[November 18, 2008]

Alliances Called One Key to Surviving the Downturn

(BioWorld Today Via Acquire Media NewsEdge) BIO-Europe 2008

There is some good news in the financial morass that has developed in the global economy, according to data presented at the BIO-Europe 2008 conference now underway in Mannheim, Germany.

A report from the Biotechnology Industry Organization (BIO) at the opening plenary session left a take-home message that alliances are now essential for capital formation among biotech companies, with mergers and acquisitions increasingly more attractive, according to John Craighead, the head of business development with BIO.

The good news, he reported, is that the U.S. biotechnology indices have outperformed the broader market with the Nasdaq Biotech index down only 13 percent compared to the white-knuckle drop of the Standard & Poor index that is down 35 percent or the Nasdaq 100 dropping 38 percent.

Yet the bad news is just below the surface, he said. The sector has been saved by an unexpectedly strong performance among the largest biotech companies that posted gains in recent trading and account for 88 percent of the total market capitalization for biotechnology, estimated at $350 billion.

Yet smaller biotechs that are traded have suffered from the flight of investors, with small-cap biotechs down a mean average of 42 percent year to date.

Only 13 percent of those companies, or 95 of 714 global biotech stocks surveyed, have escaped losses. Among 387 U.S.-based companies, cash is tight, Craighead said, with 54 percent saying they have two years of reserves and one-third reporting they have enough cash for less than one year.

One-third of biotechs currently are priced under their cash value, in some cases by as much as four times under their value, which over the past five years has been true for about 6 percent of all companies.

Under those conditions, mergers and acquisitions are suddenly looking more attractive, he said, with the potential for enhancing capital efficiency, liquidity and valuation.

The risk, he said, is that while the alternative seems attractive, it may not be a real possibility for the hardest-pressed companies since the fastest an M&A deal can be closed is six months and such deals normally average between nine to 12 months.

Another significant statistic reported during the plenary panel discussion that followed the BIO report was that 10,000 partnering meetings were scheduled at the BIO-Europe event, a stunning 25 percent increase over the 2007 event.

In a panel discussion that followed the report, moderator Vaughn Kailian, of MPM Capital in Boston, asked fellow panelists if the market is weeding out the weak players. "Is it going to be that only the good survive or only the rich survive?" he asked.

Ted Torphy, chief science officer and head of external research and early development for Johnson & Johnson Pharmaceuticals, said, "I'm afraid the latter comment might be correct. It is not a weeding out of the weak projects but of the companies that happen to be in the wrong financial position at the wrong moment," he said, which is not good for the industry. "It may be an advantage for us, but it is not doing the right thing, which should be . . . based on the quality of their platform or product," he added.

Michael A. Yeomans, senior vice president for global business development and licensing at Bayer Schering Pharma, also warned that even cash-rich big pharma is being affected.

"While we may be in a better position than some other industries, we are going to have to be very selective in the next 12 months, especially on the kinds of deals we are doing and what we are paying," he said.

Barbara Yanni, chief licensing officer for Merck & Co., observed that "Everything is upside down right now."

She said she is being approached for deals where the up-front payments for licensing are approaching the entire value of the presenting company, which explains why some negotiations are turning to acquisition with company valuations being so depressed. n

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