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Still afloat

Pharma is weathering the credit crunch and has the cash to go on a biotech spending spree

A paper boat floating on water Don't be misled by accounts of job losses, cost-cutting and 'desperate' alliance-building in pharma as formerly high-earning blockbusters escape the fold; the industry is in fact performing soundly in the midst of global economic tumult.

Aside from some proportionate collateral damage, pharma's prospects look promising, with several significant players already seeking to use the crunch to their advantage.

In short, plenty of cash, independence from bank-hosted financing and few bad debts left many sitting pretty in what rapidly became a 'biotech buyers market' during the cold months of 2008.

"For pretty much a decade pharma had a long negative period, but during this credit crunch they've actually been doing rather better," notes author and analyst Malcolm Craig. "We see AstraZeneca and GlaxoSmithKline going up in [stock] price at a time when there have been sharp falls in other sectors, notably in banking and food retailing.

"There have been constant moves by institutional investors, plus some private investors, away from biotechs and towards pharmaceuticals, which they see as a particularly strong defensive sector. With a history of good cash flow and dividends, pharma is now a good, low-risk place to put money, especially in an environment ripe for scooping up a few bargains."

If the credit crunch is much less a mortal thump to the gizzard than a helpful adjustment in the market for prospective pipeline and portfolio purchases, what then are the signs that companies will strike while the iron's hot?

Stick or twist
Perhaps surprisingly, deal-making in 2008 was markedly down on 2007: M&A activity reduced by around 37 per cent, while the number of product (including licensing) deals diminished by more than one-third.

The reason for this, explains Taskin Ahmed of deal tracking specialist, PharmaVentures, is that, while pharma's financial position is sound at present, companies are more cautious because they don't necessarily know how long their money will last.

"Companies have cash reserves available, but how much longer could they endure an economic downturn for? When they run out, will firms be able to secure lines of credit into the future?"

He notes: "At present, companies can exploit their strong cash position to go on a buying spree – and the credit crunch shifts the balance of power in the pharma–biotech relationship towards big pharma – but they are doing deals that really are necessary for the future of their businesses now more than ever; hence the caution."

The decrease in deal activity, on closer examination, is therefore not indicative of a lack of options, but of a keen focus on spending their money carefully – nonetheless investing in their future while the going is good.

Some national press journalists have been prophesying a credit crunch worse than 'the Great Depression' for several months – prompting accusations that they have talked down the markets, particularly housing, by destroying confidence. However, only now are the effects beginning to be felt.

"The most damaging effects of the credit crunch have only started to bite in the past 2–3 months – after the collapse of Lehmen Bros – in terms of credit availability," says Ahmed.

"It will take another 6–12 months to see how this filters through into pharma. But GlaxoSmithKline, Roche, Pfizer, Lilly & Co, Bristol-Myers Squibb and Bayer have all said they will use the crunch to look for acquisition targets."

Cards on the table
Imagining a Jeremy Vine'esque swingometer, denoting a 'power-to-price' contest between the UK's promising small biotechs and well-funded pharma companies: the big arrow has just swung significantly in pharma's favour. It's a landslide in fact.

With the crunch-linked loss of access to cheap credit provided by the banks and with doors firmly closed to venture capital (VC) and IPO options, biotechs can no longer afford to play The Price is Right. Doubtless there will be casualties in the coming period, as VCs focus on the most promising of existing projects and acquisition-hungry pharma waits for the market to bottom out.

As an eager property investor would wait for house prices to scrape the bottom of the barrel, pharma too could pick up some bargains in due course. The question is, when to act?

"Obviously when share prices go down in a falling market, the cost of buying gets steadily less," says Malcolm Craig. "Everybody wants to buy at the bottom of the market, but what many companies cannot decide is whether we have reached the bottom of this biotech market yet – and, if not, when it will happen."

Acquisitions need to be 'future-proof' and significant enough to make a difference to market share. However, playing the waiting game for too long is also risky, particularly where biotech targets are willing to cut a deal with early suitors in order to ensure survival.

Add to this the fact that, in marketing terms, pharma is under greater pressure to do more with less, promoting products for a market defined (and reimbursed increasingly) by patient need. Biotechs are inherently focused on addressing unmet clinical needs and poorly served or emerging areas, such as lupus, personalised oncology medicines and deafness.

We have already seen Lilly outbid BMS for ImClone in order to acquire Erbitux, a blockbuster targeted cancer therapy, plus a medley of promising oncology molecules in the pipeline. John Johnson, ImClone's CEO, said: "We believe this is an important step in ImClone and Lilly's shared goal of addressing the medical needs of cancer patients."

