Buzz

HBM Pharma/Biotech M&A Survey 2005 - 2008

Dr Ulrich Geilinger and Dr Chandra Leo of HBM

Introduction

M&A activity in the healthcare sector provided investment banks with one of the few opportunities to earn fee income in the first quarter of 2009, according to mergermarket's recently released "Preliminary Global M&A Round-up for Q1 2009." The top three global deals for the first quarter of 2009 fall into the life sciences/healthcare sector and account for a combined value of over $156 billion.

This week's Buzz article provides an in-depth view of healthcare M&A activity with HBM Partners' recently released "Pharma/Biotech M&A Survey" covering trade sales of U. S. and European biotech and pharma companies from 2005 to 2008. HBM Partners is among the world's largest investment advisory groups specializing in the global human medicine, biotechnology, medical technology and related sectors. This survey, authored by Dr. Ulrich Geilinger and Dr. Chandra Leo, details information about the number and size of M&A transactions; identifies the buyers as well as the stage, focus and location of target companies; and includes estimates of the returns to venture investors backing the life sciences companies.

Trade Sales of Biotechnology and Specialty Pharma Companies 2005-2008

Further information about the survey including a list of transactions can be found under www.hbmpartners.com/survey. The use of data and charts from this report is permitted with reference to "HBM Partners Pharma/Biotech M&A Survey".

Introduction

HBM Partners carried out an analysis of all trade sales of US and European biotechnology and specialty pharma[1] companies during 2005 to 2008. The analysis focused mainly on transactions of private venture-backed companies. The goal of the survey was to unveil patterns in sale transactions and to analyze characteristics of the successful trade sale candidates. Some results for all transactions (public & private) are also presented.

The survey does not cover diagnostics, medical technology or life sciences tools & services companies. Reverse mergers and minority investments are not included in the survey. Transactions that were announced during 2008, but did not close by year end, are excluded.

Key transaction data such as upfront consideration, total deal value including biodollars, previous venture and corporate investors, previous investments by VCs, founding year etc. was collected from various sources.

Please note that some information such as deal values or previous investments by VCs might not be available for all transactions. Also, the results presented in this report may deviate slightly from earlier reports due to subsequent reclassification or correction of data.

Trade Sales of Public and Private Biotech and Specialty Pharma Companies

Since 2005, the number of trade sales of US and European biotech and specialty pharma companies has steadily increased. Each year, at least 20 venture-backed life sciences companies were sold. The number of other private companies sold (family-owned and previous buyouts) showed a steady increase. Most striking was the doubling of larger public transactions from around 10 annually during 2005-2007 to over 20 in 2008. It seems that, during 2008, buyers took advantage of the low valuations of some public biotech companies.

Overall (upfront) transaction volume[2] jumped from $21 billion in 2005 to over $40 billion in 2007 and 2008[3] mainly driven by larger acquisitions of public biotech & specialty pharma companies.

The private transaction volume ranged between $4 billion and $12 billion per year. Proceeds from venture-backed company sales reached $5.3 billion in 2007, but dropped to $2.2 billion in 2008. Transaction volume from other private companies (family-owned and previous buyouts) vaired strongly from year to year. During 2005, Hexal was sold for $8.3 billion, generating a record number in that year.

Half-yearly numbers show that overall M&A volume really picked up during the second half of 2006 and stayed at rather high levels since then. VC-backed trade sale volumes peaked in the second half of 2007 and dropped to earlier levels in 2008. The share of VC-backed company transactions fell from an average of about 10% during 2005 to 2007 to about 5% of total transaction volume in 2008.

During the survey period, European and Asian buyers (mostly large pharma companies) have become more active and increased their share of M&A volume to over 70% in 2008.

Throughout the survey period, large pharma companies were the dominant buyer group generating between 60% to 80% of M&A volume. Large biotech firms played a relatively minor role as acquirers, except in 2006 when UCB bought Schwarz Pharma for $5.7 billion and Gilead purchased Myogen for $2.5 billion.

The most active buyers in terms of number of transactions were small biotechs who bought 70 companies during the 4 year period (vs. 60 acquisitions by large pharma, 18 by large biotech and 52 by specialty pharma). However, the transaction volume generated by trade sales to small biotechs amounted to only a few percent of total deal value.

