Life Technologies Said to Be in Takeover Talks- Bloomberg

This article smells like it was planted to chum the waters for a deal.

I think that LIFE is generally fairly valued by the markets, so they're going to have to get one of the corporate buyers (Roche, Danaher, etc) excited enough to overpay.(I don't see that happening in the case of very-disciplined Danaher, or most of the other companies named, but then again, I was shocked at what Merck KgA paid for Millipore.)

Also, as I've mentioned before, the decision of whether or not to put a company up for sale very often is solely a question of whether or not a CEO wants to move on. (This is especially true in banking M&A), so I guess Greg Lucier is ready to move on to his next challenge. I wish more Boards in that event would decide to turn the company over to a new CEO internally sourced rather than  undertaking a sale. 

Life Technologies Said to Be in Takeover Talks- Bloomberg

by Cristina Alesci, bloomberg.com
January 18th 2013 11:01 PM
Life Technologies Corp. (LIFE), a maker of DNA-sequencing equipment and laboratory materials, is in discussions with private-equity firms and health-care companies about a potential sale of the company, according to people familiar with the process.

Blackstone Group LP (BX) and KKR & Co. (KKR) are among four private- equity firms weighing bids, said two people, who asked not to be named because the discussions are confidential. Health-care companies also have expressed interest in a takeover and potential suitors have until late January to submit offers, the people said. Life said yesterday it had hired Deutsche Bank AG and Moelis & Co. to assist in a strategic review of the company.

The Carlsbad, California-based company has a current market value of about $10.5 billion, after shares rose yesterday to their highest-ever price based on takeover speculation. Life may sell for about $13 billion, with a buyout fund writing an equity check of $4 billion to $5 billion for the deal, one of the people said.

Life's "valuation has been relatively depressed," Ross Muken, an analyst with ISI Group, said in a telephone interview. "They've had an ongoing battle in terms of messaging, positioning and capital deployment."

Life trades at about 15 times estimated earnings, compared with about 33 times for Illumina Inc. (ILMN), its competitor in DNA- sequencing machines.

Life's shares rose 11 percent to $60.79 at the close yesterday in New York, the biggest single-day gain in almost four years and the highest value since shares started trading publicly in February 1999.
The company's board retained Deutsche Bank and Moelis "to assist in its annual strategic review," Life said in a statement. "The board of directors has not decided on any specific course of action."
The company's statement implies Life has "potentially received an offer from an acquirer, is contemplating a LBO or is potentially in the process of shopping the company for a strategic buyer," William Quirk, an analyst with Piper Jaffray & Co., wrote in a research note. He cited Roche (ROG) Holding AG, Thermo Fisher Scientific Inc. and General Electric Co. (GE) as potential strategic buyers.
Gene-sequencing companies such as Life and San Diego-based Illumina are attractive takeover targets because their technology can be used to provide a blueprint of a person's DNA, information that may eventually be used to diagnose disease, identify the risks of certain conditions or better target medicines.
Roche, the world's biggest maker of cancer drugs, failed last year in a hostile bid for Illumina. Life is more diversified than Illumina, with "slow-growth research consumables" dominating its portfolio, said Quirk. For that reason, "we believe an acquirer interested in the faster- growing next-gen sequencing business has better options."

ISI Group's Muken put the possibility of a leveraged buyout at 10 percent, pegging the price at $55 to $65 a share. He said a sale to a strategic buyer, such as a large pharmaceutical firm or equipment company like Danaher Corp. (DHR), may have a 40 percent chance of occurring, at $60 to $70 a share.

Roche backed away from its $6.7 billion bid for Illumina last year after investors asked for a higher offer. Roche doesn't comment on rumors or speculation, Daniel Grotzky, a spokesman for the Basel, Switzerland-based company, said by e- mail in response to a question about Life.
Seth Martin, a spokesman for GE, said the company doesn't comment on rumors or speculation. Ron O'Brien, for Thermo Fisher, declined to comment. Matt McGrew, chief of investor relations for Danaher, couldn't be reached for comment.


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Q: how do you turn $43M into $10M

A: start a retail personal genomics company.

