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Big pharma companies getting less acquisitive but more creative in dealmaking

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By Jennifer Boggs
Managing Editor

NEW YORK – With capital markets bustling for biopharma, the fact that the number of M&A deals stayed flat in 2013 compared to 2012 isn’t surprising; what is surprising, perhaps, is that big pharma, which had been expected to wow with multiple mega M&A deals, instead, kept a low profile.

Figures presented Tuesday morning by Effie Toshav, partner at Fenwick & West LLP, as she opened up a panel at the BIO CEO & Investor Conference on licensing and M&A deal trends, showed that big pharma was responsible for fewer than 20 percent of the overall acquisitions in 2013. Despite having more than $100 billion in cash for acquisitions, big pharma “last year mostly sat on the sidelines,” she said.

Those numbers track with data presented earlier this year by Thomson Reuters Recap, which indicated that big pharma was more apt to engage in partnering and collaboration deals – Recap reported a total of 690 product and technology deals totaling $21.9 billion – with 31 percent of biopharma deals in 2013 being licensing and joint venture arrangements, while only 13 percent of deals were M&A. (See BioWorld Today, Jan. 22, 2014.)

But those numbers don’t reflect negative trends. For one, a number of large and mid-sized biopharmas stepped up to the M&A table in 2013.

Even better, creative and more flexible deal structures emerged to signal a shift in the balance of power. For the past several years, macroeconomic issues have turned the industry into a clear buyer’s market, but 2013 showed a “surge of strength for the seller’s market,” Toshav noted.

One example was the use of contingent value rights (CVRs). The CVR component has given rise in the past several years, often to “make a not-good deal look OK,” Toshav said. CVRs continued in 2013 deals, but were intended more to reward the seller in the case of a “homerun.”

And the use of CVRs likely will continue in 2014, predicted Michelle Dipp, CEO and co-founder of Ovascience Inc., though they will be “more of a win-win relationship.” She also predicted more “equal-sized companies,” each bringing assets or expertise to the table, to ink joint venture (JV) and similar types of deals, “where that balance of power is not on one side or the other.”

Dipp mentioned Ovascience’s recent JV with Intrexon Corp., called Ovaxon, which will combine Intrexon’s portfolio of technologies with Ovascience’s Ovature platform, a next-generation approach to in vitro fertilization, for human and animal health applications.

For Cambridge, Mass.-based Ovascience, the deal made sense because it allowed Ovature to expand applications beyond its use in humans, the focus of Ovascience, Dipp said. “We did cogitate over, ‘Should we license?’” she said, adding that, in the end, a JV arrangement worked best.

Panelists also discussed the evolution of option deals. Very popular only a few years ago, as small biotechs were desperate for partnerships and funding, the straight-up option deal – the big pharma paid a nominal fee to gain rights to an option that it could exercise at its discretion once an agreed-upon milestone had been reached – was often fraught with problems from the start.

“All of the risk was put on the biotech,” explained David H. Donabedian, who joined Abbvie last year as head of venture investments and early stage collaborations and previously worked in global deal strategy and development at Glaxosmithkline plc. As a result, he added, the small biotech companies became so milestone-focused “they lost sight of what they were working on.”

Or the small firms found themselves strapped for cash and had to seek out the big pharma firm to renegotiate the option deal.

The lesson learned from those mistakes is that option deals can work, but they have to remain flexible to take into account the delays and stumbles inherent in drug development, and both parties have to enter the agreement with reasonable expectations.

When asked for their predictions for 2014, the panelists generally agreed that the rate of M&A activity likely will remain similar to 2013.

Dipp said she expects to see “more Alnylam-type deals,” referring to the potential $700 million deal Cambridge, Mass.-based Alnylam Pharmaceuticals Inc. inked earlier this year with Sanofi SA unit Genzyme. (See BioWorld Today, Jan. 14, 2014.)

Donabedian said he predicts more early stage deals, but they will involve more than just an arms-length investment. “There will be more activity early on.”