Deals of the Week Takes Stock in M&A

Here at Deals of the Week, we don’t often take note explicitly of buyouts outside the biopharma sphere. But one well-publicized tech deal last month piqued our interest – and it parallels another recent pharma deal in a way we found curious.

As you may have heard, social networking giant Facebook wowed the tech field with its February takeout of smartphone communications app developer WhatsApp for a jaw-dropping $16 billion plus an additional $3 billion in employee-retention bonuses, reportedly the largest-ever acquisition price for a private, venture-backed company. (We’ll note in passing that one of the deal’s biggest winners, venture firm Sequoia Capital, is also a life sciences investor.)

Now, $19 billion is a lot of scratch – it’s a bigger pile of cash than the gross domestic product of Jamaica, and it’s in the ballpark of the price Sanofi paid for Genzyme in 2011. But a closer look at the WhatsApp deal’s terms reveals that Facebook paid just $4 billion in cash – a quarter of the deal’s baseline value – and the balance, including the retention bonuses, in its somewhat volatile stock. It’s a common formula in tech, a sector in which speculative value far outpaces revenue in many cases.

In the biopharma world, such arrangements traditionally are unheard of – but that might be changing. While many pharma mega-deals include both cash and stock components, most feature bigger cash portions than paper value. Just over a third of the $68 billion Pfizer spent to acquire Wyeth in 2009 was in stock, with the rest coming in cash; Johnson & Johnson’s $21.7 billion deal for Synthes in 2011 was in the same league, weighted roughly 65%-35% in favor of cash.

That’s why Actavis’ pending $25 billion deal to acquire Forest Laboratories last month was so unusual. Actavis paid just $26.04 per share, or 29% of the total $89.48-per-share purchase price, in cash, and swapped its stock for the rest. So there’s financial risk involved: If Actavis shares fluctuate, the deal’s total value could go up or down rapidly, perhaps before it even closes. (We note that the Facebook/WhatsApp deal technically gained more than $600 million in value before it was even announced, since its stock component was based on an already-outdated five-day average of Facebook’s share price.)

It’s not the first mega-buyout to favor equity over the hard stuff; Merck’s $42 billion buyout of Schering-Plough was tilted slightly in favor of stock over cash, with 56% of the price paid in equity. But rarely are large pharma deals ever consummated with paper value vastly outweighing cash money; it’s even less likely with smaller deals. A search of our Strategic Transactions database of reveals that only about one in 10 biopharma deals since 2008 falling into the “bolt-on” range – those ranging from a few hundred million dollars to a few billion – had a stock component.

Some life sciences companies, particularly those living off their sunny growth prospects rather than established, dividend-paying, cash-rich ones, soon could find that their stock is becoming a valuable deal-making currency. And with biotechs soaring in the public markets, some of them look like good candidates for stock-heavy deals. Like Actavis’ stock price, the Nasdaq Biotechnology Index has doubled since November 2012. Emilio Ragosa, a partner with Morgan Lewis & Bockius’ mergers-and-acquisitions practice, said mid-cap biotechs – those valued around $1 billion – are in the sweet-spot. “They tend to have less cash, but their stock is appreciating more rapidly,” he said.

Big biotechs and specialty pharmas, responsible for most of the M&A deal-making action in 2013, are enjoying exceptionally high valuations, but don’t always have big pharma-like cash flow. They’re good candidates to use their strong stock prices to beef up their businesses without denting their cash piles severely.

It’s unlikely that big pharmas will change this aspect of their deal-making strategies much; as Ragosa notes, “They have enough cash on their balance sheets.” Ever sensitive to their quarterly earnings, most large pharmas will continue to avoid using stock to take out biotechs. Seven of the top 50 cash holdings among U.S. companies belonged to pharmas, according to a 2013 Moody’s report; six were sitting on double-digit billions, led by Pfizer. - Paul Bonanos

Transactional activity has been as slow as a snowy Interstate lately, but we’re still taking stock of the latest alliances in...