Saw this (Life Technologies Buys Navigenics in New Gene Diagnostics Strategy

http://pocket.co/sMzhY) story today, and while I have no idea of Navigenics really sold for $10M, I would bet a large amount that they sold for less than the $43M invested in Navigenics. The problem, as I see it, wasn't Navigenics' technology, but rather their business strategy to focus on retail genomics. You'd think that investors like Kleiner would know how expensive and difficult attracting consumers is, but their Internet bias drives them towards great tech, not great businesses.

Dako acquired by Agilent

Deals are getting done in the tools & content space, and valuations are jumping as shown by the Agilent-Dako tie up this week at 6X trailing revenues!!!* (and also the Gen-Probe acquisition by Hologic, at roughly the same valuation multiple.)

For perspective, the just re-done AFFX-eBioscience deal was at a ~4X multiple. So how is Dako 50% more valuable on the basis of revenue multiples? (Or ~7X more valuable on a gross valuation basis.)

-a bias towards higher value products in the sales mix. Per this article, reagents are only ~15% of Dako sales, while 85% is attributed to the anatomic pathology market. (Slippery, as much of the purchases for the path market are reagents in value added packaging (kits, etc)). The lesson here for life science tools companies: climb the value curve - even if just a step or two - and put a new label on your company. You're not a reagents company - you're a clinical diagnostics or molecular diagnostics company, even if none of your products have 510K approvals from the FDA.

-clinical lock-in. Once a clinician or pathologist learns to rely on a pathology product, momentum and familiarity are more important to follow-on sales than price.

-IP. Dako's assays and components are proprietary whenever possible, and quite likely patented in a minority of cases. (With trade secrets being more important than formal IP protection in most cases in this field.)

Note: the acquisition ISN'T driven by cutting edge technology. Much of Dako's products are related to immunohistochemistry (IHC) - a very standard, widely used assay technology. I suppose you could start an argument over whether or not Dako is a molecular diagnostics company - their pathology products help target molecular medicines on a by-patient basis, but these diagnostic assays are not particularly 21st century, relying on protein detection.

Also driving this deal: as noted in this story, Agilent's $4B cash hoard - half of which they are using to do this deal - is largely offshore. Agilent's choice was either to repatriate the profits and pay a huuuuuge tax to the US government (newsflash: the US has the highest corporate tax rate in the world), or re-invest the proceeds in overseas assets, like Dako. It sure would have been nice if that capital could have been re-invested in US life science companies.

The quick reaction from financial analysts is that Agilent paid full-price for Dako, but the deal will be immediately accretive to earnings, and, since Agilent used off-shore funny money to fund the deal, probably could have and would have paid more. (Plus, sizable companies in the clinical diagnostics space for acquisition are becoming scarce.)

I'd say this is a good buy by Agilent, and hope that no one mistakes the huge celebratory party Dako's Danish and Swedish owners are throwing (surely with copious amounts of aquavit, Tuborg, and Absolut), as anything other than just the way the Scandinavians roll. (Speaking from personal experience. Hei skål!)


* note that the Agilent press release refers to 2010 revenues for Dako at $340M. I bumped up Dako's sales by 10% to reflect 2011 revenues.

Called it (Affymetrix-eBioscience)!

There's not much less interesting to read on a blog than a blogger giving themselves a pat on the back, but abandoning caution, here's mention that what I predicted would happen between Affymetrix and eBiosciences has come to pass, as AFFX and eBio have adjusted the purchase price downward in order to get their merger financed.

I predicted two months ago that their stalled merger would go forward with eBiosciences lowering the price slightly. Lenders financing the deal saw AFFX's performance slip enough in 2011 to make them wonder if the deal was dangerous. I stated that both AFFX and eBio lacked better alternative than a slightly lower price.

The previous deal - valuing eBio at $330M has been redone at $315M. A 5% price reduction doesn't seem like much (and indeed it won't bother eBio shareholders much), but annual debt service on the "extra" $15M for AFFX probably would equate to an additional annual interest expense of $1M. With $1M more cash flow at the $315M price, the lenders can sleep better.

I like the new deal, and so does the market -AFFX is up ~10% since the announcement, effectively meaning that AFFX added ~$45M in value ($15M price reduction, plus ~$30M in increased market cap.)

