Valuations Step-Up With More Deals
Prior to the acquisition of Pharmacyclics (PCYC) by Abbvie (ABBV) for $20B, the top price paid for an emerging biotech company was in the $10B range. Two additional companies among the mid-caps were acquired in prior years: Cubist (CBST) by Merck (MRK) in December 2014 and Onyx (ONXX) by Amgen (AMGN) in 2013. M&A has been a major driver of biopharmaceutical stocks and the buyout of Syngeva (GEVA) by Alexion (ALXN) for $8.4B last week showed that there is a lot of value in pipelines that fit with the acquirer. Financial engineering began with “roll-up”companies created by strategic acquisitions such as Activis plc (ACT) and fortified by so-called “inversion deals” whereby a company’s headquarters could be moved to a lower tax domicile such as Ireland (17% vs 35% in U.S.) or Luxembourg.
Another serial acquirer is Valeant Pharmaceuticals (VRX) created by the acquisition of Bausch and Lomb, Medicis and Warner Chillcott but failed in a merger with Activis in 2013. Both Activis and Valeant have been very profitable to shareholders with 2 year returns of 200% for ACT and 300% for VRX. But ACT and VRX are growth companies that have exploded through financial engineering with synergies in marketing and sales, cuts in corporate expenses and favorable tax advantages.
The success of these deals and others has caused more companies to aggressively look outside for sales growth. But the biotech model is unique in that the deals are for earlier clinical stage products and new relatively unproven technology.
Large cap pharma has always looked to biotech for pipeline and technology and that has recently hit a new level with the $700M deal for Rare Disease Drugs that Sanofi (SNY) agreed to pay Alnylam Pharmaceuticals (ALNY) for access to rare disease drugs utilizing RNAi technology.
In previous posts we summarized some of the additional factors driving this dealmaker mentality.