Biogen/Eisai: Biogen Idec teamed up with Japanese pharma Eisai on March 5 to potentially co-develop and co-commercialize four compounds for the treatment of Alzheimer’s disease. While specific financial details weren’t released, Biogen will pay Eisai an upfront payment of undisclosed size, as well as a fixed number of milestones based on development, regulatory and commercial events. The team also will split worldwide profits on the drugs should they reach the market. Eisai will take the lead on the first two compounds, which it will provide. The first is a beta-site amyloid precursor protein cleaving enzyme (BACE) inhibitor dubbed E2609; Eisai discovered the compound in-house, and is about to begin its Phase II trials. The second monoclonal antibody, BAN-2401, is already in Phase II trials; it’s an immunotherapy designed to break down beta amyloid plaques after they develop. Eisai also has the option to jointly develop and commercialize Biogen’s two in-house Alzheimer’s candidates, the anti-amyloid beta antibody BIIB037 and an anti-tau monoclonal antibody, both of which are in very early stages. The BACE inhibitor space has been heating up as Merck pushes its candidate into Phase III and AstraZeneca follows closely on its heels. Both Roche and Lilly have ended programs in the space after safety signals cropped up in clinical trials. There hasn’t been any proof so far that the safety issues are class-wide, but the industry is keeping a close watch for any signs. - Lisa LaMotta

Genocea/Harvard/Dana-Farber: Fresh from its initial public offering last month, vaccine specialist Genocea Biosciences struck a research deal with Dana-Farber Cancer Institute and Harvard Medical School to study cancer immunology. Under the March 5 alliance, researchers will use Genocea’s proprietary T cell antigen discovery platform to find antigens that correlate with an anti-tumor immune response in melanoma patients. Charitable scientific network Ludwig Trust will sponsor the research; terms weren’t released. The research will play off existing work by Dana-Farber’s Stephen Hodi and Glenn Dranoff in anti-CTLA-4 therapies such as Bristol-Myers Squibb’s Yervoy (ipilimumab). Harvard microbiology and immunobiology professor Darren Higgins will lead the development of a cancer antigen protein library, which will be screened against patient-derived cells using Genocea’s platform in order to seek a correlative immune response. After an initial lukewarm reception, Cambridge, Mass.-based Genocea shares have rebounded, rising more than 50% since the company’s February 5 debut. The company is best known for its clinical pipeline of anti-infective vaccines, including therapies and preventive treatments for herpes simplex virus-2, pneumococcus, chlamydia and malaria. Its most advanced program is GEN-003, a Phase II therapy for HSV-2. - P.B.

NeoStem/Massachusetts Eye & Ear/Schepens: Cell therapy developer NeoStem also inked a deal with some of Harvard Medical School’s tentacles, entering a research collaboration March 6 with Massachusetts Eye & Ear and the Schepens Eye Research Institute. The publicly traded, New York-based stem cell company will sponsor research by Michael Young, director of Mass. Eye & Ear’s ocular regenerative medicine institute, into various eye disorders; financial terms were not revealed. The deal will fund Young’s research using NeoStem’s proprietary very small embryonic-like stem cells, or VSELs. The scientist will perform preclinical work to find uses of NeoStem’s VSEL products to combat degenerative disorders such as retinitis pigmentosa and macular degeneration. Both Mass. Eye & Ear and Schepens are Harvard Medical School affiliates. NeoStem previously has used its VSELs clinically as wound-healing therapy and to treat periodontitis; the company also has targeted cardiovascular diseases and autoimmune disorders. The eye also has been a popular target for gene therapies, thanks to its closed system and immune-privileged status. That has led to several recent fundings of companies with preclinical and clinical-stage programs. - P.B.

Thanks to Flickr user ProAeroPhoto for his photo of a different way to trade cash for stock, reproduced here under Creative Commons license.

Financings of the Fortnight Doesn't See Much To "Like"

 

Without further ado, we bring you a few IPO notes from the Facebook Fiasco Fortnight. While most market watchers trained their eyes on Zuck, his biotech-veteran CFO, his bankers, and (eventually) his lawyers, a few biotechs made moves of their own. Only one took a step forward: Kythera Biopharmaceuticals filed an S-1 after raising about $100 million through four venture rounds and seven years. The company’s lead product, a Phase III injectable meant to reduce the fat that causes double chins, is fully licensed to a division of Bayer.

Two others took steps back. TVAX Biomedical withdrew its modest $20 million offering, citing poor market conditions. The firm has an autologous immunotherapy platform that has produced a Phase III brain cancer treatment and a Phase II treatment for renal cell carcinoma. And Cancer Genetics, which first filed in late December, postponed a planned $48 million offering, according to Renaissance Capital. No official word yet on a second attempt.

