According to research firm Modern Healthcare's M&A Watch Report, there were a whopping 172 pharmaceutical, life sciences, and biotechnology mergers and acquisitions over the previous three quarters. What's rather amazing is that, based on data from researcher Current Agreements, it would mark a decline in M&A activity from previous years, 2009 through 2012.
A decline in M&A activity generally means only one thing for the biotech sector -- robust times! Usually biotech companies are looking to partner up in order to raise cash for clinical studies. In 2013, though, we had an inordinate number of biotech IPOs -- 38 to be exact -- signaling that the market for venture capital is ripe in biotech-land.
Source: Roche.
The decline in M&A deals still didn't thwart a number of larger deals from going down in 2013. Amgen's purchase of Onyx Pharmaceuticals for $10.4 billion in August gave Amgen control of blood cancer drug Kyprolis, as well as Onyx's burgeoning pipeline. Also, over-the-counter drug developer Perrigo engulfed cash-rich and Irish-based Elan for a whopping $8.6 billion in order to take advantage of Ireland's significantly lower corporate tax rate.
However, other rumored mergers throughout the past year never got more than one foot off the ground. In fact, some were just downright silly. Here are what I consider to be the three most ridiculous buyout rumors we as investors have been subjected to over the past year.
No. 3: Roche will buy BioMarin Pharmaceutical
In September, the rumor mill kept its employees working overtime by reporting that international pharmaceutical juggeraut Roche (RHHBY -1.15%) was trying to arrange $15 billion in financing to buy rare disease drug specialist BioMarin Pharmaceutical (BMRN -0.70%).
On one hand, the reasoning behind why Roche would go after BioMarin makes sense. BioMarin deals with drugs in the ultra-orphan disease space, so these drugs come with little to no prospect of competition, are protected by patents, and usually have hefty annual price tags designed to help a company recoup its costs of developing the therapy. In other words, ultra-rare orphan drug developers are usually set when it comes to garnering market share as long as their therapies are approved by the Food and Drug Administration.
But the suggestion of Roche purchasing BioMarin for what could have been as much as a 50% premium was absolutely nuts.
First off, BioMarin would have only marginally added to Roche's profitability through the first couple of years. At the moment, BioMarin isn't profitable, and it could be years before it becomes profitable because of the extensive costs of researching and treating ultra-rare diseases. Why would Roche fork over up to $15 billion for a business that would struggle to give EPS-accretive results until 2016 or later?
Secondly, Roche has the most expansive oncological pipeline in the world. Period! Why should Roche even bother with BioMarin when it has a potential gold mine right under its nose? Wall Street seems obsessed with the notion that Roche needs alternative growth pathways when its oncology segment looks more than ready to deliver consistent growth.
Finally, it was a matter of deal valuation. Even at BioMarin's currently valuation of $9.8 billion, the company is valued at roughly 10 times 2016's total sales! That's already a rich valuation, and one unlikely to attract any suitors.
No. 2: Roche will buy Alexion Pharmaceuticals
Perhaps the only thing more ridiculous than Roche ponying up somewhere in the $10 billion to $15 billion range for BioMarin was the midsummer rumor that it would come in with a bid of approximately $24 billion to acquire rare blood disorder drugmaker Alexion Pharmaceuticals (ALXN).
Source: Alexion Pharmaceuticals.
Like the BioMarin deal, which would sprout up just two months later, purchasing Alexion would make an iota of sense because it would give Roche access to blockbuster drug Soliris. Soliris is approved by the FDA to treat paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome, and just last week, the FDA granted Soliris an orphan drug designation for the prevention of delayed graft function in renal transplant patients. In other words, the drug is selling and working well thus far!
But, the idea that Roche would spend $20 billion-plus to get ahold of one drug that makes up practically Alexion's entire approved and clinical pipeline is preposterous!
The one factor Alexion has working in its favor that BioMarin doesn't is that it's healthfully profitable at the moment, meaning a buyer would likely see instant bottom-line gratification upon acquiring Alexion. The quality of the deal, though, would be the real question.
At $24 billion, a buyer would be paying about 10 times Alexion's 2015 sales estimates, which is as equally pricey as the rumored BioMarin deal. However, what puts this rumor over the top is the fact that nearly Alexion's entire pipeline is based on Soliris. So far, that's worked out well for Alexion, but I've witnessed enough instances over the years where non-diversity came back to bite a biopharmaceutical company in the behind (ahem, Affymax!). Without any genuine diversification and a $20 billion-plus price tag, Alexion pretty much has no chance of finding a buyer.
No. 1: Eli Lilly, GlaxoSmithKline, or Shire will buy Ariad Pharmaceuticals
You couldn't make some of this stuff up if you tried, but according to the U.K.'s Daily Mail late last week, Eli Lilly (LLY -0.54%), GlaxoSmithKline, and perhaps even Shire are considering a purchase of struggling biopharmaceutical company Ariad Pharmaceuticals (NASDAQ: ARIA) for as much as $20 per share -- a near-tripling in its share price from the prior day's close.
With the exception of Eli Lilly, the notion that a deal would even remotely make sense for GlaxoSmithKline and Shire was far-fetched at best. GlaxoSmithKline's oncology pipeline is growing nicely with the addition of Mekinist and Tafinlar in 2013 to treat advanced melanoma, and it's maintaining its premier position as a leading COPD treatment specialist alongside its drug development partner Theravance. What Glaxo would want with Ariad is beyond me!
The same can be said for Shire, which had seven of its 10 best-selling drugs deliver sales growth of 17% or better in the third quarter. With EPS anticipated to grow 50% from 2012 through 2016, it's not exactly as if Shire is in any way hurting for growth opportunities.
Eli Lilly, on the other hand, would at least make a shred of sense, primarily because three-quarters of Lilly's pipeline is exposed to generic competition between 2010 and 2017, and quite a few of its late-stage drug hopefuls have failed over the past two years. But, to proclaim that Ariad is on Eli Lilly's radar, or worse yet, that it would pay up to $20 per share for Ariad might be the biggest farce yet!
Source: Ariad Pharmaceuticals.
Ariad's only FDA-approved drug is Iclusig, a leukemia drug that has only recently returned to market in the U.S. after being pulled briefly over toxicity issues. A two-year follow-up study in October revealed that an increasing number of patients on Iclusig experienced thrombotic events (i.e., blood clots). Although Iclusig has been cleared for continued use in the U.S. and in Europe, it now comes with more stringent warning labels regarding its use, and at least in the U.S., it's being used as an absolute last line of defense in treating Philadelphia chromosome-positive acute lymphoblastic leukemia! Not to mention that its original promise laid with gaining an indication to treat chronic myeloid leukemia (the Epic trial), but that trial was scraped in mid-October.
The only advantage a company like Ariad can offer a buyer is its exorbitant cash value and its carry-over losses, which can help reduce taxes on corporate profits. Those two things alone are very, very unlikely to be enough to merit any biotech to bid for Ariad.
Finally, with the exception of AP26113, a mid-stage non-small cell lung cancer drug, every other indication being researched involves Iclusig -- so we're likely talking about limited usage because of toxicity issues in these indications as well!
With Ariad not expected to be at breakeven results until 2016 (assuming everything goes right from here on out), and peak sales for Iclusig cresting at no higher than $300 million by my own estimations, I'd say the prospect of any company buying Ariad is just plain silly.
