Don't tell the "biotech bubble" people about all of these cash deals. Shhh!— Brad Loncar (@bradloncar) March 30, 2015
I disagree with Brad Loncar's suggestion that the biotech bubble debate is put to bed by Monday's M&A activity -- Teva (TEVA) buying Auspex Pharmaceuticals (ASPX) for $3.5 billion and Horizon Pharma (HZNP) acquiring Hyperion Therapeutics (HPTX) for $1.1 billion.
Neither of the deals announced Monday are blockbusters or particularly transformative. Both buyers have specific needs and pursued small-ish targets for large-ish prices. The existence of a biotech valuation bubble (or not) can co-exist with continued M&A activity in the sector. Monday's deals aren't likely to cause heads to swoon like the $21 billion paid by Abbvie (ABBV) to acquire Pharmacyclics (PCYC) for half the economic rights to the blood cancer drug Imbruvica.
Teva is desperate to compensate for the looming generic competition to its most important product, the multiple sclerosis drug Copaxone. Buying Auspex, which uses chemistry to reformulate older drugs for central nervous system disorders (with new, longer patent life, most importantly) is a baby step but won't fill Teva's likely revenue and earnings gap.)
Auspex went public in February 2014 at $12 per share, so Monday's $101-per-share takeout is a huge and fast win for the company's shareholders. But Auspex has no approved products (its first drug will be filed later this year), so Teva is paying a big price for a company which isn't going to relieve the pressure felt by management to solve the Copaxone problem.
The transformative deal speculated about the most would involve Teva buying competing generic drug maker Mylan Labs (MYL).
Horizon Pharma already operates a orphan disease drug business, so buying Hyperion and its two approved drugs for rare, urea-cycle disorders is a logical bolt-on deal. Horizon is headquartered in Dublin, Ireland, which gives the company tax advantages that it can put to use acquiring U.S. companies. This may help explain why Horizon is paying about eight times projected 2015 revenue for Hyperion, which is on the high side of recent biotech M&A deals.
Everyone expects more M&A in biotech because, as I noted previously, Big Pharma is burdened with thin pipelines but has lost its appetite for R&D. Big Pharma carries lots of cash and wants to spend it, sometimes indiscriminately. In other words, Big Pharma is buying innovation and growth from biotech. It's a seller's market.
Through early March, M&A deals involving biotech and drug companies reached $59.3 billion this year, a 94% increase over the same period a year ago and the highest volume for this stage in any year since 2009, Reuters reports.
But price does matter. Sanofi Chairman Serge Weinberg says the French pharma giant is shying away from deal-making, in part, because target companies are asking too much.
"We looked at potential deals but found the asking prices to be too high for the businesses," Weinberg told Reuters in an interview published Monday. "We have opted for a balanced a strategy of innovation and diversification that makes acquisitions not indispensable."