PAUL CLAYDON Partner and European Head of Pharmaceuticals and Biotechnology Group May 2001
1 M&A: INDUSTRY TRENDS IN THE LIFE SCIENCES
European Biotech Sector European companies using modern biological techniques to develop products or services to serve the needs of human healthcare or animal health, agricultural productivity, food processing, renewable resources or environmental affairs EXCLUDES medical device and large pharmaceutical companies 2
European Biotech 2000 Biotech/life science companies ( BioCos ) Companies: Revenues: 1,570 European BioCos; 105 publicly traded; increase of 16% on 1999 1,279 US BioCos; 300 publicly traded; decrease of 3% on 1999 ε4.93 billion Europe; 38% increase ε20.02 billion US; 10% increase Market cap (public companies): ε75 billion Europe: 108% increase ε376 billion US: 156% increase 3
European Biotech 2000 A record year for fundraising Sector raised nearly ε6 billion on the public markets (US raised ε30 billion) 39 BioCo initial public offerings 60% of European public BioCos have > 4 years cash (1999: 46%) European Biotech Sector indices increased by 50% to 75% during 2000 (c.f. NASDAQ 39% decline) BUT - entire European public biotech sector market cap is only slightly larger than Amgen s 4
Mergers & Acquisitions Means outright acquisitions of companies or business and assets as a going concern BUT could also be: Strategic Alliance acquisition of distinct product/group of products acquisition of intellectual property - by assignment or licensing a composite transaction usually involving acquisition of an equity stake by company A in company B, together with a collaboration/manufacturing/r&d/ipr licensing transaction a pre-cursor to an acquisition? 5
European Biotech : M&A Trend - 2000 Backdrop of Big Pharma mega-mergers e.g. Glaxo Wellcome/SmithKline Beecham; Pfizer/Warner Lambert Increase in number of biotech : biotech deals 54 European biotech M&A deals in 2000 (403 strategic alliances in same period) Typically all share deals - no exit for investors Bid premia - average 25-35% compared to UK average of 40% in all sectors Still no evidence that Big Pharma is particularly interested in acquiring European biotech companies 6
Selected M&A involving European companies in 2000 Company Acquired or merged company Date Value ( e m) Elan (Ireland) Dura Pharmaceuticals (US) September 1917 Elan (Ireland) The Liposome Company (US) March 612 Evotec Biosystems (Germany) Oxford Asymmetry International (UK) August 503 Inhale Therapeutic Systems (US) Bradford Particle Design (UK) December 213 Millennium Pharmaceuticals (US) Cambridge Discovery Chemistry (UK) July 56 CeNeS Pharmaceuticals (UK) LION Bioscience (Germany) Cambridge Neuroscience (US) December 39 Trega Biosciences (US) December 37 7
European Biotech : M&A Trend - 2000 European consolidation has been a long time coming Historically - concerns that were too many small companies with narrow product/technology focus AND that limited access to equity capital might force companies together Ironic - most biotech: biotech M&A deals in the industry s best fundraising year ever 8
Reasons for Trend (1) Critical mass Therapeutic diversification/improving pipeline Commercial/vertical and horizontal integration Other - achieving a listing/strengthening patent position/buying revenues/profitability Not mutually exclusive - a deal may satisfy more than one requirement 9
Reasons for Trend (2) Size is important - global healthcare market requires global companies Biotech companies need to bulk up - to attract attention of investors and big pharma partners Liquidity - institutional investors not really interested in companies with <US$700 million market cap 50+ US biotech companies have market cap > US$1 billion In Europe are only 10 billion dollar club members Celltech Chiroscience - a critical mass deal 10
Reasons for Trend (3) Therapeutic diversification/pipeline To reduce risk Move towards pharmaceutical company/product portfolio model and away from single product companies Effect of product failures on share price Cantab Acambis/OraVax - a pipeline/technology deal 11
Example (1) : Celltech - Chiroscience Celltech (UK) - acquired Chiroscience (UK) in 1999 in a 350 million all share deal A critical mass deal Provided platform for acquisition of Medeva (UK) at start of 2000 Medeva acquired for ε563 million in an all share deal Enabled Celltech to become a global player 12
