Biotech’s Hot IPO Market Creates Next Takeover Targets: Real M&A

Print 15 January 2015
Tara Lachapelle / Bloomberg

After being overshadowed last year by the boom in big pharmaceutical mergers, biotechnology deals are kicking off 2015.

The first large drug transaction of the year was Shire Plc (SHP)’s agreement Sunday to buy rare-disease treatment developer NPS Pharmaceuticals Inc. (NPSP) for $5.2 billion. Biogen Idec Inc. also struck a deal of up to $675 million for a company with an experimental pain medicine. More takeovers of young companies with promising new remedies may follow as drugmakers look for ways to stoke growth.

Last year’s record amount of biotech initial public offerings is giving acquirers an even bigger pool of candidates to choose from, with innovative therapies in profitable treatment areas such as liver disease and cancer. It adds to a list of potential targets that were already on analysts’ radar, including Achillion Pharmaceuticals Inc. (ACHN) and Tetraphase Pharmaceuticals Inc.

“The IPO mill keeps on turning out new companies, and then sure enough somewhere down the line you get some other company looking” to buy them, Asthika Goonewardene, an analyst for Bloomberg Intelligence in New York, said in a phone interview.

As industry leaders shed lower-margin, non-drug businesses such as consumer health and diagnostics, they’re wanting “to be more innovative and have more drug revenue,” he said. “There are also companies still looking to plug their pipeline.”

Pharma Buzz

The more than $220 billion of drug-company acquisitions announced in 2014 was an industry record, according to data compiled by Bloomberg. While Pfizer Inc.’s pursuit of AstraZeneca Plc, AbbVie Inc.’s dropped transaction with Shire and the battle over Allergan Inc. dominated the news, large biotech deals quietly came back into the picture toward the second half of the year.

Merck & Co. (MRK) announced in June a $3.6 billion takeover of Idenix Pharmaceuticals Inc., which makes a treatment for hepatitis C. Two months later, Roche Holding AG agreed to buy InterMune Inc. for $8.3 billion to gain access to one of the first drugs in the U.S. for a fatal lung disease. Merck struck again in December with a $9.5 billion deal for Cubist Pharmaceuticals Inc. to add new antibiotics that help fight the growing threat of drug-resistant bacteria.

New Treatments

Buyers are scrambling for products making technological advances, such as immunotherapy, a new form of cancer treatment that harnesses the body’s immune system to fight the disease. Juno Therapeutics Inc. (JUNO) is one such developer that went public last year and now has a $5.1 billion market value.

There’s also a growing interest in rare illnesses that affect a small population and have an unmet medical need. Drugmakers can often charge high prices for those treatments and face little -- if any -- competition.

Sage Therapeutics Inc. (SAGE), which also listed last year, is making drugs for rare, life-threatening disorders of the central nervous system. It was valued at $1.1 billion yesterday after the stock more than doubled since its IPO.

BioMarin Pharmaceutical Inc. (BMRN), a much larger company at $14 billion, could appeal to suitors because of its stable of pending rare-disease medicines, according to Christopher Raymond, a Chicago-based analyst for Robert W. Baird & Co. While BioMarin has been considered a takeover candidate for years, it still hasn’t gotten bought.

“It’s so obvious that nobody thinks it will happen,” Raymond said in a phone interview. But BioMarin’s pipeline “coming up over the next 12 to 18 months is pretty huge.”

At this week’s annual JPMorgan Chase & Co. health-care conference in San Francisco, investors are listening for industry executives to drop hints about potential acquisitions.

High Valuations

Surging valuations could be a hurdle for some buyers. And with interest rates still so low, potential sellers may be finding it easier to raise money and remain independent, Baird’s Raymond said.

The Nasdaq Biotech Index closed at a record last month and its price-sales ratio is at a decade high, data compiled by Bloomberg show. Perennial target Achillion is among the index leaders with a 12-month gain of almost 300 percent.

“A key determinant in M&A is the bid-ask,” Raymond said. “The ask is always going to be higher than the bid, but the ask is especially big” when financing is readily available.

Even so, deal activity “is still pretty healthy,” he said.

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