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Will M&A Palooza Follow Flock of Biotech Initial Public Offerings?

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By Marie Powers
Staff Writer

With the migration of biotechs to the public markets during the second quarter of 2013, Cowen and Co. LLC theorized in its recent biotech quarterly report that merger and acquisition (M&A) activity in the sector might be suppressed this year.

In a report, titled "Where Has All the Biotech M&A Gone?" the company's analysts made a compelling case that M&A activity is countercyclical with stock performance and the market for biotech IPOs. "As we are enjoying a favorable market cycle and IPO window, we would expect M&A activity to be fairly modest," they wrote.

A year has passed since the last blockbuster pharma-biotech M&A: the $7 billion dollar acquisition of Amylin Pharmaceuticals Inc. by Bristol-Myers Squibb Co., of Princeton, N.J., and AstraZeneca plc, of London. (See BioWorld Today, July 3, 2012.)

"History also suggests that even in down years the sector has benefitted from one or two very high profile acquisitions," Cowen's analysts wrote. "Hence it is possible that the second half of 2013 could still witness more M&A activity than observed in H1 ."

They could be right. Or not.

With an unsolicited $10 billion bid from Amgen Inc., of Thousand Oaks, Calif., for South San Francisco-based Onyx Pharmaceuticals Inc. still on the table, speculation began swirling last week that Roche AG might seek to acquire rare disease firm Alexion Pharmaceuticals Inc.

On Sunday, Reuters News (whose parent company, Thomson Reuters, recently acquired BioWorld Today) reported that two sources familiar with the matter said the pharma is seeking financing for a potential bid for Cheshire, Conn.-based Alexion. The rumors gained momentum on Monday when analysts weighed in on the merits of a potential deal.

"Should an offer materialize, a hefty premium to the 3-month average of $96 would be required to satisfy management and shareholders," observed Credit Suisse analyst Lee Kalowski, questioning whether such a deal would offer Roche sufficient synergies to foot the bill.

Moreover, "Roche tends to approach acquisitions with discipline," Kalowski added, noting that Roche purchased subsidiary, Genentech Inc., of South San Francisco, for just 7 percent above its original offer price. Last year, Roche upped its initial offer on San Diego-based Illumina Inc. by 15 percent but then walked away. (See BioWorld Today, July 22, 2008, March 13, 2009, and Jan. 26, 2012.)

With its shares (NASDAQ:ALXN) hitting a 52-week high of $125.65 on Friday – a 53 percent run-up from $81 .82 in February – Alexion would not come cheap. The company's shares currently trade at 32 times forecast earnings for the next 12 months, according to Thomson Reuters data cited by Reuters News, more than double Amgen's 13.2 times.

"The total cost of a potential ALXN acquisition – and the associated sales and earnings multiples on such a deal – would seem to result in a short list of other companies that could emerge with a competing bid," Kalowski wrote.

Amgen Bid for Onyx Spikes M&A Speculation

Kalowski wasn't the only one with misgivings about the pairing. Deutsche Bank analyst Robyn Karnauskas wrote Monday morning that "our [European Union] pharma team is very skeptical about the likelihood of this deal from Roche's perspective due to lack of strategic fit, synergies and high valuation vs. risks." Although Roche and other "European mega caps" can afford Alexion's market cap of more than $21 billion, she predicted Roche is more likely to seek a technology asset or company "with more strategic fit or transformation potential."

And an informal poll about the acquisition talk conducted Friday by ISI Group analyst Mark Schoenebaum found more skeptics than believers among the 173 respondents, with many also citing lack of synergy. Still, 55 percent predicted Roche, of Basel, Switzerland, could buy Alexion by year-end.

Alexion shareholders could potentially gain more from a deal inked later in the year, suggested Piper Jaffray & Co. analyst Ian Somaiya, who noted that the company's value could rise with the release of positive data on Soliris (eculizumab) expected later this year. The drug, initially approved in 2007 as the first therapy for the rare genetic disorder paroxysmal nocturnal hemoglobinuria, also is approved in the U.S. and European Union in atypical hemolytic uremic syndrome, and Alexion is pursuing additional indications. (See BioWorld Today, March 19, 2007, and Sept. 26, 2011.)

And despite the focus on Soliris, Alexion isn't a one-trick pony. At the close of 2011, the company bolstered its pipeline by nabbing Montreal-based Enobia Pharma Corp. for $610 million up front and $470 million in sales and regulatory milestones, gaining asfotase alfa (ENB-040), a Phase II enzyme therapy for the ultra-orphan disease hypophosphatasia. The compound subsequently received the FDA's breakthrough therapy designation. (See BioWorld Today, Jan. 3, 2012.)

Officials from Roche and Alexion did not respond to interview requests.

On Monday, Alexion's shares retreated from their high, falling $6.33, to close at $107.93.

Almost any biotech M&A bid this year s likely to attract multiple suitors before it goes into the books and, with low-cost financing available, one or two big deals could unleash a deluge. In addition to Alexion and Onyx, Acorda Therapeutics Inc., Ariad Pharmaceuticals Inc., Biomarin Pharmaceutical Inc., Regeneron Pharmaceuticals Inc., Vertex Pharmaceuticals Inc., are among potential targets cited by analysts.

As Credit Suisse analyst Ravi Mehrotra wrote in a recent research note, "M&A speculation has been to date a relatively small part of the unprecedented 130 percent bull run (since August 2011). The announcement that Amgen had made a $10 billion bid for Onyx is likely to catalyze a certain level of M&A bid speculation/premium for the whole biotech sector." (See BioWorld Insight, July 8, 2013.)

But the strength of the IPO market may cause some gnashing of teeth before any biotech M&A deal can close. As the Cowen analysts wrote, "Put simply, a bull market may make it difficult for sellers and buyers to agree on a price."