Advancing acquisitions

This edition's table covers the top 20 deals by value announced during the first couple of months in 2010 where financial terms were publicly disclosed. Interestingly, there are fewer deals reported for the same time span than were reported in the previous issue, which could reflect the strong impetus shown by companies racing to close deals for the calendar year-end. Unlike the previous review, the most notable trend here is the increased prevalence of acquisitions.

There are various rationales for companies electing to acquire a company, including product portfolios, rather than partner a single product asset. For many, this provides them with an infrastructure that may be necessary to enable the business to roll out its own product portfolio. Examples of acquisitions of companies with marketed products include Alcon, Mepha, Solvay and Allergan. However, one anticipated trend, which is not fully evident yet, is the rollout of discarded assets from the major pharma mergers of Pfizer-Wyeth and Merck & Co-Schering Plough. These divestment programmes will include manufacturing and research facilities as well as product assets, of course. As both of these major mergers only closed towards the end of 2009, the outflow of divestments is really just beginning.

Another reason for acquisition is to purchase a company because the individual product asset has been valued too highly as a licence deal, making it more economic to acquire the business in its entirety than licence the one product opportunity. The other key issue to consider here is the economic climate. Private investors have become risk averse in the last two years and, if given the option, may well elect to take a secure approach and seek to exit earlier than originally planned. This is in contrast to the major pharma approach where there is less strategic gain in acquiring the whole company simply to get access to one or two products. The exception is if the company is buying into a whole new therapeutic area, platform technology or capability, such as biologics.

For major pharmaceutical companies though, acquisition is a quick fix for a faltering pipeline where organic growth is unsuccessful. For example, there have been numerous failures in phase III reported recently, including Roche's ocrelizumab in rheumatoid arthritis and Pfizer's dimebon (latrepirdine) in Alzheimer's disease.

Pipeline filling
The focus on pipeline filling is clearly evident, with the majority of the deals highlighted here being early stage or platform technologies. It is interesting to note that these early stage platforms are still commanding significant amounts for exclusivity around specific targets. In particular, the deal between Dicerna and Kyowa Hakko, if extended from the currently agreed targets, could reach a value of $1.4bn. Another interesting feature of this deal is that Dicerna has secured an option to co-promotion rights. This is becoming a more common feature, even for the smaller companies. Retaining this ability to access the market directly leaves part of the asset within the company for future growth, which is a pleasing feature for the investors.

There was no discernible trend of therapeutic area for the period covered, but the most common deal therapy areas were oncology, respiratory, CNS and anti-infectives. It is no surprise that most of the deals were also for significant value indications, the more niche of them for late stage opportunities.

Major pharmaceutical companies are represented in seven of these top 20 deals, suggesting that they are busy plugging gaps in portfolios and pipelines. Interestingly, all of the big pharma deals are for early stage or platform technologies. This is to be expected, as it is mostly the majors that have the budgets and resources to be able to take early opportunities through to market.

Early stage investments can still be a bit of a gamble, though. On average, approximately one third of the major pharma R&D budget is deployed in early-stage drug development, but only ten per cent of these projects will eventually reach the market. The success rate does improve, of course, increasing to 20-30 per cent at phase II and 50-70 per cent at phase III.

While it is not unusual to see some of the major companies appear more than once in the top 20 table, it is rarer to see smaller or mid caps with two or more entries.

Cephalon has two entries, representing the acquisitions of Mepha AG and Ception.

Founded in 1987, Cephalon has steadily grown by deals. It has tripled its turnover over the last six years, which now exceeds $2bn. Originally focused around CNS, the company is now expanding its interests. It acquired Ception via an option enabling Cephalon to judge the performance of Cinquil in phase II studies before taking up the option. Although options are not always mentioned in the press releases, this approach is becoming increasingly common as a means of accommodating risk. The acquisition of Mepha, the Swiss-based generic company, not only extends Cephalon's European infrastructure, but takes the company into branded, generic and branded generic fields as well.

Similarly, Galapagos has a successful track record in partnerships and acquisitions. Although only listed once in the table, it has had a busy quarter. Galapagos acquired Argenta Discovery, enhancing its drug discovery services capability. In addition, the company sealed its strategic alliance with Roche in chronic obstructive pulmonary disease (COPD) as well as securing further milestone payments under another alliance with Merck & Co in the field of inflammatory disease.

Although operating in different areas of the industry, both companies have created a positive, partner-of-choice reputation, which is essential for their success.

*$100m for option to acquire, then $250m to buy equity if option is exercised
**Collaboration may be expanded in the future to include additional targets taking the total headline value to $1.4bn

The Author
Sharon Finch is founder and CEO of Medius Associates

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