By Marie Daghlian
Although financing and dealmaking are taking a breather while capital markets endure August’s volatility, private equity firm HBM Partners’ recently published Pharma/Biotech M&A report finds a pickup in M&A activity in the first half of 2011, both in terms of the number of deals and the dollar amounts of the transactions.
The report covers all completed trade sales of North American and European drugmakers since 2005 but its analysis is mainly focused on private VC/PE-backed transactions. Up front deal values from biopharma trade sales reached $51.6 billion during the first half of the year, according to the report, as compared to $67 billion for all of 2010. Among deals completed during the first half of the year, 18 were for more than $200 million, a number that had not been reached since the second half of 2006, before the global economic crisis. The biggest sale of a private company was Takeda’s $13.68 billion acquisition of Swiss pharma Nycomed, which returned close to $8.5 billion to its private equity investors.
While investors have been leery of biotech IPOs, several top deals produced good exits for venture investors. Most of the acquired venture-backed firms had lead products in mid to late stage development, or already on the market. Plexxikon’s investors got a 7x return on their investment according to HBM analysis, which shows estimated investor capital of $105 million. Daiichi Sankyo (DSKYF.PK) paid $745 million upfront and potentially another $130 million in near-term milestones for the U.S. co-marketing rights to the targeted cancer therapy Zelboraf, which received U.S. Food and Drug Administration approval this week.
Shire’s purchase of Advanced BioHealing for $750 million ahead of its IPO reflected a 16x return based on estimated investor capital of $47 million. And Amgen’s (AMGN) $425 million payout for Biovex returns an initial 2.5 times invested capital of $166 million, but it is a payout that could end up rising to as much as $1 billion if certain milestones are met.
Other exits also proved profitable for venture capitalists as the average ratio of exit deal values to amount invested by venture capitalists jumped to 3.0x, or 4.5x if contingent payments are taken into account, according to the HBM analysis. While investors would like to see a higher return, this is the best ratio over the past five and a half years of upfront proceeds to invested capital for biotech companies and almost double the paltry 1.6x ratio in 2010.
M&A in the first half of 2011 has indeed been robust. Capital markets were rising steadily and pharmaceutical companies continued to seek outside innovation to help bolster pending revenue decline from patent expirations. But recent global events have jarred the markets and worried investors, making it difficult to know if the positive M&A trend will continue. Certainly as biotech stocks fall, they may become more attractive to pharma buyers. Cash-strapped companies will face an increasingly difficult financing environment. And venture and private-equity investors will likely continue to seek an exit through sales rather than IPOs.