Based on the AFFX press release, pro forma 2011 for the combination of AFFX and eBio might look like this:

Revenue: $338M
EBITDA: ~$5M (swinging to a positive)

Make no mistake, AFFX wants/wanted eBioscience to pave over their declining genomics business. The deal extends the period for AFFX to turn this business around (I still think there's plenty of life left in Affy genomics hardware & consumables), and if so, multiples expansion (sales or EBITDA) will lift the stock substantially. Still, I predict that AFFX in a few years will be known more for their consumables business than their genomics business, and that's probably a good thing.

Cash-equity equivalence for pharma.

Pfizer says they're looking for acquisitions around $4B. They've had a bit of success buying assets of that size, but that buyout space is becoming crowded - every big pharma would be happy to acquire meaningful but not humongous assets of that size to pave over their patent cliff.

But why is it that PFE or any other big pharma is willing to splash out billions for acquisitions when internal R&D budgets are under pressure? Here's why big pharmas have more incentive to buy innovation externally than fund it internally:

1. Risk/reward & timing: An investment in internal R&D might pay-off in ~5 years, whereas acquiring assets (particularly approved products) are a "sure thing." Until R&D becomes more predictable or higher reward, pharma will always be oriented to lower-risk, shorter term rewards.

2. Financial expectations: all big pharmas are sensitive to the almighty EPS (earnings per share.) An investment in internal R&D has a current cost to EPS and uncertain rewards, while an acquisition often has (understated) current costs and overstated future rewards. (Depending on synergy, more broad distribution, etc.)

3. Access to excellence: No offense to (internal) pharma researchers, but by buying assets, big pharma can buy from the top research efforts in the world. An acquisition likely has a tremendous concentration of focused expertise - be it in the target or disease of interest. Who knows more about diabetes, BMS, or Amylin, or who knows more about transgenic expression systems, Protalix or Pfizer? Internal R&D efforts can of course be high-quality, but most are very, very broad, and by definition somewhat dilute.

4. Internal inefficiencies. Pharmas have expensive structures and high legacy costs. Take another look at this chart from my February post "R&D Efficiency," indicating that pharma spends ~$5B in R&D per FDA approved drug.

In contrast, every biotech big or small is targeting a cost per drug approval in the hundred of millions, not billions, indicating their efficiency advantage. (As an example, Amylin - rumored as an acquisition target of BMS for ~$4B - probably spent between $500m and $750m in developing Bydureon, suggesting that they, if representative, are ~8X more efficient than BMS' historical internal efforts.


5. M&A accounting: this is the big one - our tax laws have a massive preference for equity-based M&A. Pfizer has ~$70B in cash on hand and generated an additional $20B in operating cash in 2011, while investing ~$10B in R&D (which includes cash payments to development partners, so this figure is not entirely internal R&D.) PFE has ~7.5B shares outstanding

Consider 2 scenarios for PFE:

-PFE increases cash R&D spending by $10B/year.

Financial result: EPS falls by about $1 per share.(-80%). (Assume $10B more in R&D is offset by $2.5B less (ballpark) in taxes.)

-PFE buys 2 companies (such as 2 x Amylin) for $5B in PFE stock. (Each.)

2 x Amylins would contribute ~$1.3B in new revenue (using 2011) figures, and while Amylin loses a small amount of money, Pfizer would likely assert that they would cut some overhead, and increase sales using PFE's sales force, eliminating the annual operating loss in the short term. Longer term, PFE grows sales (@ a profit margin in excess of 90%), and cuts Amylin overhead and R&D by $750M per year.

To fund the deal, PFE issues 442,000,000 new shares at current prices, or a roughly ~5% increase in shares outstanding, slightly diluting EPS in the near term. However, the acquired assets could  increase PFE's annual earnings by $1B roughly in the second year (assuming ~20% increase in revenues, with the costs detailed above, making the deal quickly accretive (=~12% EPS). Also: post-merger accounting may lead PFE to write-off half ($5B) of the M&A value as "goodwill." This is a hit to book (GAAP) earnings, but has, in effect, a cash benefit, as corporate taxes are reduced by the write-off of goodwill. End result: small near-term share dilution, medium term EPS increase due to the acquired assets and a lower tax bill, without spending much/any cash.

