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gained more than $600 million in value before it was even announced, since its stock component was based on an already-outdated five-day average of Facebook’s share price.)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

What Is the Buoyant Biotech IPO Scene Doing to Private Biotech M&A Trends? FOTF Says: Not Much

Despite a slight slowdown, there's considerable cash already sloshing around the biotech IPO space. There's (still!) plenty more stacked up in investor suitcases from California to the New York Island just waiting to back anything with a pulse. The momentum is here! This land grab is your land grab!

All of which should mean that biotech boards weighing exit options the past year or so have had choices that didn't exist for most companies in the preceding four or five years. Remember the lean times? The doldrums? You don't?

That revived optionality should translate into fewer companies agreeing to pharma takeovers. For the ones that do opt for the warm embrace of a bigger drug company, it should also translate into leverage. Those biopharma start-ups that choose to pull the M&A exit cord should be driving better bargains. But data we compiled from Strategic Transactions suggests neither is true. At least not yet.

It's worth remembering that even during the coldest days of the Biotech Winter, when asset prices were at their most depressed, pharma companies flush with cash didn't really go on a shopping spree. Volume of private biotech M&A never really spiked. We reported that in 2009, and it pretty much held true the next few years. Why? Assets were cheap, but pharma was picky. Prices slackened a bit, and it won't be surprising if they tick up now as biotech booms (despite this week's hiccup among the larger issues). But volume has stayed fairly constant.

In fact, the roughly two dozen private biotech M&A deals from 2013, compared with the past five years or so decade of data, slots in at just about average. Part of this might be due to company building strategies, born or embraced in the lean years, that emphasized capital efficiency, single-asset structures and baked-in-buyouts. Those were good ideas for the lean years, and they're still good ideas for these times-o-plenty.

Now, what about prices? Data is of course limited; not every acquired company discloses a price tag, and absolute values tend to be worthless unless you know how much money went into the target prior to a deal. Instead, we looked at step-up multiples, and by-and-large, those haven't changed much either.

Instead, up-front deal values on average have bounced around the 3x line for quite a while, and that's roughly in line with, and perhaps a a bit better than, the average pre-money to post-money step-ups we've seen in the biotech IPO space. But acquisition multiples are where we've heard, anecdotally, that things may be changing. So long as biotechs have the kind of optionality that public investors provide - i.e. not just getting onto the market but raising enough cash to have a credible alternative to a pharma partnering deal or outright acquisition - those upfronts might start sliding up. Or perhaps, instead, biobucks that are locked-up in earn-out payments will become easier to attain.

Speaking of optionality we know you've got choices for your every-other-week biopharma financing wrap-up. Thanks for sticking with ...

Acadia Pharmaceuticals: Just a week after reporting in its fiscal 2013 results that its cash on hand at year end totaled $185.8M, thanks mostly to a $108M secondary offering in May 2013, Acadia increased its cash position again on March 4, netting $171M in a FOPO of 6.4M shares for $28.50. The company, which could realize an additional $27M if underwriters buy up to 960k shares in the overallotment, is preparing to file an NDA in late 2014 for pimavanserin in psychosis associated with Parkinson’s disease and is working on pre-launch activities.  Acadia presented pivotal Phase III data at the March 2013 meeting of the American Academy of Neurology. Studies showed the serotonin 5HT2A antagonist/inverse agonist significantly reduced psychosis over placebo (the primary endpoint) and helped maintain patients’ motor control. There were also clinically meaningful benefits in measures of nighttime sleep, daytime wakefulness, and caregiver burden. At the end of 2013, Acadia began testing pimavanserin in Phase II for Alzheimer’s-related psychosis. The company also recently advanced into preclinical studies a muscarinic agonist for glaucoma through its deal with Allergan. --Amanda Micklus

Neurocrine Biosciences: The San Diego biotech focused on neurological and endocrine-based diseases priced a follow-on public offering February 26 to sell 8 million shares at $17.75 each, with net proceeds of $133.5 million. Neurocrine said it would use the proceeds to fund its R&D.  Primary among its programs is NBI-98854, a wholly owned vesicular monoamine transporter 2 (VMAT2) inhibitor in Phase II for tardive dyskinesia. In 2012, the biotech reported mixed results from a Phase IIa study of ‘98854 in which patients at one of eight sites fared better on placebo than study drug. Neurocrine has said it plans to keep that program for itself as it attempts to evolve into a fully integrated pharmaceutical company. If successful, it would be quite a turnaround story. In 2006, the firm was rocked by the FDA's refusal to approve its insomnia drug indiplon, then partnered with Pfizer. Its comeback began in earnest with strong clinical data from its gonadotropin-releasing hormone (GnRH) antagonist elagolix, which is now partnered with AbbVie and in Phase III for endometriosis and Phase II for uterine fibroids. This is the second large FOPO by Neurocrine in slightly over two years – it raised $83.2 million in January 2012 by selling 10.9 million shares at $8.10 apiece. This time around, it granted underwriters Jefferies and J.P. Morgan a 30-day option to buy up to 1.2 million additional shares. The stock closed trading March 5 at $17.84 per share, with a 52-week high of $20.29 and a low of $8.57. – Joseph Haas

