CBI Conference: M&A’s Expected to Increase as Big Pharma Seeks to Fill Pipelines

By Avis Bridgers, Nerac Analyst

The conference name is a mouthful: The Center for Business Intelligence’s 4th Annual Forum on Early Stage Product Development and Commercialization Strategies for the Bio/Pharmaceutical Industry. But the late February conference in Philadelphia offered a buffet table of ideas and information. What held the menu together was one dominant theme: At least for the foreseeable future, Big Pharma will continue looking to emerging biotechnology companies for innovation―both for potential new compounds to fill development pipelines and for biomarkers and diagnostics, first to identify new products and then to aid in patient diagnosis and monitoring.

Underlying that main theme was a recounting of the myriad challenges that confront the pharmaceutical industry today: rising R&D costs, shriveling development pipelines, generic erosion of innovators’ products, globalization and managed care considerations, increased public scrutiny of the industry and its regulators due to spiraling healthcare costs, and toxicity issues of some popular medications. The list is long and painful, and will undoubtedly change the face of the pharmaceutical industry forever.

IPO Strategy Limits Favor M&A
According to Michael Margolis, Vice President of Investment Banking for Rodman and Renshaw LLC, an exit strategy based on initial public offerings for emerging biotechs is limited today. A more realistic exit strategy is acquisition. In fact, the M&A market is creating much more value than IPOs recently. Some companies may be forced to merge just to generate cash in this more cautious investment environment.

James Foley, Ph.D., president and CEO of SMART Biosciences Inc., stressed that for an early stage company, the intellectual property portfolio is the company’s product. With that in mind, the company should understand the range of indications that their IP claims, their relative risk and value, and then prioritize studies based on this understanding. Careful study design can maximize value while mitigating risk. According to Dr. Foley, Phase II data is needed to value.

IP Valuation Is Critical
Debra Bowes, of Chevy Chase BioPartners LLC, noted the importance of assessing the range of enabling patents as well as the range of blocking patents surrounding key company patents in assessing intellectual property value. One should assess the freedom to operate within these IP areas and whether any sub-licenses will be required to make full use of the IP portfolio. Without careful assessment and tracking of the company’s IP and the surrounding landscape, companies risk under-valuation and the squandering of assets.

As well, the competition should be monitored throughout the potential product’s lifecycle. One should have a deep understanding of the biology and mechanism of action of the invention and be aware of competitive IP, drugs in development and those marketed for the same indication(s). One should know not only what company owns competitive IP, but also what company is developing it.

This essential information allows emerging companies to maximize their value as an acquisition target and to guide their drug development efforts to areas where successful outcome is most likely.

‘Buy Side’ vs. ‘Sell Side’
Harris Kaplan, of Healogixs, spoke of “buy-side” and “sell-side” companies. The increasing complexity and expense of licensing deals (and the fact that studies smaller companies conduct often must be repeated to meet Big Pharma’s more stringent standards) argues for acquisition. But in most cases, the management team and the scientists who created value in the emerging company leave after acquisition, and shareholder value does not increase. Biotech share prices are increasing as a result of the desperation with which Big Pharma seeks compounds to fill their pipelines, further exacerbating Big Pharma’s valuation problems.

According to Mr. Kaplan, buy-side companies are slowly reorganizing around this new model. AstraZeneca, for instance, has dedicated approximately 150 employees to watching for emerging technologies. On the sell side, it’s all about the biology and the mechanism of action. The goal is finding indications of interest.

It’s important for the emerging company (the sell side) to be aware of this difference in focus. In fact, early awareness of the structure of the inevitable acquisition interface should allow the emerging company’s management team to make choices that will result in a high value partnership – perhaps one which even increases shareholder value in the short term, and allows further development of the emerging company in the longer term.