How Small Biotechs Should Protect Their Interests During Mergers and Acquisitions

Early-stage companies need to assess whether a potential deal might unduly encumber the value of their intellectual property
Jan 01, 2008
Volume 21, Issue 1

Strategic alliances and partnering deals were a big biotech news story during 2006—with deal values setting an all time record of over $23 billion for the year. The strategic partnering trend continues during 2007 and in this column we present some frequently asked questions and answers about the merger and acquisition (M&A) activity in the life sciences sector.

Q: Which have been the more significant deals in the year 2007?

Sergio Garcia
A: The Merck/Sirna deal continues to be an especially impressive one to consider, not only because of its size ($1.1 billion), but also because of the generous premium Merck paid to purchase early-stage, platform technology—a premium of 102%. Until recently, big pharma has been shopping for late-stage products with robust clinical validation. In this case, Merck paid over $1 billion to obtain—and to prevent others from accessing—Sirna's RNA interference (RNAi)/gene silencing technology that Merck perceived as a strategic long-term opportunity. Sirna had a significant intellectual property (IP) portfolio in RNAi-based therapeutics that complemented Merck's internal research capabilities and this clearly was a major factor in Merck's willingness to acquire the company at such a large premium.

Another interesting development is big biotech moving aggressively to acquire companies and technologies that they perceive as critical to future shareholder value. Amgen, for example, has acquired five companies in the past three years. The M&A deal was Amgen's acquisition of Avidia for $380 million. Avidia was an early-stage company with a portfolio of human therapeutic proteins known as avimer proteins. Avidia's patented technology was regarded as very attractive because it had potential application in a wide range of disease areas, including inflammation, oncology, and neurology.

And we're seeing mid-cap biotech companies becoming good targets for acquisition. Back in 2006, Amgen acquired Abgenix for $2.2 billion and Genentech acquired Tanox last year for $919 million. This year, of course, AstraZeneca's $15.6-billion acquisition of MedImmune has received a lot of attention, given that MedImmune at that time was the sixth largest biotech company. Although MedImmune is a successful company, it had struggled recently to meet investor expectations. This transaction demonstrates how big pharma continues to see M&A as a quick path toward building out a broader pipeline in biologics.

Q: What's driving the volume of strategic transactions and M&A deals?

A: Obviously, the tough IPO market has been a primary driver of biotech's activity in M&A. Many of the companies that have chosen the IPO path are struggling to maintain their offering price; and we're seeing more and more companies trading well below it. Additionally, the rising cost to bring a new drug to market is forcing venture capital (VC) investors to seek alternatives to IPOs, such as M&A, so they can recover their investments in early-stage biotech companies.

Another interesting development is the leverage emerging biotech companies have when dealing with larger biopharmaceutical or pharmaceutical companies. Big pharma has a lot of cash right now, but drug development pipelines continue to look anemic. What is more, pharmaceutical companies have a significant number of blockbuster drugs facing patent expiration. Pharmaceutical companies need innovative technologies and products, which is precisely what emerging biotech companies can provide. This shifts the relationship between the companies and allows the biotech company to negotiate a more attractive deal for itself.

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