INTRODUCTION

The basic objective of any business is to increase the value of the shareholders’ financial investment in the company. Shareholders of a company can achieve that goal when their investments are productively used in the manufacture of goods or delivery of a service, but only with successful sales and marketing, which also requires regulatory approval in the case of human therapeutics. Many small biotherapeutics companies1 may not possess these additional competences, and must obtain external support to develop marketable products. One way of obtaining the necessary support is through an M&A opportunity for the company or its products, pipeline candidates or intellectual property (IP). However, a common misconception among small biotherapeutics companies is that M&A is the exclusive domain of cash rich companies that create bargaining asymmetries during negotiations. In fact, companies large and small with recourse to finance can grow through a well-considered M&A strategy. In addition, M&A offers an alternative to initial public offering (IPO) as a way to profitably exit the business and reward the investors and shareholders in the process.

As with any promising new technology, a wave of investment in biotherapeutics came in the 1970s, most notably with the founding of biotherapeutics giant Genentech.2 Five years after its formation, Genentech raised $35 million with its IPO and began generating licensing revenues from pharmaceutical companies such as Eli Lilly that could leverage their experience to gain market approval for Genentech's products as human therapeutics.3 Ultimately, this business model led to this year's takeover of Genentech by Roche, which had acquired substantial ownership interest in Genentech over the years, for $47 billion.4

Although not every biotherapeutics company is destined to be the next Genentech, approval of its human insulin product paved the way for expansion of biotherapeutics into the pharmaceutical industry. Biotherapeutics represent a new paradigm in drug development because of high efficacy, reduced toxicity and high reimbursement rates. From a regulatory perspective, compliance with the US Food and Drug Administration's (FDA's) mandate to biotechnology companies to demonstrate efficacy of a biotherapeutic over an existing drug is relatively easy with a biotherapeutic's targeted mechanism of action and reduced toxicity. In addition, biotherapeutics are not susceptible to challenge under the Hatch-Waxman Act, which allows generic drug companies to challenge patents covering classical active pharmaceutical ingredients (APIs).5 The regulatory barrier as a result of this legislative mandate, in combination with the technical difficulty of copying a biotherapeutic drug, make biotherapeutics less subject to generic competition.

The recent reversal of the federal funding ban on stem cell research by the Obama Administration6 and the passage of the California Stem Cell Research and Cures Act7 suggest a current political climate favourable to the development of biotherapeutics based on regenerative medicine. It is reasonable to expect that federal funding may presage changes in the regulatory landscape for regenerative medicine, encouraging investment opportunities in stem cell companies. For example, pharmaceutical giant Pfizer recently announced plans to invest in the sector after opening stem cell research units in the United States and United Kingdom,8 the two nations which incidentally host the greatest number of both acquirers and targets in the biotechnology M&A landscape.9

In addition, the pharmaceutical industry is going through a transformation in efforts to launch new products quickly at reduced cost. The current average cost to bring a drug to market is unsustainably expensive at $1.32 billion and 7.5 years, with a success rate of about 20 per cent.6 Pressured by high risk and generic competition, the pharmaceutical industry is betting on biotherapeutics companies to improve research productivity and cut costs. For example, Sanofi-Aventis axed 14 experimental drugs from its pipeline at the end of the first quarter of 2009 to concentrate on 51 candidate drugs, more than two-thirds of which are biologics brought into its portfolio through strategic alliances with biotechnology companies.10 Further, major pharmaceutical firms are expected to drive sales and revenue by expanding their presence in emerging markets such as personalized medicine, which is strongly driven by biotechnology.9 These developments logically forecast a trend where small biotechnology companies become a major source of innovative biotherapies to flow through the dry product pipelines of established pharmaceutical companies.