M&A is even more advantaged by the tax rules that reward share repurchases. If PFE repurchased $10B in stock (tax-free) instead of spending the same amount on R&D, EPS would be increased as the denominator shrinks.


My original goal was to calculate an equivalence between cash and equity ("$1 cash = $10 in equity spent in M&A," or something like that, but it seems that the ratio is more like $1 to infinity., advantage M&A.

With math like that, and the other advantages outlined above, it is almost surprising that Big Pharma does ANY internal R&D.

I admit it: I don't "get" the generics business.

On one hand, I see the appeal of the generics business - there's ALOT of profit to be made by undercutting traditional pharma companies in off-patent drugs. Who doesn't like the idea of winning 30% of pharm.'s revenue with an investment of 1% of pharm.'s revenue?

On the other hand, any generics company really has only one variable to compete on: cost. (Who wants to compete solely on cost? Not me.)

By definition, the generic chemicals manufactured are identical, so there is no competing on product performance, and presumably every generic company's cost to manufacturer a particular chemical is roughly the same (though the difference in labor costs between, say Dr. Reddy's in India, and Teva (Israel and USA) isn't insignificant.)

So why would one generic company pay a premium to acquire another, as Watson did to acquire Actavis last week? At 14X EBITDA, the deal doesn't work on a purely financial basis, unless the combined operating margin roughly doubles (requiring a $1.2B improvement in operating margin, on $8B in annual revenue. That ain't happening.)

Watson will be acquiring Actavis manufacturing assets, which adds a mild amount of strategic value, but it seems to me that the only two ways that this deal ends up being rewarding for Watson is 1) if success in the generics business is entirely based on scale, or 2) the greater fool theory takes hold.

So with generics M&A occurring roughly monthly and big boys like Pfizer stomping into generics, I need someone to correct me, or otherwise explain this industry to me, because I just don't see an investment rationale, or why risk capital would chase this industry, other than to lock-in a modest annual ROIA.

(And it's not like I'm the only one not questioning the wisdom of generics investment - Deutsche Bank is taking a ~$375M hit on their investment in Actavis, as a result of the Watson-Actavis deal.)

Help, anybody?



btw: I think the manufacturing challenges inherent in bio-similars makes this subset of the generics industry much different than the chemical generics discussed above.

Gen-Probe sale validates molecular future

Hologic, the "Woman's Health Company," announced today that they're betting the company on genomics.

Well, that's not exactly what HOLX announced, but practically speaking, when a $5B company with a mild amount of DX exposure decides to pay $3.75B to buy a nucleic acid testing firm (Gen-Probe), they're really betting the company on genomics.

I like the deal for both HOLX and GPRO - HOLX gets exposure to growing markets and technologies which nicely complement their core business. (Tthe combination of HOLX's focus on women's health and GPRO's HPV tests is a perfect fit.) GPRO - who's growth was slowing - gets a nice bump in valuation, and probably a good amount of independence.

It'll be interesting to see what becomes of the non-women's health applications of Gen-Probe. Will HOLX punt the cancer testing business to QGEN or Clarient (GE)? Since the deal is all-cash, HOLX might want to later de-lever by punting the cancer tests or other assets.

Two unfortunate side effects of the acquisition: Gen-Probe is/was the largest, most prominent molecular DX pure-play. With Gen-Probe losing its' independence, we're losing both a bellwether for MDX, and losing a buy-side specialist. Gen-Probe is/was in excellent position to commercialize interesting DX coming from smaller players, as is the case of their PCA3 product sourced from Diagnocure.

One other impression from the HOLX-GPRO deal: re-reading Roche's rationale for their pursuit of Illumina, it sure seems to me that Gen-Probe would have been a better fit for Roche instead of Illumina. I wonder if they'll try to top HOLX's offer. (Or maybe GE or Danaher will.)

Interesting pharma M&A stat….

From this Bloomberg article: recent pharma acquisitions of >$500M have been at an average 71% premium to their pre-deal market price.

The article suggests that this is driven by the large number of Big Pharma's products going off-patent and therefore needing to be replaced. This is true, but I think there's also the partial explanation of a cost of capital arbitrage.