Most Active Buyers

The table below shows the most active buyers (in terms of number of transactions), i.e. firms that closed 3 or more acquisitions between 2005 and 2008. Pfizer tops the list, both overall and in the number of VC-backed companies acquired. Novartis was also a very active buyer during the period spending more then $25 billion on acquisitions[4].

Amgen was the most acquisitive large biotech company, followed by Biogen Idec. Specialty pharma companies Shire and Valeant also bought three companies each.

We expect that large pharma companies will remain active buyers. Mega transactions such as the planned acquisitions of Genentech by Roche and Wyeth by Pfizer will further drive up M&A volume. Public companies will most likely continue to be attractive M&A targets due to low valuations. Smaller, private companies might, therefore, find it harder than in the past to attract high bids.

Trade Sales of Private VC-Backed Biotech and Specialty Pharma Companies

In the following chapters, the acquisitions of private VC-backed US and European biotech and specialty pharma companies will be analyzed in more detail. All of these companies were backed by one or several institutional venture funds, usually raising money in several rounds. In 50% of cases, a corporate venture fund was also invested.

Venture firms with investments in 5 or more of the private companies sold during 2005-2008 were (in alphabetical order): Advent (UK), Alta Partners, Atlas, Burrill, Domain Associates, Forward Ventures, HBM BioVentures, MPM Capital, NEA, OrbiMed, Oxford Bioscience Partners, ProQuest and SV Life Sciences.

From 2005 to 2008, the survey counted a total of 91 trade sales (> 20 each year) of private venture-backed North American[5] and European biotechnology and specialty pharma companies. Furthermore, there were 41 transactions with other privately held companies and four previous buyout companies ( Zeneus, Betapharm, Medpointe, Talecris). These trade sales are not included in the further analysis.

Table 1: Trade Sales of Private Biotechnology and Specialty Pharma Companies

Number of Transactions

2005

2006

2007

2008

Total

Venture-backed companies

21

23

23

24

91

Previous buyouts

1

1

1

1

4

Other private companies

6

9

12

14

42

Total

28

33

36

39

136

The 91 trade sales of VC-backed companies generated a total transaction volume of $13.2 billion (or $15.6billion including biodollars). The following tables summarize some key data for trade sales of US and European target companies over the last four years.

Table 2: Transaction Volumes US vs. European Trade Sales

US

Europe

Total

Number of transactions

56

32

88

# of Transactions
> $100 million

29

9

38

Transaction volume upfront ($ billion)

10.4

2.7

13.2

Transaction volume
incl. biodollars ($ billion)

12.6

3.0

15.6

Average transaction size (upfront, $ million)

203

102

168

Total investment by VCs into private companies sold between 2005 and 2008 amounted to approximately $4.8 billion. The average multiple between proceeds and invested capital therefore was about 2.9x. The average return multiple for VC investors was 2.2x (transactions where private valuation data was available). Thus, average returns from trade sales were substantially higher than the average multiple achieved in IPOs. Step-ups in IPO pre-money valuations vs. private valuations were estimated to average 1.6x[6] during the study period. Taking further into account the negative post-IPO performance of most newly listed stocks, M&A generally gave investors far better returns than IPOs. However, not all M&A transactions produced good outcomes for investors: Only about 45% of the deals generated good returns for VCs (multiple >2x). Returns to VCs are analyzed in more detail in one of the following chapters.

Table 3: Other Key Transaction Data

US

Europe

Total

Total VC investment
($ billion)

3.6

1.3

4.8

Average VC investment
per company ($ million)

68

42

59

Upfront proceeds /
VC investment (average)[7]

3.0x

2.5x

2.9x

Estimated multiple
to VC investors (average)

2.4x

1.9x

2.2x

Years from founding to trade sale (average)

6.1

6.0

6.1

% of companies sold with corporate partnership[8]

43%

47%

44%

% of companies bought by corporate partner[9]

16%

9%

13%

% of companies sold that had one or several corporate investors

52%

41%

48%

% of companies sold at preclinical stage

25%

53%

35%

Not surprisingly, about one third of the companies sold had a previous partnership with another pharma or biotech company. However, only a small portion of VC-backed biotech and specialty pharma companies were sold to that existing collaboration partner.

A substantial minority (35%) of trade sales happened before the target company reached clinical stage. The company stage at time of trade sale (and the respective return to VCs) is covered in more detail later in this report.

