As blockbuster drugs began to come off patent, big pharmas – fearing loss of revenue share – rushed to couple with their counterparts in 2009. The big pharmas are hungrily looking for additional products and innovation to fill their sagging pipelines and in 2010, they will refocus and continue to look to small and mid-sized biotech companies for licence, partnership and acquisition transactions.
The liquidity crunch in the venture capital community and capital markets has created an environment in which small and mid-sized biotech companies need to consider a pharma deal earlier than they may ideally desire. In addition, although licensing deals have traditionally been pharmas’ preferred route of engaging with early-stage biotech companies, depressed valuations of public biotech companies are making acquisitions more attractive and, ironically, even cheaper than licensing deals. At the same time, the licensing deals continue to be increasingly complex financial deals, which are precursors to follow-up acquisition.
In 2009, distressed biotech merger and acquisition transactions often took the form of tax-loss deals and reverse mergers. In Canada, the tax-loss deals were fuelled in large part by Canadian income trust conversions, which led the income trusts to search for shelter for their revenues.
Mergers and acquisitions will continue to be strong in 2010 since pharmas’ needs are unquenchable. The real question is whether the deals will involve healthy or distressed entities. The answer will depend largely on how wide the capital markets will open as well as the alternatives available to potential targets. In the last half of 2009, U.S. biotech public markets were busy with registered direct offerings; the issue is whether the window will stay open and whether it will widen for larger traditional public offerings. The Canadian biotech public markets are still in slumber mode, but we see signs of movement. Another factor will be whether the competition for biotech deals among pharmas will increase or decrease with fewer players in the market.
Medical device mergers will also continue at a healthy pace, although the acquirors will be more deliberate and the valuations more rational than in the past.