Pharma companies tend to have a cost of capital just a few points more than the borrowing from the Fed. This figure can be calculated for each pharma company, but let's just assume 8% over the long run, but with today's low interest rate QE2 environment, that might be more like 6%.

Biotechs, - even public biotech's - have a MUCH higher cost of capital. This too varies based on company, disease-focus, maturity, etc., but probably somewhere in the range of 12-18% today, or 2-3X big pharm.'s cost of capital.

Big Pharma companies (generally) trade based on earnings multiples, while biotech's tend to trade on the value of growth, which is risk-adjusted by the biotech firm's MUCH higher cost of capital.

Consider the forward and trailing P/E ratios of the first 7 pharmas that came to mind:

So let's say that you've got a blockbuster ($1B in revenue) at typical pharma margins (27% operating margin - we'll use that as a stand-in for EPS.)

That suggests that on a forward basis, the blockbuster is worth $3.25B (forward P/E of 12 x ($1B x .27)) to the pharma.

But if the blockbuster has sales of only ~$250M at this point, and $1B in revenue is still years off, the discounted (risk-adjusted)  value is much less perhaps half the value of its' forward value under the wings of a pharma company.

This example is pretty much a reflection of the setting of the HGSI-GSK merger talks. HGSI had $130M in revenue (JV revenue) and a market value of <$1.3B immediately before GSK launched their $2.6B takeover offer.

What I've described above - pharma's lower cost of capital relative to biotech driving M&A activities - is nothing new, but with interest rates today low enough that borrowing costs are almost negative for big pharma, it should really only be news if Big Pharma WASN'T buying, irregardless of the oncoming patent cliff.

Thanks to FierceBiotech for pointing out the article.

HGSI in play, an era comes to a close

It's been a long, long, long road for Human Genome Sciences, but congratulations are due for their $2.6B buyout offer from GSK at a roughly 50% premium to their previous trading price of $7 per share. HGSI rejected the offer, but it is widely expected that HGSI and GSK close a deal at a slightly higher price ($3B?), though it would be fun to see GSK hold firm on the pricing of their offer - I don't think HGSI is likely to attract higher bids from any other companies.

By way of comparison, over its' history, HGSI raised ~$3.8B in capital.

The buyout is driven by HGSI-developed Benlysta (for Lupus, partnered with GSK) and it's near term pipeline which includes a pretty exciting atherosclerosis drug. Once again, we see big pharma buying a partner who has been substantially de-risked, something to consider as Vertex, Onyx, and others approach this stage.

But HGSI will forever be to me a lesson in buzzword-investing.

Rewind to very late 1999-2000 - the peak of the internet investing bubble and the dawn of the genomic age. Tech investor fervor and the news of the success of the Human Genome Project ran up the stock prices of all things genomic. HGSI peaked at a split-adjusted price of 103 in 2000. (Reminder: GSK's current offer is ~$13 per share.) Here's a crazy chart of HGSI's stock price over the last 13 years:

(Live link to chart)

But genomics shares (including Celera, Incyte, etc.) cratered quickly once the hot money cooled and once the realization hit that genomics products seriously lagged, for a variety of reasons. What followed was a lonely decade for genomics stocks, and I can't help but wonder if the 2000-era fervor was a net negative for genomics. (Did the investing bubble distract management from building a successful long term tech platform? Did the unreasonable expectations of the market poison the well for future genomics companies?)

The genomics bubble was nothing new - remember the gene therapy bubble or the angiogenesis bubble before that? Since the genomics bubble we've seen a stem cell bubble and an RNAi bubble, so clearly the investment community hasn't learned the lesson to ignore or at least devalue hype, but HGSI's sale to GSK shows that post-hype, post-bubble companies can still generate value. 

UK company buys US company that's really a Chinese company.

Abcam bought Epitomics this week for $155M. These two companies are very good at what they do, and this seems like a good combination, though a bit rich in price.

Part of the reason why Epitomics fetched such a premium is that there is real antibody IP behind the company, as opposed to most reagent companies.

This deal also firmly establishes Abcam on the ground in China, as 2/3rds of Epitomics' employees are based in China.

