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Big pharma will likely look to acquire companies running out of cash before they file for bankruptcy and will likely forgo riskier partnership deals with small biotechs, according to industry experts interviewed by Pharmawire.
With a number of companies looking for some form of financing within the next six months, industry sources interviewed said they expect a number of acquisitions within the first half of the year. But they added that other options, such as acquiring assets out of bankruptcy court or signing additional partnership deals, may prove to be more complicated.
”We’re going to see a decline in partnership arrangements in the short term,” said Jeff Quillen, co-chair of the life-sciences group at Foley Hoag. Big pharma, he said, would be reluctant to strike partnership deals with companies that may still be at risk. Those deals would then be at risk in bankruptcy court.
Many small biotechnology companies have less than a year’s worth of cash, and large pharmaceutical companies are aware time is on their side, said John Chambers, managing director and head of health case investment banking at Merriman Curhan Ford. Big Pharma can afford to be very selective and can wait until the smaller companies head to bankruptcy court in order to pick up the assets there, he said.
But that strategy could also lead to complications, said John Leone, partner at Paul Capital Healthcare, who also noted that this was a good time for Big Pharma to look for the assets they need to pad their pipelines. He cited Novartis’s October acquisition of Nektar Therapuetics’ pulmonary business by way of example.
An industry executive agreed with Leone, saying that bankruptcy may prove complicated to a potential suitor. Instead, big pharma might be playing a waiting game, as they watch the smaller companies run out of cash. But potential suitors will likely buy these companies before they go to bankruptcy court, the executive noted.
Stephen Graham, co-chair of the life sciences group at Fenwick & West, noted that he didn’t think big pharma would wait for companies to go into bankruptcy to acquire assets - calling that strategy risky. If companies have already identified a drug or technology that they are interested in, they would likely make a move as late as possible, but still before bankruptcy, he said.
Smaller companies are so short on cash that even filing for Chapter 11 bankruptcy might be difficult, noted Quillen. A company contemplating Chapter 11 requires capital for such things as hiring lawyers and liquidation experts. The near term bankruptcies will more likely be Chapter 7, which involves completely dissolving the company as opposed to restructuring its debt, he said.
A private equity (PE) investor in the industry speculated that Panacos Pharmaceuticals, which has lost over 85% of its market capitalization in the last year, will likely go out of business. He estimated that the company has about USD 10m to USD 12m in cash. Insmed’s current market cap is about USD 60m, which is down nearly 44% from a year ago. CombinatoRx is also going through ”miserable times,” he noted, adding that its market cap is down 88% from last year.
The one ray of hope for small biotechs remains the possibility of a stimulus bill passed early in the Obama administration. That bill could include a number of helpful measures for the life sciences industry, including the ability for companies operating at a loss to get cash from the government now in exchange for tax credits they would give up whenever they became profitable, Quillen said. If the bill passes, many companies would likely try to hold out for better deals than sell for their current low valuations, he added.
Regardless of a stimulus bill, finding partnership deals will also be particularly difficult for companies that have products in early stages, Chambers said. Product candidates that do not have proof of concept data yet are seen as risky investments in a sale or partnership process, he said. In a partnership deal, a healthy balance sheet and ample cash are good qualities to have, giving the company leverage to negotiate better terms for itself, he noted.
The PE investor said obesity is one such risky area. Arena Pharmaceuticals, which has a Phase III obesity compound, has yet to find a partner despite talking about licensing the rights for more than a year.
Orexigen, with its Phase II and Phase III obesity compounds, has not found partners for either. At a recent investor conference in New York, Orexigen CFO, Graham Cooper said a ”marquee partnership deal” is needed in the obesity space to boost confidence in the indication. Until then, potential partners will remain apprehensive.
”I would imagine that once January rolls around a whole lot of focus will be on companies with low valuations and we very well might begin to see that rush,” Fenwick & West’s Graham said. ”There are some tremendous opportunities out there.”
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