MONTREAL - At a time when public markets often are unreceptive to small and midsize biotech companies, is merger and acquisition activity replacing initial public offerings as the preferred exit strategy for shareholders?
According to panelists at this year's VentureForum East meeting, in some ways it is, though M&A isn't always the best option for the industry as a whole.
While pedestrians strolled the sidewalks of downtown Montreal on a hot, sunny day, biotech executives and investors strolled the plush, air-conditioned hallways of the Marriott Chateau Champlain hotel on their way to presentations and one-on-one meetings. The third annual venture meeting on the East Coast, and the first to be held in Canada, the meeting brought together more than 300 attendees, including 60 presenting companies and 60 venture capitalists, and featured discussions of some of latest industry trends, such as whether M&A is the new IPO.
To some extent it is, said moderator Simon Gill, co-head of health care investment banking with RBC Capital Markets Corp. There's "very different return profile" with M&A compared to the traditional IPO route, and it's clear why, from a VC perspective, M&A is the preferred way to go.
According to BioWorld Financial Watch data, 24 companies completed IPOs this year, through the end of May, bringing in an average of $51.2 million in proceeds, with many firms pricing their shares much lower than anticipated. On the M&A side, BioWorld Industry Snapshots shows 51 deals done through May of this year, with 18 of those valued at $100 million or more. The biggest deal, by far, was Darmstadt, Germany-based Merck KGaA's $13.3 billion buy-out of Swiss firm Serono SA, which closed in January.
But despite the buzz generated by those big transactions, the reality is that few biotechs will get those kinds of offers, since big pharma and big biotech "can't buy them all," said Kenneth Galbraith, a venture partner with Ventures West Capital, who estimated that "maybe 10 percent of those companies" are going to land a deal that provides an adequate return for shareholders.
Small companies can develop their pipelines "a lot longer than they think they can," he said, and shouldn't allow themselves to be wooed by "the big checks" at the expense of company growth.
As the former chairman and interim CEO of Vancouver, British Columbia-based AnorMed Inc., Galbraith recently was in the midst of a very public boardroom fight regarding acquisition offers. In spite of the turmoil, the end result turned out to be a positive move for the company - at least so far. Cambridge, Mass.-based Genzyme agreed in October to pay $13.50 per share, or $580 million, for the small biotech, which represented a significant premium for a company that had been trading around $5 only a few months before. In exchange, Genzyme gained rights to AnorMed's chief asset, the late-stage cancer drug Mozobil. (See BioWorld Today, Oct. 15, 2006.)
"It was a pretty good deal," Galbraith conceded, though if the upcoming pivotal data show stellar efficacy with Mozobil, AnorMed's former owners might "wish we'd held on to it a little longer."
Sometimes, though, the offer is just too good to pass up. That was the case last fall when Whitehouse Station, N.J.-based Merck & Co. Inc. offered to buy RNAi company Sirna Therapeutics Inc. for about $1.1 billion. The companies initially were discussing a potential collaboration. But interest in Sirna was "rapidly escalating," putting Merck in the position of having to decide whether to pursue an acquisition, said Reid Leonard, executive director of licensing and external research at Merck Research Laboratories. Ultimately, he added, the big pharma firm Merck took the next step and agreed to buy Sirna's shares for $13 apiece, representing a 102 percent premium. (See BioWorld Today, Nov. 1, 2006.)
"Merck executives didn't want to be in a position five or 10 years from now wishing that they'd placed that bet," Leonard added.
It's hard to predict whether the industry can sustain the rampant M&A activity, or if the spate of buyouts is simply a temporary reaction to the disappointing public markets. Merck, like the rest of big pharma, remains hungry to fill its development pipeline as its blockbuster drugs inch closer to patent expiration, but it's unlikely that M&A will ever replace the traditional partnering model, Leonard said. "You acquire all the assets, but also the liabilities," and then there's managing the integration as well as making sure that the biotech innovations don't get lost in the big pharma machine.
To ensure that Sirna continues with its work in short-interfering RNA, Merck allows the company to operate as a wholly owned subsidiary and many of the scientists stayed on board after the acquisition.
The VentureForum East meeting, organized by the Biotechnology Industry Association, ends today.