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gained more than $600 million in value before it was even announced, since its stock component was based on an already-outdated five-day average of Facebook’s share price.)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.

Tweeting Around Europe's DTC Ban: Bayer Named and Shamed

A press release about a new drug launch is ok; a tweet isn't.

That appears to be the conclusion of a months-long saga over drug firms' -- in particular Bayer UK's -- use of social media to allegedly 'promote' its drugs in Europe, where DTC advertising remains a no-no.

Never mind that tweets don't respect geography. Bayer will be named and shamed in various medical journals (The Nursing Standard, 17 Aug; BMJ and The Pharmaceutical Journal, 20 Aug.) for tweeting about new UK drug launches earlier this year, according to the PMCPA, which administers the UK drug industry's (the ABPI's) Code of Practice.

The German conglomerate in March tweeted on the launch of "first and only melt-in-the-mouth erectile dysfunction treatment" (Levitra), following a similarly promotional tweet the year before about multiple sclerosis drug Sativex, according to the Digital Pharma blog.

The company claimed at the time that it was issuing only 'factual and non-promotional' information, linked to approved press releases. It also said at the time that guidance from the PMCPA on the use of social media was 'far from clear'.

The guidance has been updated to include what amounts to a ban on tweeting about prescription medicines, however. But Bayer would not comment specifically on whether it now found the guidelines clearer, saying only that "as a member of the ABPI, Bayer recognises the industry Code of Practice and, as a company, is absolutely committed to compliance with all laws, regulations and good business practices."

Of course it is. And that -- could we call it contrition? -- is the effect that the watchdogs wanted this naming game to achieve. Any companies perceived as attempting to circumvent Europe's DTC ban via social media networks like Twitter had better think again, or risk being brandished as, per the ABPI code, 'bringing discredit upon' the pharmaceutical industry.

This case will almost certainly fuel the ongoing debate around a stalled piece of EU legislation attempting to harmonize and update the region's policy on information to patients (what's allowed, what isn't).

Meantime, notwithstanding the name-and-shame ads, we bet that the @bayerukireland twitter account may have picked up a few more followers-- if only to keep tabs on them. Whatever its intention, Bayer did effectively circumvent the DTC ban in the case of Levitra: plenty of non-medical professionals know what's available as melt-in-the-mouth.

image by flickrer fanie used under creative commons