There are marked differences between trade sales of US-based and European companies, such as the higher average VC investment and the higher average deal value for US transactions. Also US trade sales generated higher average multiples on invested capital (and, as detailed at the end of this report, better average returns for VCs). European companies were more often sold at a preclinical stage (53% of all cases) than their US counterparts (25% of all cases).

Transaction Volumes 2005 - 2008 for Venture-Backed Companies

Transaction volume rose strongly up to 2007, but dropped substantially in 2008. VC-backed companies only generated 5% of overall M&A volume in 2008 (compared to about 10% in the previous years).

Half-yearly figures show a similar development with especially the second half of 2008 showing a significant decline in transactions and deal value. Buyers apparently were more focused on public acquisitions where low valuations attracted strong interest.

2007 was a strong M&A year mainly because of the high number of large US transactions (over $250 million). In that year, there were 9 such transactions (vs. 4-6 transactions for the other years.)

Milestone-based or contingent payments (biodollars) amounted to less then 20% of total upfront proceeds. The fact that, in 2007, 93% of total consideration was paid upfront is another indication for a "seller's market" during that year. In 2008, milestone payments increased again with more buyers looking to pay top dollars only once certain goals have been reached.

Between 2005 and 2008, $10.4 billion (or 80% of transaction volume) was generated by the 56 trade sales of US companies, whereas the 32 European transactions amounted only to $2.7 billion. The European share of the transaction volume varied from year to year, reaching a respectable 36% during 2008. When comparing Europe to the US, one should consider that that the amount of venture capital invested annually in the US biotech market is about 3 to 3.5 times higher than in Europe.

As already mentioned, the average transaction volume for US-based target companies was twice as high as for European deals ($203 million vs. $102 million). Also, the number of larger (>$100 million) transactions in the US was much higher then in Europe (see next page). Especially striking was the year 2007, when there were 11 US trade sales with a deal volume of $100 million or more, whereas only one European transaction reached this threshold.

Who Were the Buyers?

Large pharma companies were the dominant buyers of venture-backed biotech & specialty pharma companies, contributing to almost two thirds of the transaction volume. Larger biotechs and specialty pharma companies contributed 16% of deal volume each. The most active buyer group in terms of number of deals were smaller biotech companies (37 deals). However, their contribution to overall transaction volume was only 6%. The average deal size for this group was below $30 million, often paid in shares, vs. close to $300million for large pharma deals.

Large pharma firms were the most important buyers in all years, generating between 60% and 70% of transaction volume. In 2008, specialty and smaller pharma companies have become more active, increasing their share of deal volume to 25%.

While US buyers clearly dominated during 2005-2006, European buyers stepped up their acquisition activity in 2007, and in 2008 spent considerably more dollars for private acquisitions than their US counterparts.

Buyers, especially the larger ones, paid mostly in cash for their acquisitions. Small biotech companies often paid in shares, the reason presumably being that cash was not available or that sellers were willing to accept shares as a payment.

Not surprisingly, trade sale to large pharma companies produced the best average returns to VC investors. Most transactions with larger biotech firms also showed good to very good multiples. If a company could not attract a larger buyer and was (or had to be) sold to another small biotech company, investors in the majority of cases lost money.

Time to Exit

Creating significant value in a biotechnology or specialty pharma company takes time. The time span from the company's founding to its trade sale averaged 6.1 years. Assuming that VCs usually made their initial investment 1 to 2 years after the company was founded, the average holding period for (early) investors was 4 to 5 years. The data also indicate that holding periods tended to increase from 2005 to 2008.

There was no significant difference between time to liquidity in the US vs. Europe . The graph above suggests that successful companies (i.e. transactions generating 2x or more to VC investors) were able to attract buyers a bit earlier. Companies that were sold at a loss to investors generally took longer to reach a trade sale (average of 7.5 years). Also, time to exit for companies focused on biologics increased to 8 years in 2008 (vs. 6 years for small molecules companies).

Stage of Lead Product

At the time of the trade sale, 50% of all companies were at clinical development stage, i.e. their lead compound was in phase I to III. In 38% of the transactions, the products were still preclinical. 11% of the companies sold had approved or marketed products. These were mostly specialty pharma companies (7 out of 10).