Currently, growth in the pharmaceutical industry is heavily M&A driven, with many targets emerging from the biotechnology company pool, particularly companies with monoclonal antibody technology.11 This suggests that a growing percentage of research and development (R&D) efforts for human therapeutics is represented by biotherapeutics relative to classical APIs. Further, while the number of M&A transactions fell from 1074 deals in 2007 to 973 deals in 2008, biotechnology companies led M&A transactions in healthcare with an estimated at $223.1 billion at play. While the 9 per cent decline in transaction volume and 4 per cent contraction in M&A spending, according to Irving Levin Associates Inc., were primarily due to a 43 per cent drop in dollar value for deals in the pharmaceutical sector, biotechnology deal values increased by 116 per cent in 2008 to $93.7billion over the previous year, suggesting a rise in premiums in that sector.12

Although biotechnology serves many industries in addition to the pharmaceutical industry, a growing number of biotechnology companies have become exclusively dedicated to therapeutic applications in recent years. These companies have drawn the interest of a consolidating pharmaceutical industry ( Table 1), which is expected to continue to boost the biotechnology sector through M&A.13 To turn that interest into high-return buyouts, small biotechnology companies must understand the pharmaceutical market, identify gaps in the therapeutic pipelines for significant treatment markets, develop technology to address those gaps and protect that technology with sound IP. In this article, we provide examples from the market for biotherapeutic products in order to illustrate strategies for protecting market shares that will be significant enough to attract high-dollar M&A opportunities.

Table 1 Recent purchases of biotechnology companies by pharmaceutical companies

BIG PHARMA’S MOVE INTO THE BIOTECHNOLOGY FIELD

Large pharmaceutical companies are looking to increase profit margins in the face of patent expirations, dwindling pipelines and cost pressures. One strategy for these companies is to diversify, for example, by manufacturing generics or expanding into new geographic regions.14 An alternative approach is to consolidate. Recent examples of deals designed to create efficiencies through M&A include the Pfizer–Wyeth merger, Roche's buyout of Genentech and the Merck–Schering Plough merger – all multi-billion dollar deals.15 In addition to these, deals are being made by drug companies with increasing frequency to acquire biotherapeutics companies with promising clinical candidates. For example, of the 14 product acquisitions by Pfizer in 2007, six involved investment in biotherapeutics, each an example of the growing importance of biotherapeutics to its business.16 Also, as recently as 24 March 2009, Merck Serono Ventures announced a new venture fund of $55 million to invest in start-up biotechnology companies, underscoring the importance of biotechnology innovation to its growth.17

There are many reasons for pharmaceutical companies to look to biotherapeutics for pipeline acquisition opportunities. It is generally accepted that compared to chemically derived APIs, biologically derived compounds are difficult to copy by generic manufacturers and have targeted action minimizing side effects associated with many classical APIs. Further, compared to chemotherapeutic drugs prescribed for cancer patients, biotherapeutics attract high reimbursement rates that often exceed $40 000 per patient in treatment costs. For example, Avastin®, approved for treatment of non-small cell lung cancer by the FDA, was priced at $56 000 by Genentech while Revlimid®, approved by FDA for the treatment of myelodysplastic syndrome, was marketed by Celgene for a price of $55 000.18 In contrast, oncology drugs based on APIs such as carboplatin and cisplatin are priced at $12 466 and $13 662, respectively.19 High-priced clinical products such as Avastin® and Revlimid® are just a couple of examples suggesting that target unmet medical needs are attractive for pharmaceutical companies looking for commercial biotherapeutic candidates. It is this attractiveness that leads one to expect more of the same activity in the future.

Other recent investment examples include a $190 million paid by Bristol-Myers Squibb for Kosan Biosciences, Inc. with its Phase III clinical compound against multiple myeloma20 and Sanofi-Aventis’ $546 million investment in Acambis’ vaccine pipeline.21 In the former case, Kosan advanced its product far enough in clinical trials to attract investment by a good commercialization partner. In the latter case, Sanofi-Aventis provided financial support for some time to Acambis to develop its pipeline, and retained an option to purchase Acambis through its payments. Both strategies worked; each required forethought on the part of the management of the target company that led to success for its investors.22

M&A AS AN EXIT STRATEGY FOR BIOTHERAPEUTICS COMPANIES

For those early and mid-stage biotherapeutics companies without access to cash, M&A can be the only profitable exit strategy.23 This is especially true if the option to remain as an independent enterprise diminishes without a source of cash to fund current and future operations, given the current recessionary conditions in the economy where public financing has dried-up and even venture financing has receded considerably. Under these circumstances, M&A offers a company the ability to execute a profitable game plan that preserves the interests of the shareholders as well as that of the management.