For any small company -- let alone a biotech -- hoping to tap the public markets, the Facebook bungle couldn’t have come at a worse time. The Euro crisis drags on, and the ripple effects of a potential Greek Euro exit loom ever larger in macroeconomic calculations. Then comes Facebook, only the most watched, most anticipated U.S. financial event of the so-called recovery, and instead of a shot of much-needed confidence, it delivered yet another ringing example of American institutional ineptitude at best, criminal venality at worst. Years to prepare, to hire the best and the brightest, and this is the best they could do?

This headline made us chuckle: "IPO activity remains slow despite Facebook offering." Despite? We venture that in sectors like ours, it was more like an extra twist of the knife. Next time an underwriter comes knocking with a fabulous biotech, potentially game-changing science, visionary leadership, blah blah blah, what will happen? Hardcore biotech investors will surely do their own diligence, but what about the “swing voters,” the more general investors who might crack open a window to make a biotech bet or two? Are they going to stick their necks out? Would you?

You don't have to buy our shares, and you don't have to "like" us. Just enjoy another edition of... 

TVM Capital: The international venture firm has raised its seventh life-science fund with a northern twist. Announced May 28, the fund will be based in Montreal and focus mainly on single-product companies in Quebec, part of an asset financing trend that VCs such as CMEA Capital, Atlas Venture, and Index Ventures, as well as non-traditional investors, have tested recently. The new fund also marks the fourth time since November that a Big Pharma has poured cash into a Canadian biotech investment vehicle, including the Merck Lumira Biosciences Fund, which we noted in this column earlier this year. A major chunk of TVM Life Sciences VII, which has C$150 million ($146 million) committed, comes from Quebecois fund-of-funds manager Teralys Capital, with ties to several regional investors. The goal is to fund about 15 projects, mainly but not exclusively in Quebec. Another major limited partner is Eli Lilly & Co., which alongside its investment will open a branch of its Chorus drug development network in Montreal. It’s unclear, however, what ties Chorus Canada has to the Lilly/TVM arrangement. A Teralys managing partner told “The Pink Sheet” that Chorus will not have rights to help develop the assets that receive TVM investments. Other VC investors in TVM Life Sciences VII included BDC Venture Capital, Fondaction and Advantus Capital Management, a subsidiary of the Minnesota Life Insurance Company. Only the size of the investment by Teralys (C$65 million) and that made by BDC Capital (C$20 million) were disclosed. – John Davis

Royalty Pharma: The buyer of biopharmaceutical royalty streams said May 24 that it raised $600 million in debt to fund future acquisitions. That a royalty fund has raised cash is no surprise; RP rival Cowen Healthcare Royalty Partners announced a $1 billion fund, its second, to start 2012. OrbiMed Advisors also got into the game with a $600 million royalty fund in 2011. The funds have recently marketed themselves as alternatives to life-science venture capital for limited partners uneasy with venture’s sallow returns and long fund cycles. But Royalty Pharma prefers bond holders to equity holders, which makes sense given that royalty deals are more like debt than equity investments, with lower risk and return profiles. The $600 million tranche, with a borrowing spread of Libor + 3% and a maturity date of November 9, 2018, brings RP’s total debt load to $3.4 billion. Two other tranches of $850 million and $1.9 billion mature on November 9, 2016 and May 9, 2018, respectively. RP said that strong demand for the debt issue boosted the size from $500 million to $600 million. The firm has bought royalty streams to more than two dozen products including Humira (adalimumab), Remicade (infliximab) and Cimzia (certolizumab). - A.L.

