Dealtalk: Market turmoil drives small biotechs to big pharma

InVivo Therapeutics Holdings

16/02/2016 06:00

(For more Reuters DEALTALKS, double click on  DEALTALK/ ) 
    By Carl O'Donnell 
    Feb 16 (Reuters) - Numerous small biotechnology companies 
have been all but shut out of the capital markets, leaving many 
with no choice but to consider a sale to larger peers.         
    The Nasdaq Biotech Index is down nearly 30 percent since 
September, when Democratic presidential candidate Hillary 
Clinton criticized drug companies' "price gouging" on Twitter 
and sparked concerns about a government crackdown on rising drug 
costs. 
    No regulatory crackdown on pricing has materialized, but the 
sector's decline has run unabated, compounded by broader stock 
market volatility. 
    "Clearly this is a very challenging market for raising 
capital," said Mark Perrin, chief executive officer of InVivo 
Therapeutics  NVIV.O , a small biotech company focused on 
treating spinal cord injuries. He said he plans to wait for 
valuations to rebound before tapping the markets.     
    On the other hand, the market turmoil could help maintain 
dealmaking momentum in the life sciences sector this year after 
a record year for mergers and acquisitions in 2015.  
    Since the beginning of the year, a number of small publicly 
traded life sciences companies have been exploring a sale, 
including Sagent Pharmaceuticals  SGNT.O , Alimera Sciences 
 ALIM.O , XenoPort  XNPT.O , MannKind Corporation  MNKD.O  and 
Pernix Therapeutics  PTX.O , Reuters has previously reported. 
 urn:newsml:reuters.com:*:nL2N14X1AI  urn:newsml:reuters.com:*:nL1N14615R  urn:newsml:reuters.com:*:nL2N1552C4  L2N15A22H   urn:newsml:reuters.com:*:nL2N15N1J6 
    These five companies have seen their equity values plunge by 
an average of nearly 40 percent since September, causing their 
price-to-2015-sales ratios to tumble from an average of 5.3 to 
only 2.1. 
    Best-positioned to take advantage of the sell-off are large 
life sciences companies with strong balance sheets. Specialty 
pharmaceutical companies Mallinckrodt  MNK.O  and Horizon 
Pharmaceuticals  HZNP.O , for example, have access to at least 
$2 billion each in funding for potential deals and have been 
exploring opportunities.  
    Mallinckrodt is assessing potential deals "across specialty 
brands and generics portfolios," Chief Executive Officer Mark 
Trudeau told Reuters at the JPMorgan Chase & Co  JPM.N  
healthcare conference last month.  
    "For the next six months, your bank might be named Pfizer 
Inc  PFE.N ," said Erik Gordon, a professor at the Ross School 
of Business at the University of Michigan.  
    Also likely to enter the fray are other small drug 
companies, which may find that increasing scale through 
stock-for-stock mergers is far less dilutive than trying to 
raise equity in today's capital markets. Pozen Inc  POZN.O  and 
Egalet Corp  EGLT.O  could serve partners for struggling 
companies seeking a deal, industry sources said. 
 
    WATCHING THE IPOS  
    The present downturn is one of the most severe in the 
history of an industry known for its wild gyrations. The last 
pullback to match its severity was in 2000, when the Nasdaq 
biotech index was engulfed in the broader turmoil rattling tech 
stocks and lost more than a third of its value in less than 
three months.  
    If the trend persists, it could discourage venture capital 
firms and initial public offering investors from backing young 
life sciences companies. Shareholders of these companies 
typically fare much better when they are able to shepherd their 
drug pipeline to fruition prior to a sale. 
    Although more small companies are expected to go on the 
auction block in the coming weeks, the flurry of dealmaking 
could unravel were stock prices suddenly to return to last 
year's highs, according to bankers and investors interviewed by 
Reuters.  
    Last week, two biotech companies - BeiGene  BGNE.O  and 
Editas Medicine  TKTK  - completed initial public offerings, 
marking the first successful IPOs of 2016. Both firms obtained 
valuations within their target price ranges.   
    This week, two more biotech firms successfully priced their 
IPOs, AveXis Inc  AVXS.O  and Proteostasis Therapeutics Inc 
 PTI.O . To be sure, all relied primarily on the companies' 
existing base of investors, rather than attracting broader 
interest.  
    However, if more biotech IPOs launch successfully in the 
coming weeks, this could help restore confidence in capital 
markets, both for investors and companies.  
    "The bottom line is that [BioGene and Editas] got it done," 
one of the bankers said. "It shows that if you have got quality 
assets, investors will step up to the plate." 
    For cash-poor companies that cannot or will not sell, the 
other option in a down market is to license a drug to a larger 
competitor, giving up some future earnings in exchange for cash 
today, according to Ross' Gordon.      
 
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Biotechnology sector graphic     http://tmsnrt.rs/1oxuk5L 
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 (Reporting by Carl O'Donnell in New York; Editing by Greg 
Roumeliotis and Dan Grebler) 
 ((Carl.ODonnell@thomsonreuters.com;)) 
 
Keywords: BIOTECH M&A