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Fundamentals of an asset still rule the day
Top pharma dealmakers debate conflicting trends in biotech transactions. It was standing-room only for the plenary session devoted to
"A Day in the Life of Experienced Dealmakers" on the second day of BIO-Europe 2007 in Hamburg.
Marking its fifth consecutive year, this provocative and highly popular session led by James Watson, Managing Director and Head of
Merchant Banking at Burrill & Company gathered executives responsible for headline-setting developments over the past year in the
fast-changing landscape of pharma-biotech dealmaking.
Joining Watson on the podium for the hour-long debate of strategic deal making issues were John G. Goddard with global responsibilities
for AstraZeneca as the Senior Vice President for Strategic Planning and Business Development, Vincent Aurentz the Senior Executive
Vice President for Portfolio Management and Business Development with Merck Serono International, Michael Yeomans the Senior Vice
President of Global Business Development and Licensing at Bayer Schering Pharma, and Doug Giordano the Vice President of Worldwide
Business Development for Pfizer.
Watson set the table for the pre-luncheon discussion, noting that the scope and pace of partnering has accelerated dramatically over
the past year, presenting graphic presentations of the big numbers turned in for both the number and value of transactions.
A significant trend, he said, looking at the number of deals, is that the role of Big Pharma in these transactions has been reduced
steadily while what he called "Big Biotech," and specialty pharmaceutical companies, have come forward to play a bigger role in
these expensive agreements.
According to Watson, "This is a valuable area of activity that should prove to be an important source for partnering."
Another development of note is the emergence of regional deals in terms of defining territory rights where China and India, as
examples, have asserted new-found interests.
Finally, of note is the decline in deals valued at below $50 million as the industry shifts to mergers and acquisitions for late-stage
programs, demonstrated by the growth in transactions valued in the$100 million to $500 million range.
Meanwhile, Watson noted, European-based companies were being dwarfed by the M&A action in other regions and raised a question as
to whether moving forward the industry would see more companies in Europe coming together to gain the critical mass now needed to
compete for a research and development presence in the key US market.
Addressing the first panel topic of the increasing complexity and sky-high costs of deals today, Giordano from Pfizer pointed out not
all assets were attracting big numbers and the trend toward high prices was skewed by the qulity products with a strong market
potential, an ability to differentiate an offering, and most critically, those with the highest likelihood for reimbursement in the
payor market.
Yeomans at Bayer Schering Pharma said he was troubled by the growing complexity of deals where "its negotiations were no longer about
upfront, milestone and royalty payments anymore but joint development and control of the development process. It is becoming moe of a
partnership with joint steering comittees and demanding a more active management of the alliance requiring a greater investment of
time in managing these deals."
Goddard with AstraZeneca also said he did not think the trend toward a growing complexity in transactions was a good thing for the
industry as "there can be clauses in contracts that may prevent a company from doing things three to six years out. This requires a
greater review of what we are getting into and simplicity would be the preferred option."
Giordano with Pfizer said that "one of the issues we struggle with is that companies come to us and they are not at a point where they
are ready to engage in the kind of partnerships they are seeking and need to be more realistic about wat their capabilities really
are."
"One of the reasons these companies are coming to us," he said, "is because of our expertise in developing products. The same reasons
they are coming to us conflicts in many ways with their insistence on a side-by-side, 50-50 codevelopment opportunity. We are not a
bank, we do have that expertise in structuring a develoment plan to achieve the ultimate commercial success."
Complexity of deals is not restricted only to deals for building a portfolio by bringing an advanced asset to market but applies
equally to discovery research where a pharma seeks to expand its pipeline through externalisation of development according to
Yeomans.
Control remains the hottest issue in negotiations today, he said, "How much control to keep, how much do you want the discovery
partner to take remains the single biggest decision and there is no single answer to this. It has to be worked out on a case by case
basis."
Externalization of drug development for AstraZeneca is a strategy for giving a window on the world to its interal develoment teams
said Goddard. "Whether we bring things in, spin things out, divest or partner, the goal is to bring that external energy into the
internal organization, and we'll do it any which way to move things forward."
Goddard sounded almost wistful when he spoke of a simpler world of mergers and acquisitions compared to the complexities of today's
partnering.
"The good thing about M&A is that it is clean, you own it and the complexity completely disappears. And it can happen relatively
quickly," he said. Where some collaboration negotiations stretch out to a year-long process as partners seek to cover every aspect of
what might happen, he cited a recent acquisition which took just four weks from the first phone call to the public announcement.
M&A is not going to go away, agreed Giordano, since the opportunities are coming up consistently from two directions. One direction
is quite simply the intervention by investment banks and the finance community that puts new offers on the table every week for
acquiring companies.
The other, he said, "is the internal, strategy-driven objective that says how we want to get to where we want to be in a certain field
that looks at whether we can do it through licensing or through an alliance or asks if an acquisition is appropriate."
"Yet often times, starting down that track, when you do not really know what the right deal structure is going to be for a certain
transaction," he said, "what started out as a licensing discussion will move into an M&A mode and the complexity we talked about
earlier in this discussion, and the continuing high prices tags in recent years, drive more of these deals toward M&A."
Aurentz with Merck Serono said that for negotiations he has participated in recently he notes a trend where investors push dual tracks
where the company they are backing starts discussions with a licensing opportunity but very soon propose the 'strategic option.'
"The M&A from a deal perspective does look cleaner, but the downside is it is much riskier. You are making a significant bet because
what attracted you to this smaller company still has only an 85% chance of making it to market. Clearly it is not a winning strategy
for building a portfolio and filling gaps to go out to make serial acquisitions.
The licensing structure, in terms of managing risk, whether with co-development or co-promote remains attractive.
The marketplace will remain robust, he said, with a wide range of requirements and needs, as well as a range of constituents focused
on how to frame a deal. And we will continue to see companies exploring the M&A marketplace.
"Which brings things back to the fundamentals of the assets" he said, "Is this an attractive asset or technology platform? And how
does it fit with strategic direction of a larger biotech or larger pharma?"
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