Prosonix: The Oxford, UK firm extended its Series B round with £5.7 million ($9 million) to push forward development of its generic asthma treatment fluticasone propionate (PSX-1001). The firm is banking on its ultrasound drug-engineering technology to convince European regulators to approve its inhaled version of GlaxoSmithKline’s Flixotide/Flixonase. Ultrasound induces the crystallization of drugs from solution and can be precisely controlled, leading to the formation of particles with little variation in size and shape. The particles are stable and do not require formulating with excipients for use in inhalers. In contrast, conventional jet-milling makes inhaled powders that are more unstable and with more variable physicochemical properties, Prosonix CEO David Hipkiss told our "Pink Sheet" colleagues. Pharmaceutical companies that currently dominate the respiratory products sector, such as GSK, AstraZeneca and Novartis have not faced significant generic competition because of the complexity of developing inhaler drug delivery technology, and the difficulty of showing bioequivalence to inhaled powders. Also, in the U.S. there is no regulatory pathway for generic inhaled respiratory products. Belgian investment firm Gimv joined existing investors in the second tranche of the Series B. In the June 2011 first close, Prosonix raised £11.4 million from a European syndicate that included Ventech of Paris; Gilde Healthcare Partners of Utrecht, the Netherlands; Entrepreneurs Fund BV and Solon Ventures, both of London; and Quest For Growth of Leuven, Belgium. Prosonix hopes to start a Phase IIa trial later this year for its second product candidate, a twice-daily inhaled therapy for chronic obstructive pulmonary disease. - J.D.

Sangart: The San Diego firm added $50 million from a previous investor to bring its Series G round to $100 million and its total cash raised to $280 million. Sangart said the cash will help it complete its current Phase IIb trial for its lead product, an oxygenated form of recycled blood meant to treat tissues deprived of oxygen after traumatic injury. It will also aim to complete a Phase Ib for another product that uses carbon monoxide instead of oxygen with the recycled blood to treat sickle cell anemia. When the two trials are done, the company wants to look for a licensing partner for one or both products, or perhaps even a buyer for the company, CEO Brian O’Callaghan told “The Pink Sheet.” The cash comes from Leucadia National Corp., which also contributed most of the first $50 million Series G tranche. Leucadia is a conglomerate with diverse holdings in mining, beef packing, wine, and timber. – Lisa LaMotta

Photo courtesy of flickrer striatic, who gets two thumbs up.

Deals of the Week Ponders The Complications

Sometimes, a pharma partnership is a prelude to a buyout deal. Other times, as some lovelorn users of one newsworthy social network like to say, it’s complicated. For GlaxoSmithKline, its relationships with three different companies show how one kind of deal can lead to another – or not.

This week, GSK acquired one longtime partner, wrestled with another after it rejected a hostile bid, and raised its stake in a third. First, it paid GBP 61 million ($99 million) to acquire the portion of proteomics drug discovery company and longtime partner Cellzome that it does not already own. GSK will pay cash for just over 80% of Cellzome shares; it previously owned a shade less than 20% of the company, thanks to a 2001 deal in which GSK sold its Cell Map division to the privately-held German start-up, then just a year old. The deal, expected to close Monday, gives GSK access to additional tools to assess interactions between drugs and proteins, potentially leading to better visibility into drug successes and failures during the discovery process. The two are already familiar with one another: They’ve been collaborators in an inflammatory disease partnership since 2008.

The first-comes-love-then-comes-marriage arrangement doesn’t seem to be happening for GSK and Human Genome Sciences, though. As we noted last week, that deal turned hostile as HGS rejected a $13-per-share bid that valued it at $2.6 billion. Now, HGS is trying to remain independent by adopting a poison-pill strategy, a shareholder rights plan that would kick in if a third party acquires 15% of HGS stock. While HGS is still retaining banks to explore strategic options, the new provision would allow its stakeholders to thwart a takeover attempt; it reiterated that it believes GSK’s offer is inadequate this week as well. GSK and HGS are already partners on the lupus drug Benlysta (belimumab), as well as a pair of pipeline drugs including Phase III cardiovascular drug darapladib.

Is there a middle ground between outright acquisition of a partner and a hostile takeover of one that doesn’t want to be bought? How about what GSK did with its collaborator Theravance this week? The British pharma took that relationship to the next level when it acquired 10 million additional shares of publicly traded Theravance for $213 million, based on terms announced in April. That boosts its ownership stake from 18.3% to 26.8%. The two have been allies since 2002, and have expanded their partnerships around bifunctional muscarinic antagonistic beta-2 agonist (MABA) and long-acting beta-2 agonist (LABA) programs under development for chronic obstructive pulmonary disease, including Relovair (fluticasone furoate/vilanterol).

Sound complicated? Some deals are easier to complete than others, but we've got more news than that to report this week. Now stop hitting 'refresh' and read...

