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Apr 1, 2012 (Vol. 32, No. 7)

2012 Has the Makings of a Breakout Year

Clinical Data, Regulatory Decisions, and M&A Activity Fuel Positive Market Sentiment

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    Eugene Rozelman

    Numerous biotechs are set to turn the card on clinical trial data readouts that should drive significant value inflection for their shareholders. A number of key regulatory decisions that will likely impact investor sentiment are also on the calendar for 2012. Partnering and acquisition activity has intensified as large biotech and pharma companies execute strategic initiatives with a view beyond their respective patent cliffs.

    Leading industry players will be jockeying for position in hot therapeutic areas, as seen in the hepatitis C virus (HCV) infection space, looking to capture market share and revenue that will provide a much needed boost to their bottom line.

    Although investor confidence is moving in the right direction, lingering issues with the U.S. economy and European debt hanging over the global economy could dampen the market’s enthusiasm over pending clinical data, FDA outcomes, and M&A activity.

    In 2012, the decision of when and how to raise capital will be influenced by macroeconomic issues as well as company-specific factors. If capital markets continue their volatile ways, making it more difficult to raise funds through the public markets, more licensing deals will be necessary to fund programs and M&A may emerge as the go-to exit strategy for private biotechs.

    The 2012 presidential elections may impact sentiment and performance of the broader markets and of the healthcare sector. While an election year may bring with it the potential for increased volatility, biotechs have outperformed the S&P in three of the last four election years—beating the S&P by 72% and 21%, in 2000 and 2008, respectively.

  • Strong Signs that Confidence Is Returning to the Biotech Capital Markets

    As 2011 came to a close, there were several indications that the biotech sector could see a meaningful up-tick in both capital markets and M&A activity. Several companies acted nimbly to take advantage of windows of opportunity to complete sizable equity raises, ending the year with strengthened balance sheets and enhanced strategic positions.

    Idenix Pharmaceuticals raised over $70 million to fund its drug development effort in HCV, which includes lead drug candidate IDX184. Ariad Pharmaceuticals raised over $250 million in mid-December to prepare for the commercial launch of its lead compound, ponatinib, in the U.S. and Europe, and­, if approved, to sell, market, and distribute ponatinib in these and other markets, allowing Ariad to retain the potentially substantial commercial value of ponatinib.

    Financing momentum continued into 2012, as Amarin completed a $150 million Notes deal in early January.

    Last year’s biotech M&A activity was punctuated by Gilead’s late November bid of approximately $11 billion for Pharmasset, a clinical-stage pharmaceutical company focused on the development of oral therapeutics for the treatment of HCV. Gilead’s offer represented nearly a 100% premium to Pharmasset’s stock price prior to the announcement of the deal and fueled speculation over which other HCV developers could be in the crosshairs of large biotech and pharma companies vying for a slice of the massive HCV therapeutic market opportunity.

    Earlier that fall, Roche acquired Anadys Pharmaceuticals, another HCV drug developer, for approximately $230 million, translating to a premium of about 250%. The string of deals in the HCV space continued, as Bristol-Myers Squibb announced its intention to acquire Inhibitex for approximately $2.5 billion, during the first week of January.

  • The M&A Train Is Moving and Will Likely Pick Up Steam

    Global economic concerns and volatility in the broader markets has translated into a shortage of limited partners willing to put money into venture funds. With the initial public offering window still tenuous and the feared retraction of some biotech VC firms starting to play out, private biotech companies are under increased pressure to consider strategic options. Limited access to capital for private companies will be a driver of increased M&A activity.

    A smaller pool of capital available for early-stage development activity creates a greater need for VCs and private companies to consider and implement new models for risk sharing. Examples include nonexclusive licensing options, multistep acquisitions, options around geographic rights, project financing, and reverse mergers. Luckily, large pharma companies are becoming more aggressive in terms of M&A and partnerships, as pipeline gaps have not been sufficiently filled.

    We are likely to see momentum for deal-making accelerate in large, lucrative therapeutic areas including anti-infectives, oncology, cardiovascular, CNS, and other areas where large pharma has a commercial presence, and there remains a significant clinical need for new treatments.

    For example, last fall Quanticel Pharmaceuticals struck a deal with Celgene to discover and develop first-in-class cancer drugs. As part of the deal, Celgene retained an exclusive option to acquire the start-up.

    Additionally, the stocks of the majority of biotechs that recently launched products underperformed in 2011. Those companies with viable products whose market values have been depressed by disappointing product launches could prove to be enticing targets for pharma companies looking to leverage their existing commercial infrastructure by adding marketed products.


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