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Mood high as meeting starts: will 2013 wins carry over?

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By Randy Osborne
Staff Writer

SAN FRANCISCO – “Really great momentum” going into the J.P. Morgan Healthcare Conference this year seems likely to persist, at least through 2014, said Thomson Reuters Recap analyst Laura Vitez.

“At the beginning of the 2013, people were wondering if we might see some more mega-merger activity this year, but the opposite [happened],” she said.

“The big pharmas were not that active,” Vitez said. “They certainly didn’t merge with each other. In fact, some of them spent their time dividing themselves in half, or making rearrangements that some people think indicate they intend to divide themselves up into higher and lower-margin businesses.”

Instead, pharma firms, as well as the larger biotech companies, proved more inclined to strike collaborative deals, said Vitez’ colleague, Vinay Singh. Recap will be offering an analysis of its detailed findings in data presentations at the conference.

Last year, as compared with the five years before, “discovery-stage deals were certainly a seller’s market,” Singh said. “There were big up-fronts being paid for discovery-stage, preclinical lead molecule compounds and assets. It kind of works hand in hand. They weren’t so willing to pay huge money for acquisitions, but they were paying certainly more than in years past for early stage assets and licensing deals.”

Singh told BioWorld Today that 2013 “might have been a ‘backlog’ year. For the past three or four years, we’ve been anticipating big deals to be made, and they weren’t, and so there was a kind of desperation on both ends, be it biotech or big pharma, to get deals done. They were both willing when they came to the table to make compromises.”

And sometimes those compromises went both ways at the same time, he said. “One thing I did notice was that, despite the fact that big premiums are being paid for discovery-stage assets in these licensing deals, a bulk of them were actually of the license-option variety, which isn’t always a great thing for either party,” Singh said. “They were trying to go about it in a creative manner, just to get deals done.”

The boom in initial public offerings (IPOs) also fueled the sector. “Unquestionably, with a surging public market, there was a rising-tide effect industry-wide, as it pertained to exits,” with collaborations, mergers and acquisitions rising accordingly, Singh said.

“Frankly, not all the IPOs that came out this year were great,” he said. “Through the first 10 months of the year, everyone who filed was going out ahead of their target price. And then, I believe, in the last two months we had five or six that were either retracted or amended, because of stated market conditions.”

Singh said he had no opinion on whether IPOs would regain footing in 2014, but the activity in the latter part of 2013 could “speak to where the trend may be going.”

Vitez said some of the recovery has come from the public market interest in biotech, but plenty of other factors played their parts.

“I don’t think our future is predicated on whether or not that [IPO spate] continues,” she said. “There’s a lot of interesting stuff going on,” such as disease foundations become involved in funding research earlier, and outfits such as the Wellcome Trust starting venture funds.

THE ORBIT OF THE HOTBED

“The past, from 2008, has been really scary, really dire, really difficult, and it feels like we’re coming out of it,” Vitez said. “There’s not one answer. There are a variety of things that people are trying, that people are figuring out, and it’s helping across the board.” She cited pharma-academic alliances, and “a whole variety of risk-mitigation strategies.”

Quite a few option-to-acquire deals took place in 2013, she noted. “Many of those have earn-outs on the back end, so you have risk mitigation, in that it’s an option for acquisition on the front end, and then you have earn-outs to handle the value gap on the back end, to get the buyer and the seller to agree. Some of those were done with a concomitant Series A financing as a way for the [venture capitalists] to get comfortable and put their money in.”

Vitez likened the varied strategies for perking up the industry to the ways that car traffic fatalities were lowered. “There wasn’t one solution to getting those numbers to come down,” she said. Increasing the legal age for drivers, along with adding seat belts, head rests, crumple zones and air bags, got the job done. “An analogous thing is happening here,” she told BioWorld Today.

In Singh’s view, “the big takeaway [from the Recap data] is that it was a good year, relative to last year, and the numbers were more on par with the five years prior to that. Not only was it a good year in numbers, but you’re seeing, industry-wide, companies taking really creative approaches to try to circumvent a lot of the issues they dealt with in the last five years.”

About the bellwether J.P. Morgan event, Vitez said its reputation as a “hotbed of initial deal-making” is well deserved, and not entirely because of the conference alone.

“It creates its own orbit,” she said, noting that smaller conferences – half-day seminars, informational breakfasts, workshops sponsored by law firms – have sprung up around the meeting, for years held in the historic Westin St. Francis hotel.

“The whole event is critical,” she said. “It’s not that term sheets get done, but it’s where introductions are made, and relationships begin to form. You need to get to know the people on the other side of the table.”