Agilent/Dako: The words “biggest tech IPO in history,” were frequently spoken of Facebook’s offering this week, but it’s worth remembering that the spinout of Agilent Technologies from Hewlett-Packard in a 1999 offering was once ranked among the biggest ever. Agilent made a move in the life sciences May 18, when it acquired Danish cancer diagnostics company Dako for $2.2 billion in cash. Agilent, a Santa Clara, Calif.-based maker of electronics measurement equipment, already markets a variety of life sciences and chemical analysis products. Its microscopes, imaging equipment, software and other laboratory gear allow study of biological samples at the molecular level; they are sold into the commercial pharma, biotech and research market as well as the academic and government markets.  Dako sells antibodies, software and instruments for cancer diagnostics, including diagnostic kits, probes, and reagents used in flow cytometry. It posted revenues of about $340 million in 2010. Swedish private equitiy firm EQT Partners AB acquired Dako from its founding family for about $1.3 billion in February 2007; Novo Nordisk held a minority stake at the time. – Paul Bonanos

Piramal/DRG: Flush with cash from the May 2010 sale of its branded generics business to Abbott Laboratories Inc., Piramal Healthcare Ltd. announced on May 16th that it will acquire life science analytics and consulting firm Decision Resources Group for $635 million. The acquisition is Piramal’s second this quarter; in April it moved to acquire Bayer AG’s molecular imaging business, including florbetaben, a Phase III molecular imaging agent for diagnosing Alzheimer’s disease. Last August, the company made a significant investment in Vodafone’s Indian operations. The DRG acquisition price represents a 4x multiple of DRG’s projected 2012 top line sales of $160 million. The beneficiary of the sale is Provident Equity Partners, which focuses on the media, communications, education and information sectors, and has over $23 billion under management. Provident took a majority stake in DRG for $193 million in May 2010, investing out of its $4.25 billion Fund V. The sale to Piramal, expected to close in the second quarter, will bring Provident a 2.1x return on investment. Piramal chairman Ajay Piramal cited rising demand in the pharma sector for “specialist information” during a time of rising research costs and increasing complexity in accessing global markets. In particular, he emphasized Piramal Healthcare’s reputation and relationships with global life science companies and its knowledge of emerging markets. DRG CEO Peter Hoenigsberg echoed the demand for information about emerging markets, which he called “the primary avenues for growth in the pharma industry” – and mentioned Piramal’s experience in emerging markets as a factor in the deal. - Michael Goodman

Bristol-Myers Squibb/Tsinghua University: Bristol-Myers Squibb has teamed up with China’s Tsinghua University to develop novel targets for oncology and immunoscience on May 14. The partnership will focus on 3D protein structure mapping of biological targets, as well as structural biology research. "This is Bristol-Myers Squibb's first discovery collaboration in China and is an example of the company's deepening commitment to the country," said Francis Cuss, senior vice president of research at BMS. "We are delighted to be working with Tsinghua University, a world-renowned and highly esteemed research-based academic institution with expertise in target identification and structural biology that will support the discovery of new medicines to fight serious diseases in China and around the world," he said. The multi-year partnership is one of many that have popped up in recent years between innovation-hungry Big Pharma and the academic community. - Lisa LaMotta

Newron/Zambon: Two Italian companies struck a licensing deal around safinamide, a novel Parkinson's treatment that showed safety and efficacy in a recent Phase III trial. Chemical and pharmaceutical company Zambon paid a total of €20 million ($25.4 million) to Newron Pharmaceuticals of Milan to option and license the drug worldwide, not including Japan and other Asian territories already covered by a deal with Meiji Seika Pharma. (One-time rights holder to safinamide, Merck-Serono, returned the drug to Newron in October 2011, throwing a wrench in Newron's previous corporate development plans.) Newron will also receive milestone payments of unspecified size, as well as double-digit royalties if the drug is commercialized. Zambon will shoulder further development costs of the drug. Newron had been lining up safinamide for approval in 2013. The compound is expected to be marketed as an add-on treatment administered alongside dopamine agonists in patients with various stages of Parkinson's disease; Newron says it has both dopaminergic and non-dopaminergic properties. Separately, Newron said new chief executive Stefan Weber will replace founding CEO Luca Benatti, who stepped down from the position after 13 years. - P.B.