Ireland-based speciality pharmaceutical business Shire has just grabbed Germany-based biotech firm Jerini in a friendly takeover to include a late-stage orphan drug for hereditary angiodaema, a rare genetic disease.

Vaccines developer Acambis is being acquired by sanofi-aventis, and biopharma group Speedel will be integrated into Swiss firm Novartis. The 'combination' in September 2008 of BTG and biopharma firm Protherics is also indicative of a move to expand from a position of strength.

"As you range through the biotech companies with small price tags, particularly those listed on AIM (Alternative Investment Market), there are a lot of bargains already out there – available at prices that are petty cash for a pharma company," Craig observes.

These opportunities have really emerged only over the last 12 months. Because of the effects of the credit crisis on market dynamics and prices, the trend is destined to accelerate. However, plenty are keeping their powder dry until the right moment.

"Pharma is starting to do some interesting things, with some being particularly active on the acquisitions front," he notes. "The deal we haven't seen yet is AZ going for Shire, but they may be waiting for the market to bottom out," says Malcolm Craig.

AZ has just announced 1,400 job cuts and CEO, David Brenan, said of the credit crunch in an October visit to Japan: "The indirect effects of this unprecedented situation are still unclear and it is difficult to predict their impact."

Speculation surrounding other potential big-name M&A deals includes the acquisition by Pfizer of Bayer or a bid by sanofi-aventis for Bristol-Myers Squibb (BMS). BMS was the victim of a $275m drastic drop in value of so-called 'auction rate securities'  early in 2008; essentially this was exposure to the sub-prime mortgage chaos in the US.

Yet, just because the market has made the biotech's pecuniary position uncertain does not mean that all such threatened companies will kowtow.

Some cash-strapped but entrepreneurial examples include Cambridgeshire-based Phytopharm, whose novel molecule for Parkinson's and Alzheimer's has reversed the loss of dopaminergic neurones (restoring learning and memory ability) in preclinical studies.

Early this year, the firm secured a $1.2m contribution from the Michael J Fox Foundation, which – with renewed support of shareholders – eventually cascaded into a $13.9m sum.

Patients' organisations that are keen lobbyists and co-funders, are becoming potent partners with firms unwilling or unable to invest alone – particularly in rare diseases.

Other routes via non-profit organisations, consortiums and foundations, such as the Bill and Melinda Gates Foundation, are finding favour too with organisations that are in need of a cash injection but are unwilling to sell all to pharma for a knock-down price.

There is the fact that not every pharma purchase of a biotech has proven fruitful. In 2007, the level of biotech financing reached approximately $50bn, according to the Economic and Social Research Council, generating around $59bn in revenue, of which $1bn was profit. It took years of investment with a relatively high risk of failure to achieve that.

This further illustrates why the global credit crunch is an opportune moment for pharma to act. There are major risks in drug development in any case and it is widely accepted that significant investment in pharma's homegrown pipeline has not delivered masses of marketable new medicines.

Biotech is good value. Despite bursting with innovation that is aligned directly with market needs, and targeting unmet areas it is increasingly unable to finance its R&D as the credit crunch scares off all but the least timid of institutional and private investors.

PharmaVentures' business editor, Taskin Ahmed, says that while it could be a win–win result, the curent situation invites pharma to go on the prowl: "Pharma companies are able to use their cash reserves to acquire biotechs outright for technologies or products, filling their own pipelines. They may be picking up bargains in the process, as biotech stock prices are down and firms may have to accept less favourable deal terms."

Playing partners
Pharma may be in a clear position to buy, but there is also evidence that firms are making every pound in the bank count for the maximum. The outsourcing of research and manufacturing is gaining favour, offering 'reactive' cost-saving through scale-up-scale-down flexibility.

Craig pinpoints GSK as an example: "GSK has effectively abandoned its formal R&D operation in favour of a 'venture capital R&D' model, setting up a large number of units as VC operations that try to discover new drugs, rather than concentrating the whole of one research department on finding the next blockbuster. We see pharma companies cutting costs all the time."

Some have likened it to the current housing market: people still have their own personal financial challenges, which have been made worse by the credit crunch, but for buyers there has rarely been a better time to negotiate over a purchase price, expand horizons and build a better future.

The Author
Rob Skelding is a freelance pharmaceutical writer

8th December 2008


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