Table 2 shows M&A data on several preclinical and clinical stage companies, as well as those that successfully commercialized products before offering themselves for sale to major pharmaceutical companies. An analysis of acquired biotherapeutics companies across the entire spectrum of clinical development shows that the premiums, or payoffs, range from 15 per cent to 233 per cent over and above the closing prices of company shares on the day the deal is announced. However, the premium realized by the acquired company depends on many factors including the experience of the management, the development stage of the company and its products, the strength of its IP portfolio, the nature of its product(s), the size and needs of the market and clinical data on the product candidates. In the case of private biotechnology companies, according to an analysis by Bain & Co, between 2003 and 2005 buyers paid 3.5 times the targeted company's accumulated capital investment. In general, the size of the deal is small for early stage companies, which typically receive a few million dollars, up to a hundred million dollars at the high end. A review of global biotechnology M&A deals by MarketResearch.com over the past 5-year period showed the average deal size at $94 million with only 4 per cent of the transactions valued at over $500 million, mostly for mid-sized biotechnology companies.24 For late stage companies, however, and others with marketed products and promising product pipelines, the size of the deal can approach $1 billion and beyond.

Table 2 Representative premiums for biotechnology companies at every stage of the product developmental cycle

The number of new biotherapeutics has gained significant ground on classical pharmaceuticals in recent years through M&A. Particularly, protein-based therapeutics have been on the rise since the original FDA approval of Genentech/Lilly's insulin product in 1982, and are expected to grow to a market value of $87 billion by 2010 according to one source.25 Another recent estimate suggests that the global market for protein-based drugs will reach $55.7 billion in 2011, up from $47.4 billion in 2006 at an average annual growth rate of 3.3 per cent.26 This is indicative of the fact that more pharmaceutical companies are effectively creating markets for new classes of products by acquiring biotherapeutics pipelines and commercializing them effectively.

THE CURRENT STATE OF THE BIOTHERAPEUTICS PIPELINE

According to Biopharm Insight, there are currently thousands of biotherapeutic molecules in clinical trials for the treatment of hundreds of disease indications. Diseases with unmet needs such as Alzheimer's disease, diabetes and many types of cancer tend to be representative of target indications. Further, diagnostic tests for these diseases often accompany therapeutic candidates within the same research platform in a manner that is distinct compared to classic pharmaceutical R&D. In fact, the Amplichip CYP450 microarray test, marketed by Roche Diagnostics, detects genetic variations that can influence drug efficacy and adverse side effects paving the road to practice personalized medicine.27

Table 3 shows the number of drugs currently in the worldwide biotherapeutics pipeline broken down by general therapeutic area. Cancer is clearly the most populated therapeutic area for clinical development, probably because this area includes a number of distinct diseases with different therapeutic targets, nearly all of which find some genetic abnormality in their aetiologies. Similarly, infectious diseases include a wide variety of diseases, some of which can be prevented by vaccines, others by antibodies, still others by interfering with the metabolism of the infectious agent or mode of invasion of the host. Hormones are the oldest class of recombinant molecules in terms of market approval, and still have significant presence in the pipeline. Central nervous system drugs under clinical development are numerous due to the unmet needs of patients suffering from such diseases as Alzheimer's and Parkinson's diseases. These are areas where drugs developed under the classical paradigm have failed to provide adequate therapies.