Aquinox Pharmaceuticals: IPO activity slowed the past couple weeks, but Aquinox debuted March 6 by selling 4.2 million shares at $11 each. It hit the midpoint of its proposed range, but it ended up selling 14% more shares than it originally intended. Its lead compound, AQX-1125, is in Phase II for two indications, chronic obstructive pulmonary disease and bladder pain syndrome. Both trials started in 2013 after the firm pulled in an $18 million Series C round led by Johnson & Johnson Development Corp. and with participation from new investor Augment Investments and returnees Pfizer Venture Investments, Ventures West Capital and Baker Brothers Investment. AQX-1125 is an activator of the enzyme SHIP1, a modulator of the PI3 kinase pathway and, the company says, particularly important in preventing abnormal inflammation at mucosal surfaces. The founders of the Vancouver, BC firm discovered SHIP1 while at the University of British Columbia and created a mouse model whose immune system lacks SHIP1. The asset that became AQX-1125 came from Aquinox's 2009 deal for one of Swedish firm Biolipox's compound libraries. Lead underwriters Jefferies and Cowen, along with Canaccord Genuity, have the option to buy up to 555,000 additional shares.  – Alex Lash

Human Longevity: Pioneering biologist Craig Venter’s newest project will aim to compile a vast amount of genomic data to treat disorders associated with aging, with an eye on adding decades to the human lifespan. The former genome-mapping CEO of Celera Corp. and founder of the J. Craig Venter Institute unveiled the project March 4, revealing an initial funding round of $70 million. HLI didn’t name the full list of investors, but it includes lead backer KT Lim, a Malaysian billionaire whose holdings include a long list of casinos and resorts. Another investor, Illumina Inc., supplied HLI with two systems that can sequence a genome for $1,000, and normally list for $10 million apiece. The remainder of the roster includes an assortment of high net worth individuals, Venter said. HLI says it will initially create 40,000 genomic sequences annually, and may soon obtain 100,000. At first, most will come from consenting patients in University of California, San Diego research programs. HLI plans to unite genomic, microbiome and metabolome data to create profiles of healthy and unhealthy patients from all ages, including infants and supercentenarians. It will also investigate the associations between depleted stem cells and aging-related diseases, and will first address cancer before moving on to neurological, cardiovascular and liver disorders. – Paul Bonanos

Best Of The Rest (Highlights Of Other Activity This Fortnight): Novel dermatology drug developer Thesan Pharmaceuticals has now raised close to $66M, thanks to a $49M Novo Ventures-led Series B round that closed on February 24…days after Endo completed its $1.5B buy of Paladin, Paladin spin-off Knight Therapeutics, which will own rights to the rare disease drug Impavido for leishmaniasis, grossed $Cdn71M by selling warrants to GMP Securities, Cormark Securities, and other investors…Pain treatment maker Recro Pharma priced its IPO, selling 3.8 milion shares at $8 each to raise $30 million...Ampio Pharma netted $64M in a follow-on public offering to complete clinical trials of Ampion and Optina (for osteoarthritis of the knee and diabetic macular edema, respectively) and submit regulatory filings…using momentum from its recently filed NDA for Alzheimer’s combination memantine ER/donepezil (partnered with Forest), Adamas Pharmaceuticals filed for its IPO…and Abingworth closed its tenth life sciences fund, worth $375M. --Amanda Micklus

Stakeholders in Consumer Genomics, Read This

Noting a flurry of recent commentaries in peer-review journals, our February Science Matters column in START-UP (link here, free access) discussed how the personal genomics company 23andMe has accelerated the consumer genomics debate through its dust-up with FDA over the lack of evidence and documentation supporting its Personal Genome Service, which FDA warned falls under its definition of a medical device.

The commentaries, in Nature, NEJM, and JAMA are a reminder that genomics is rapidly becoming incorporated not only into the clinic, but into everyday life. It is forcing FDA and other agencies to take a stand on critical technical, legal, and ethical issues, which will influence the strategies of medical diagnostics and pharmaceutical companies as well as labs performing tests directly for the consumer. As we wrote, those regulatory decisions should be made with the awareness that at some point, barriers to consumer access to these data will come down.

In researching the column, we were directed towards a draft report by the Presidential Commission for the Study of Bioethical Issues, “Consuming Genomics: Regulating Direct-to-Consumer Genetic and Genomic Information.” Its authors call the 86-page document “one of the first to analyze the effect of the 23andMe Warning Letter on the industry, to focus on the bifurcation of genetic interpretation and information as an independent medical device, and to analyze future regulatory approaches available to FDA.” Forthcoming in the Nebraska Law Review, a draft is available here.

The report provides a clear, detailed, up-to-the-moment summary of the the regulatory, ethical, and legal issues around DTC genetic testing. It also lays out what FDA considers a laboratory-developed test, what it considers a clinical device for commercialization, what it considers a research exemption, and why. It's a great read for those of us trying to keep straight FDA's thinking on LDTs, its jurisdiction, and the possible dividing lines between regulated and unregulated products, as well as the history of the consumer genomics field. -- Mark Ratner

Note: This post originally stated that the report is from the Presidential Commission for the Study of Bioethical Issues. The authors, Kayte Spector-Bagdady and Elizabeth Pike, work for the Commission. However, the report was written in their personal capacities.