants until it's presented with an opportunity—which in turn should reinforce the will of investors eager for a fat premium to hassle executives into strategic-alternative evaluations.

CEO David Brennan told IN VIVO not long ago that although he wouldn’t rule it out, bigger acquisitions aren’t really on his radar screen. "We're focused on getting more quality products into the portfolio," he said. "Large-company transactions are complicated, painful, and take a lot of effort." (See "CEO Interview: AstraZeneca’s David Brennan," IN VIVO, March 2007 (Also see "CEO Interview: AstraZeneca's David Brennan" - In Vivo, 1 Mar, 2007.).) Maybe so. But AZ’s acquisition of MedImmune may effectively replace another complicated, painful and difficult process: building biologics development from scratch.