Table 3 Investigational new biotechnology drugs by therapeutic area

Note in Figure 1 that 70 per cent of over 9000 candidates in the biotherapeutics pipeline remain in preclinical studies. Of the 9606 biotherapeutics in clinical development, only 725 have been launched. However, another 644 are currently in Phase III clinical trials and nearly 4000 are in Phase I or phase II clinical trials. Thus there is a substantial volume of work underway by biotherapeutics companies developing novel disease treatments. From among these companies, a willing and able pharmaceutical company may consider a possible merger or acquisition, or some other stake in the pipeline to replenish its thinning product pipeline. However, such acquisitions are the result of a review of strategic fit, robustness of clinical data, strong IP protection and clear advantage over competition.

Figure 1
figure 1

Distribution of biotechnology or drugs across therapeutic areas and stage of development.Source: Biopharm Insight.

STRATEGIC CONSIDERATIONS FOR BIOTHERAPEUTICS COMPANIES IN M&A

To value a biotherapeutic, one has to have a good idea of what the market is willing to pay for the ultimate product. If the technology platform is capable of generating multiple products or applications, the value of the technology increases manifold. For instance, ImClone Systems’ Erbitux® (cetuximab) was initially the only monoclonal antibody approved by the FDA in 2004 for the treatment of advanced and metastasized colorectal cancer. However, what triggered the interest of pharmaceutical companies to covet its assets were the subsequent approval of Erbitux® for the treatment of head and neck cancer and the promise of its efficacy against multiple solid tumours such as lung, breast, ovarian, and pancreatic cancers. In acquiring ImClone in July 2008 for $6.5 billion, Eli Lilly acted upon its strategic priority to broaden its oncology portfolio, capitalize on growth opportunities tied to Erbitux® and add several mid-stage and late-stage assets.28 Generally, an acquirer of a product that agrees to manufacture and market the product pays the company a price based on projected sales. If a manufacturing and marketing agreement is struck before complete development and/or regulatory approval, an option to purchase may be linked to completion of those events in the future.

The size of the deal and the quantum of the premium, as discussed earlier, largely depend on the attractiveness of the product in the marketplace, the size of the market, existing competition, the efficacy of clinical data and the cost and risks associated with bringing the product to the market. The degree of risk associated with evaluating biotherapeutics and the time to complete different stages of clinical and product development are diagrammed in Figure 2.

Figure 2
figure 2

Per cent risk associated with different stages of drug development.

For instance, the premium received by a preclinical-stage company will likely be less than 15 per cent as the risk associated with bringing any product from that company to the market is very high. These risks include clinical development, regulatory approval and marketing, as well as market risk. If the company presents proof-of-concept pivotal data at the end of Phase II clinical trials, the seller may negotiate a more lucrative deal. Substantial risk still remains as Phase III clinical trials are long and expensive, and the buyer must obtain regulatory approval before the product can be marketed. Considering the time involved in product development and marketing, projected revenues are typically discounted by 20–40 per cent in calculating a purchase price.

Running a successful biotherapeutics company also requires maximizing efficiency. Efficiencies can be achieved by containing and lowering costs through outsourcing non-core business operations and eliminating needless processes and unprofitable business segments. In this way, companies also realize economies of scale and scope. Further, biotherapeutics companies retain or expand their market leadership through introduction of internally developed or acquired products and securing of new technology platforms, ideas and people. For example, Celgene Corp. acquired Pharmion®, Celgene's partner company, for $2.9 billion in November 2007 at a premium of 46 per cent.29

By acquiring Pharmion®, which sold Celgene's Thalomid® for multiple myeloma in Europe, Celgene gained European market access for Revlimid®, approved to treat myelodysplastic syndromes. To maintain market leadership is to continually shape the public opinion in favour of your company with superior products compared to your competitor. Once you understand what the needs of the potential suitor, focus on how to package your company and its assets as delivering value to their company. It is important to realize that cash-rich pharmaceutical companies look at acquisitions from a strategic perspective and buy attractive companies that make strategic additions to their portfolio.

