January 15, 2010 / 11:56 AM / 10 years ago

ANALYSIS - Risk still a red flag for biotech deals

SAN FRANCISCO (Reuters) - Big pharmaceutical companies want to secure new products as blockbuster drugs lose patent protection, but their limited appetite for risk may slow the pace of dealmaking.

This has created a tough situation for some smaller drug developers that traditionally have counted on larger companies to invest in their unproven products.

“The market is really ugly out there,” Arena Pharmaceuticals Inc Chief Executive Officer Jack Lief said on the sidelines of the JPMorgan healthcare conference in San Francisco this week.

One year ago, Lief said Arena expected to secure a commercial partner for its experimental obesity drug by the end of 2009. But on Wednesday, he said the goal was to have a deal in place by the time the drug gets regulatory approval, which would be late 2010 at the earliest.

The financial crisis that began in late 2008 sparked a surge in dealmaking on the part of development-stage biotech and healthcare companies that found themselves without access to equity and debt markets.

The capital markets began to open up in late 2009, but larger companies still hold much of the leverage in partnership and licensing talks, industry experts told Reuters at the conference.

“The appetite for good compounds is still there among big pharma,” said Hari Kumar, chief business officer of privately held Amira Pharmaceuticals. “What I do see is a tendency to be a little bit ... slower-moving in terms of how they want to do things.”

He attributed some of the slowness to reshuffling in the wake of 2009 megadeals: Roche Holding AG’s acquisition of Genentech for nearly $47 billion, Pfizer Inc’s $68 billion purchase of Wyeth, and Merck and Co Inc’s $41 billion merger with Schering-Plough.

“I think by the end of the year, early next year, the dust will start to settle,” Kumar said.


He and others said smaller companies still had fewer funding options than they did several years ago.

“It’s all been about access to capital in the last year, year and a half,” said Mike Nowak, managing director at hedge fund Yorkville Advisors. “I think it will be that way through 2010 and beyond, especially for companies with sub-$500 million market caps.”

Also, larger pharmaceutical companies are getting a lot smarter about the kind of deals they are making. They understand the value they bring to the table, Nowak said, and they are looking to share revenue from drug sales rather than make large upfront payments.

Glen Giovannetti, who heads Ernst & Young’s global biotechnology practice, said much of the capital raised in 2009 went to a limited number of companies, most with products on the market or well along in development.

“Companies are looking to invest in later-stage or approved products,” he said. “When it comes to experimental platforms, they would typically prefer to do an alliance.”

GlaxoSmithKline Plc CEO Andrew Witty said last year’s financial meltdown did strengthen the hand of big drugmakers seeking deals with biotechs, but “it is never good to strike a deal with a shotgun.”

Amira’s Kumar said most development-stage biotechs made it through the recent financial storm, either by cutting costs or being very focused.

And while Cytokinetics reached a cardiovascular drug development deal with Amgen Inc worth up to $650 million last year, CEO Robert Blum is not sure what this signals for the industry as a whole.

“The climate for access to capital for companies like ours is improving,” Blum said. “But it is not clear how that plays for others with less robust balance sheets.”

(Reporting by Deena Beasley; Editing by Lisa Von Ahn)

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