Development-stage M&A premiums reward very patient investors

The 19% premium represented by Forest Laboratories' base-case takeover price of Furiex Pharmaceuticals might not be excessively generous, but this and other deals over the past few years show that sudden rewards for investors are still possible, even in a biotech bull market.

Yet the fact remains that, although the M&A thesis underpins the investment case for any development-stage biotech company, big bets on public pre-revenue businesses are still fairly rare (see table below). Acquirers have preferred to buy private companies, or to hedge their bets with contingent payouts.

The latest private biotech to be acquired is Ipierian, snapped up last week by Bristol-Myers Squibb for $175m up front – a hefty amount for a preclinical-stage business.

Further milestones of up to $550m plus royalties show just how keen Bristol is, though the deferred nature of the earnouts indicates a certain degree of hedging against development risk – a wise strategy given Ipierian’s focus on the notoriously failure-prone area of neuroscience.

Furiex investors, too, stand to receive another $360m if the full amount of a contingent value right (CVR) is realised, and on this basis the premium to Furiex’s close on April 25 is a more generous 56%. This makes the acquisition premium seem pretty standard among takeovers of listed development-stage companies.

Recent acquisitions of listed, pre-revenue* companies
Acquirer Target Up-front value ($m) Premium (day before announcement)
2014
Forest Labs Furiex 1,140 19%
Mallinckrodt Cadence  1,400 26%
2013
Allergan MAP 958 60%
AstraZeneca Omthera 323 88%
Cubist  Trius 707 35%
Otsuka Holdings Astex 886 3%
Jazz  Gentium 1,000 2%
2012
Bristol-Myers Squibb Inhibitex 2,500 163%
AstraZeneca Ardea  1,260 54%
Upsher-Smith Proximagen 347 16%
Gilead Sciences YM BioSciences 510 81%
2011
Forest Labs Clinical Data 1,058 -12%
2010
Abbott Labs Facet Biotech 681 67%
Shire Movetis 537 74%
BTG Biocompatibles 278 28%
2009
Johnson & Johnson Cougar 970 16%
Bristol-Myers Squibb Medarex 2,400 90%
Leo Pharma Peplin 288 72%
*defined as having previous year's sales <$100m; deals valued at >$250m, excluding future earnouts; source: EvaluatePharma

The above list looks only at public company acquisitions where the initial outlay was at least $250m. For the purpose of this analysis, it has been assumed that previous year’s revenues below $100m indicate a development-stage business, as such a low level of sales effectively makes a target a pre-revenue company.

For instance, Furiex booked $71m of Takeda royalties in 2013, but this was not the acquirer’s key focus (Forest bids to dominate both ends of IBS market, April 29, 2014).

One clear outlier in this look at the past few years’ acquisitions is Bristol’s purchase of the hepatitis C company Inhibitex at a massive 163% premium. With the benefit of hindsight the acquirer might like to have pushed to hedge its bet, given the subsequent failure of Inhibitex’s BMS-986094.

Elsewhere, AstraZeneca’s move on Omthera and Cubist’s takeout of Trius Therapeutics also involved additional CVRs to the tune of $120m and $111m respectively, while Forest’s earlier acquisition of Clinical Data specified future contingent consideration of up to $212m.

On the debit side, the only recent public acquisition of a pre-revenue business not to give investors a hefty premium was Jazz’s takeout of Gentium in December 2013.

In the case of Astex and Clinical Data, the seemingly low premiums paid relative to the previous day’s close are misleading. Both had been talked of before the actual deal was struck, and on a 30-day close basis Otsuka offered a 48% premium for Astex, while Forest’s was 19%.

Rarity

Still, it is noteworthy that takeovers of listed, development-stage companies are a relative rarity, with licensing remaining the far preferable route for big pharma.

And, even though most of these target companies can arguably be considered to be pre-revenue, for several, including Furiex and Omthera, the final development risk had already passed. This shows continuing risk aversion on the part of large acquirers – bull market or no bull market.

Not so, apparently, if private biotech takeouts are considered, as the case of Ipierian bears out. Indeed, as far as development-stage M&A goes, this is where much of the action has been of late, with last year’s private M&A deals including J&J’s buyout of Aragon for $650m up front, Glaxo buying Okairos for $325m and Astra's $560m takeover of Pearl.

Seasoned public market biotech investors and venture capitalists alike will be more than aware of this.

To contact the writers of this story email Jacob Plieth or Amy Brown in London at news@epvantage.com or follow @JacobEPVantage or @AmyEPVantage on Twitter

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