Example (1) : Celltech - Medeva Commercial presence in US Strong cash generating business Distribution channel - ability to retain significant rights on some products in some big markets - value enhancement Cost savings Cash generation from sale of non-core assets e.g. sale of vaccines business to Powderject Pharmaceuticals Nearer term profitability End of 2000: Celltech market cap was ε5.1 billion (was ε436 million 2 years earlier) 13
Example (2) : Acambis/OraVax Acambis (UK) formerly an acquisition target of Cantab (UK) Acambis (UK) acquired OraVax (US) in 1999 - all share deal of US$20 million Acambis s reasons for the acquisition: - near term revenues from sale of Arilvax yellow fever vaccine - four potential products in development - further potential products at research stage - ChimeriVax viral vaccine development technology platform and extra vaccine development expertise - improved access to product acquisition opportunities in the US and greater participation in US vaccine research 14
Example (2) : Acambis/OraVax Subsequently - OraVax obtained (2000) 20 year contract worth ε365 million from US Government to develop and make new smallpox vaccine to counter potential bioterrorism Strategic alliance with Baxter Healthcare (2000) around the OraVax yellow fever vaccine and US manufacturing plant - including an investment in Acambis equity of 28 million by Baxter Deal also demonstrates need for financial strength and how a company can reinvent itself 15
Example (3) : CeNeS/Cambridge Neuroscience, Inc. CeNeS Pharmaceuticals (UK) acquired CNSI (US) in 2000 - all share deal of $39 million Reasons for acquisition - more substantial and valuable drug discovery, research and development portfolio - enhanced drug development capability - wider IPR in drug discovery targeting ion channels - increased financial strength - US presence 16
The Future: A View from Big Pharma Jan Leschly - Chairman & CEO, Care Capital LLC - former CEO SmithKline Beecham Why care about Big Pharma s view? Are the establishment - with huge R&D budgets and established global sales and marketing operations Big Pharma are involved in the life sciences Are competitors and potential partners of biotech companies Historically - the route to market for the vast majority of products discovered by biotech companies 17
10 Year Forecast 50% decrease in Big Pharma s sales if do nothing drugs currently generating ε91 billion sales will suffer patent expiry steady sales growth is not enough - shareholders require robust growth in share value target growth rates in excess of 10% strategies needed to offset sales decline need products with ε1.6 billion to ε2 billion new sales every year historically - only 3% of compounds get from pre-clinical studies to pre-registration and only 1% actually emerge as a drug 18
Solutions for Big Pharma in-licence development stage products from biotech companies or acquire biotech companies outright merge with another Big Pharma - create bigger R&D budgets and make cost savings to plough back into R&D, e.g. Glaxo Wellcome/SmithKline Beecham increase internal productivity and innovation to fill product pipeline (at least partially) from in-house products Big Pharma expects 50% of sales to come from product and technology acquisitions, in-licensing and M&A 19
The Future Consolidation will continue Range of drivers Biotech M&A not solely driven by financial weakness But financially strong companies will benefit 2001 - early deals continue trend of cross-border activity - Bioglan (UK) acquired Hexal s Skincare Division for ε36 million - Eurogene (UK) merger with Quattrogene (Finland) to form Ark Therapeutics 20
M&A Considerations Impact on risk profile Impact on earnings/potential earnings Impact on investors expectation of time to profitability Need for competent management Working capital : ability to raise cash on back of the deal Valuation issues - particularly cross border 21
M&A - Impediments Corporate egos/management issues Valuation issues/share price volatility Regulatory - particularly in cross border deals Timing There are no such things as mergers in biotech. They are all acquisitions. Peter Fellner CEO, Celltech 22