Please note that numbers do not add up to 91 (total number of transactions) since in a few transactions the stage of lead compound was not known.

In HBM's previous M&A report, we forecasted a shift to later-stage acquisitions. As the graph below demonstrates, this shift has not happened (yet). The percentage of preclinical transactions did not change much and 2008 even showed an increased number of transactions at phase I stage.

While preclinical companies more often produced negative returns for VCs than companies at clinical development stage or with marketed products, the former group also had its fair share of trade sales with good returns to investors (2x or more). The survey indicates that best returns for VCs are generally achieved once products have reached at least phase I or II.

Acquisition prices for clinical- or later-stage companies are evidently driven by factors other than just the stage of the lead compound. Moreover, the larger investment needed to progress beyond phase II may also have prevented the later-stage companies from generating higher returns to VCs.

Biologics vs. Small Molecules, Platform vs. Products

Acquisitions targets of large pharma buyers were often companies that developed biologics such as antibodies, next-generation antibodies or vaccines. The increased focus on biologics of several large pharma companies has been widely covered in the press. Future surveys will show whether this interest to add biologics products and capabilities will continue.

Related to the fact that large pharma companies were keenly interested to acquire biologics companies is the observation that such transactions showed a better average return to investors (2.8x vs. 1.7x for small molecule companies).

With the acquisition of a private biotech or specialty pharma company, corporate partners usually seek to buy a product (or a product portfolio), a drug discovery platform or a combination of both. The survey analyzed the deal rationale (platform and/or products) as mentioned in the respective press releases.

According to this analysis, large pharma buyers were most interested in companies that had both products (lead compound usually in clinical stage) and a drug discovery/development platform. Large and smaller biotech acquirers were also attracted to product/platform companies, but equally often cited products as the main reason for the acquisition. Specialty and smaller pharma buyers clearly focused on product acquisitions.

Platform deals without clinical-stage products were relatively rare (13 deals). Almost all larger transactions were product or platform/product acquisitions.

Companies with a product-enabling platform and at least one product in clinical trials produced the best returns for investors (and also the lowest percentage of losses).

Therapeutic Areas

During the survey period, oncology-focused companies generated the highest number of transactions. Other active areas were CNS and pain, metabolic diseases, anti-infectives and vaccines, as well as autoimmune and inflammatory diseases. Please note that multiple assignments to therapeutic areas were possible, since some companies were active in more than one field.

Which therapeutic areas generated the best returns for VCs? Given the relatively low number of transactions in each therapeutic area, any such analysis can only be indicative. The data suggest that trades sales in anti-infectives (10 deals), autoimmune/inflammation (13), cardiovascular (5) and respiratory (3) produced the best returns (with the majority of exits generating a 2x or higher multiple for VCs). Transactions in oncology (25 deals) and metabolic diseases (10) produced satisfactory returns in 50% of the cases. Companies active in CNS or pain (15) were mostly sold at a loss to investors.

Return Multiples to Venture Investors

As referred to previously in this report, the transaction outcomes, i.e. return multiples for venture investors, were calculated or estimated in most cases (using VentureSource and other information). Please note that these return estimates may not in all cases be accurate and that no distinction between early- and later-stage investors was made. Multiples were estimated based on the upfront consideration (in cash or shares) divided by the average venture valuation. Potential biodollar payments were not taken into account. Return estimates were not possible in some smaller (and probably less successful) transactions, where neither investment nor transaction values were available.

The returns to VCs from trade sales were classified into the following categories:

  • "very good return" for VCs or "Winners": multiple of 3x or more
  • "good return": multiple between 2x and 3x
  • "positive return": multiple between 1x and 2x
  • "loss" or "Losers": multiple below 1x

Almost half of the trade sales produced "good" or "very good" returns to VCs. About 30% of all deals produced a loss. The number of exits with "good" or "very good" returns held steady over the period with about 10 such deals every year. The number of losses increased slightly in 2008.

The returns from US-based investments were generally better than from European target companies. The "track record" of European transactions was negatively affected by the very disappointing year of 2007 (which was very strong for US trade sales). During that year, only the sale of Arrow Therapeutics to AstraZeneca produced a decent return to VCs (estimated to around 2x). 2006 and also 2008 showed a much better performance for European trade sales. In 2008, the majority of exits in Europe generated "good" or "very good" returns to VCs.