Patent filings are strategically critical for adequately protecting biotherapeutics under development, and as such should be made strategically. When the technology matures and proof-of-concept data becomes available, value can nevertheless diminish if the scope and duration of IP rights are inadequate for managing product life cycles. Patent filing strategies should be designed to protect rights to sell the products in the geographic markets of interest. This requires up-front analysis of competitors and their holdings, and the purported product and associated patent claims must be clearly distinguishable from them.

A good example of a company that accomplished these objectives is Iomai Corporation, now owned by Intercell AG. Iomai identified needle-free vaccine delivery as having a clear benefit to the patient and began filing international patent applications as early as 1999 to ensure coverage of key markets.30 Unlike injected vaccines, Iomai's transcutaneous immunization platform technology confers lymphatic immunity that improves the efficacy of parenteral immunization in a pain-free manner by way of a transdermal patch. By crafting patent claims to cover pain-free, self-administered, transdermal skin patches to deliver vaccines that are capable of being mailed and stable at room temperature, Iomai positioned itself to expand the limited vaccine supply and develop new market segments for paediatric vaccines and pandemic and seasonal flu vaccines.

Iomai also understood the interests of potential buyers of its technology. Once the company presented robust Phase II clinical trial data for its travellers’ diarrhoea vaccine patch, an unmet market need, Iomai signalled the viability of the new technology platform to potential suitors. For Intercell, a company adept at vaccine development, acquisition of Iomai was a perfect strategic fit. The transaction, for Intercell AG, meant not only maintaining unparalleled capability in developing novel vaccines, but also having the ability to deliver them without needles. By owning rights to a new technological capability that complements Intercell's vaccine development efforts, it signalled its intention to play for the long term and take on existing competition in the vaccine market. Thus the broad applicability of Iomai's technology to multiple Intercell vaccine platforms – as well as other platforms whose owners could benefit from a license – was an attractive enough feature to command a high premium for its investors.

Although M&A can be a good exit strategy as already discussed, it may also be useful for realizing value of a latent product line or IP portfolio. Often companies discontinue clinical trials for business reasons unrelated to the merit of the programme. In a 2002 study of why companies terminate clinical trials showed that 21.7 per cent of the trials were halted based on strictly economic considerations.31 A product under development may no longer fit the portfolio criteria of a company due to changed market, regulatory or business environment. However, these products can be sold to other companies to recover expenses. In this fashion, a discontinued product can still be turned into a source of revenue rather than languish.

A company may be running more programs than its finances permit, diluting the focus of the management on the most profitable segment of the business. From a strategic perspective, a clinical-stage company can send conflicting signals to investors and the marketplace if engaged in multiple programs and operations. For instance, Peregrine Pharmaceuticals Inc. owns an antibody manufacturing plant, Avid BioSciences. Avid supports product development efforts targeted at cancer and viral infections at Peregrine while generating revenue through commercial engagements with other companies. However, with repeated capital infusions, the company shares are heavily diluted forcing the company to rely upon debt financing to the tune of $10 million as recently as December 2008 to fund its multiple clinical trials. The company could benefit through strategic clarity by divesting non-core business activities of manufacturing and virology programs and redefining itself as an oncology-focused company while funding its operations strategically and without recourse to debt.

CONCLUSION

Unequivocal political support and regulatory clarity could pave the way for more M&A activity around biotherapeutics in the future as we recover from the current liquidity crisis. In order for a small-or medium-sized biotherapeutics company to position itself as an attractive M&A target, it must understand the total value of its product pipeline by evaluating not only its focused product indications, but also the potential number of products and additional indications available for out-licensing or sale. Protection of these secondary markets by sound IP is critical to increasing value in this way and foreclosing new competition. This increases the overall perceived market size and can create transaction premiums based on expansion into adjacent markets through deployment of latent assets. With an increased market size, however, comes the need to demonstrate production efficiencies that create the economies of scale necessary to meet the expected demand. Biotherapeutics companies should also prepare to meet regulatory and other milestones that can drive up option premiums by reducing risk to investors. Finally, it is necessary for biotherapeutics companies to understand how to position their products in a way that will attract customers in view of the political considerations that accompany regulatory approval and public acceptance of biotechnology products.