West Coast Editor

SAN FRANCISCO - "I can't remember a year that was as active and had as much transformational activity in healthcare as 2006," said Douglas Braunstein, head of investment banking in the Americas for JPMorgan, as he opened the firm's 25^th healthcare conference at the Westin St. Francis hotel.

Braunstein, with almost 20 years in the sector, noted that the meeting began in 1983 with only 21 presenting companies, compared to 330 at last week's event, which drew about 5,000 public investors and 1,500 financiers from private equity and venture capital. Ninety percent of talks were done by CEOs, a quality that Braunstein called "probably our most important."

JPMorgan, Braunstein pointed out, had a hand in some of the more significant transactions of the year, including Celgene Corp.'s $1 billion-plus offering of 20 million shares at $51.60 per share, boosting volume to meet index fund demands and get on the coveted Standard and Poor S&P 500 Index.

Celgene replaced AmSouth Bancorp on the index after the close of trading Nov. 3. About 12.5 million Celgene shares traded on the news, and the next day, Celgene disclosed plans to issue 20 million shares to meet demand. The firm also achieved a place on the S&P 500 GICS Biotechnology Sub-Industry index.

In November, biotech companies made up about 1 percent of the total S&P 500, with health care stocks taking about 12.4 percent - more than half of them pharmaceutical firms, with some managed care and health care equipment stocks mixed in.

"While the S&P for the last seven years has been generally flat, investment in healthcare has doubled, from a little over $1 trillion in 2000 to almost $2.3 trillion today," Braunstein pointed out. "During 2006, generally, healthcare cooled off, relative to the S&P," though the sector "has had a tremendously active year in terms of [merger-and-acquisition] and capital markets activity."

Geoffrey Meacham, biotech analyst with JPMorgan, said M&A action is likely to keep going, but picking the likely players is tricky - not only from a judgment standpoint, but in terms of avoiding regulatory trouble for JPMorgan. But he offered some general ideas about biotech firms that might become buyers.

Genzyme Corp. "has always had a rollup model," he noted, and Biogen Idec Inc. "has been very active on the business development front. I don't know if they would take anybody out soon, but maybe if they get a few good quarters of Tysabri under their belt ." Tysabri (natalizumab), an alpha-4 antagonist administered by infusion for multiple sclerosis, returned to the market last year after Idec voluntarily pulled back the compound because of its link to a viral infection called progressive multifocal leukoencephalopathy.

Pharma companies' buyout strategy of waiting for Phase III data before making a move is different from biotech's. "This is a trend - if pharma doesn't want to outright buy a biotech before a Phase III or Phase II result, but they have a conviction, they'll sign a massive biobuck' deal," Meacham told BioWorld Financial Watch. "They'll pay a small upfront [amount] and take big bets."

He pointed to the summer deal between ChemoCentryx Inc. and GlaxoSmithKline plc, worth up to $1.5 billion, with $63.5 million up front in cash and stock as part of a Series D financing and potentially the rest in research funding and milestone payments. The worldwide multi-target alliance is focused on treatments for inflammatory disorders, and includes a late-stage product, Traficet-EN, for inflammatory bowel disease, as well as three preclinical research programs.

"You can biobuck these deals to death," Meacham said.

JPMorgan worked on a hefty number of transactions during the year, helping, among others, Amgen Inc. with its $5 billion stock buyback in December, when Amgen's previous re-purchase authorization had about $1.5 billion left. "Our expectation is that 2007 in the equity markets will continue to be a very strong year," Braunstein said.

A panel discussion late Monday reviewed the advantages of private vs. public company ownership. John Coyle, managing director at JPMorgan, asked participants what public investors are missing that private sponsors see - and Tim Sullivan, partner at Chicago's Madison Dearborn, called that a good question.

"We'll find out in a few years, I guess," he said. Sullivan's firm looks at life "a little bit differently in taking companies private," he said. "We're comfortable leveraging the balance sheets of the companies." The approach "might be financial engineering, but it does tend to enhance shareholder equity value," he added.

"When we take concentrated control, we work with management, and they typically are, if you will, bellying up to the bar and putting equity in the deal as well," Sullivan said. "The dialogue with ourselves and management is a very direct one. They basically have to make it happen. The debt itself [incurred in the deal] is something that forces a certain discipline."

Casualties occur. "In many of the cases, if there are peripheral business that certain of the managers may have fallen in love with that aren't part of the strategy, we typically will have that direct dialogue with the management team [and] discuss whether they're getting the best return on the invested capital," Sullivan said. "If not, we'll sell that business to others who might do better with it. It's just a dialogue. We hold them accountable."

They're already accountable as investors, he allowed, but the scrutiny by would-be investors from outside is even more stringent. "Everything today seems to be expensive, but the fact is, we're looking at businesses in many cases that the public, for whatever reason, has fallen out of favor with," Sullivan said.

Coyle noted that the conventional wisdom lately has turned upside down. Whereas the tougher job used to be considered the private-company CEO's, now people are calling the public position more of a challenge.

Jonathan Coslet, a partner at Texas Pacific Group, acknowledged that the public CEO's job is difficult - "Mr. Nardelli found this out last week," Coslet said - and the job should be. Coslet was referring to Robert Nardelli, CEO of Home Depot, who resigned.

Earnings-per-share "doubled during his tenure, [but] the stock price was flat and for that, and many other reasons, he's looking for new things to do," Coslet said. "I'm not sure it was his fault that the [Home Depot's price-earnings ratio] went from 40 times to 20 times." (Another shoe dropped last week, when a group of Home Depot shareholders sought a temporary restraining order to block the chain from paying Nardelli any more of his $210 million severance package.)

Shareholders, Wall Street, and hedge funds are "impatient and short term oriented," Coslet said, and likely to put plenty of pressure on public CEOs.

"Short term may [mean] quarter to quarter, it may even be year to year, but they know one thing for sure: When they come into a private environment like ours, we have no ability to create value in a short period of time," he said. "We're always going to be long term investors."