Summary and Outlook

While our research shows that the transaction volume for trade sales of VC-backed private biotechnology and specialty pharma companies decreased from 2007 to 2008, we believe that the private M&A market will remain vibrant. VC-backed biotechnology companies have developed a host of technologies and clinical products that could help to strengthen the internal pipelines of larger pharma and biotech companies.

Achieving an attractive private company sale might, however, become more challenging for the following reasons:

  • With the IPO window now being closed for over a year, the number of private biotech companies seeking an exit by trade sale has increased substantially and will increase further.
  • Public companies with, in many cases, historically low valuations compete with private companies as acquisition targets.
  • Very large acquisitions and mergers (such as the planned takeover of Genentech by Roche or Wyeth by Pfizer) may divert the resources and management attention of cash-rich buyers (at least until these large transactions have been "digested").

Potent buyers have taken and will attempt to take advantage of the current "buyer's market" by proposing deal structures with more modest upfront cash payments and further payments contingent on reaching defined milestones. At the same time, the prices for companies with several interested buyers will continue to be driven up in auction-like processes.

Over the last four years, M&A clearly was the most profitable exit route for private life sciences companies, especially if they were able to attract a large pharma or biotech buyer. M&A will remain the dominant exit route for 2009 and probably also for 2010. More than ever, biotech entrepreneurs and investors therefore have to focus their companies on assets and products that are or will be attractive for other, larger pharma and biotech companies. Since the refinancing market is very challenging, reaching this goal quickly has become a key priority.

23 February, 2009

Please address questions and comments to the authors of this report:

Dr Ulrich Geilinger, ulrich.geilinger@hbmpartners.com

Member of the Board of Directors and Investment Advisor Private Equity Team of HBM Partners Ltd.

Over 20 years of venture capital experience at Innoventure, Credit Suisse, Apax and Vontobel; former advisory board member of leading European private equity funds including Apax, Atlas and others. Studied natural sciences and industrial engineering at the Swiss Federal Institute of Technology (ETH) Zurich, and completed his studies with a PhD. Former board member EVCA and former president of SECA. Board member of HBM Partners Ltd., Westmed, BioMedInvest AG I and BioMedInvest AG II.

Dr Chandra Leo, chandra.leo@hbmpartners.com

Investment Advisor Private Equity Team HBM Partners AG

Over ten years of experience in private equity, clinical practice and biomedical research. Former principal at Wellington Partners Venture Capital, focusing on life science investments. Previously physician at University Hospital Leipzig (Germany), postdoctoral scientist at Stanford University (USA). MBA degree from INSEAD, completed medical studies in Berlin and London. Board member of Cardiac Assist and ESBATech.

HBM Partners AG, CH-6300 Zug, Switzerland, phone +41 43 888 71 71

HBM Partners is among the global leaders in Life Science-focused investing with over USD 1.5 billion under management. HBM's advisory business was founded in 2001 with the vision to invest across the life cycle of healthcare companies, from venture backed early-stage all the way to listed companies.

HBM Partners manages several private-equity funds as well as cross-over and public equity funds. Our companies' teams of professionals have a thorough understanding of the biotech-medtech and diagnostics industries through active investing in both private and public companies. The teams' experts have substantial operational and financial industry experience. Since inception we have invested in over 100 companies and in most of them we actively contribute to value creation through management support and board participation.

[1] For the purpose of this survey, "biotechnology companies" were defined as companies discovering and developing innovative biologics or small molecule drugs. "Specialty pharma companies" in this survey were defined as companies that market niche drugs (or develop new medicines based on drug delivery, reformulations etc.).

[2] Unless otherwise mentioned, transaction volume means the upfront consideration paid in cash and/or shares.

[3] The 2008 figures include the $11 billion purchase of a minority stake in Alcon with the option to buy the company.

[4] Includes the $11 billion acquisition of a minority stake in Alcon.

[5] Including 3 small trade sales of Canadian biotech companies with a transaction volume of $64 million. These transactions will be excluded when comparing US vs. Europe transactions.

[6] About 1.4x for US IPOs and 1.8x for European IPOs

[7] Only for transactions where information on invested amounts was available.

[8] Companies that had a collaboration with another pharma or biotech firm.

[9] Companies that were bought by their existing corporate partner.