Acquisition multiples:

6.3X ttm revenue

20.4X ttm EBITDA

While there are several reagent companies leveraging low cost production in China, Epitomics is arguably the most significant and with the greatest IP base, so this represents Abcam buying "Tiffany" assets instead of trying to just buy Chinese access on the cheap. I think this is the smart way for non-Chinese companies to leverage China. Abcam will win not only adding the production capacity, but Epitomics' Chinese operations should help Abcam sell more product into China.

So, while the Epitomics multiple of revenue is high, think about it as the regular acquisition of a reagents company at 4X sales, plus operating synergies, plus the purchase of novel IP, plus the expense of opening a 170 person facility in China so de-risked that it will be earnings positive a year after the deal closes. If you call the operating synergies worth $15M, the IP worth $15M, and the Chinese operation worth $30M, Epitomics is a good bargain for Abcam even at a headline 6.3X sales. (Provided that Abcam retains the Chinese personnel. It wouldn't be that hard for the Epitomics-China team to raise capital and start a competing operation. Or to be recruited to a competing entity like Origene.

The other good thing about this deal: it reminded me to take a look at Abcam's stock. I've only skimmed their 2011 results (published Monday), but so far it seems a solid company fairly priced. The big question: what's the endgame for Abcam? Would LIFE or TECH or another big player (GE?) be interested in scooping up Abcam in a few years at a premium to current valuations?

I think the answer to that question depends on Abcam's ability to expand into further value-add areas beyond reagents, like IVDs or drug discovery assays.

The M&A game….

…..featuring Illumina + Roche again and an addendum to my post last week about the Affymetrix-eBioscience non-deal. What do these 2 deals have in common?

Luke Timmerman @ Xconomy has a good piece this week with 5 reasons why the Roche + Illumina deal isn't right for Illumina. I shared reason #6 in the comments:

• "…..because the touted “total solution” provided by a Roche + Illumina combination is a fairy tale. Illumina sells equipment. Roche sells drugs and diagnostics. What tiny bit of equipment that Roche sells (454) hasn’t done well. I don’t see how selling Illumina equipment makes Roche’s drug or diagnostics businesses any better. What “total solution” becomes enabled by the combo that isn’t possible by Roche just buying a roomful of Illumina (or someone else’s) sequencers?" 

What the ILMN-Roche and AFFX-eBiosciences deal have in common is that both deals are now an exercise in game theory. Consider ILMN's options:

1. Accept Roche's bid. (notgonnahappen. Roche's offer is ~$6 below the current price) 
2. Adjust the terms: wrestle for a higher bid from Roche or find another bidder to up the price. 
3. No deal. Win a proxy fight by making the stand-alone scenario more real and financially attractive. 

Likewise, consider eBioscience's options:

1. Accept AFFX's likely revised downward terms, though still rich, in order to allow AFFX to win debt financing of the acquisition. 
2. Adjust the terms by selling to another suitor, likely at a lower price than AFFX's rich offer. 
3. No deal. No liquidity for investors. 

Timmerman argues Illumina shareholders should vote to remain independent for largely qualitative reasons. Unfortunately, I think the decision to be made by shareholders is much more cold and quantitative: what's the better risk-adjusted net present value?

1. Roche's $44.50/share bid, (again, notgonnahappen.) 
2. a sweetened bid, or 
3. the capital gains in future years from selling ILMN shares after the company stock re-appreciates. 

Putting some #'s to #3. Using round figures, ILMN is at $50/share, and had a previous high of $80/share. Holding ILMN stock for 2 years to see $30 in appreciation would require an annual return to equity holders of 26.5% - a not unreasonable scenario, particularly in such a growing industry. The problem is, the $30 gain offered in the future (over two years) can be made a lot less relevant with a sweetened bid 'now' by Roche.

What if Roche offered an additional $2B, which would raise the ILMN offer to $60/share, or about a third of the 2-year gain upfront? This might be hard for ILMN shareholders to turn down, especially if the offer is cash-heavy.

To me, and likely to both ILMN shareholders and Roche management, the outcome is determined largely by your appraisal of ILMN's NGS technology. If you think ILMN is in danger of being passed by Ion Torrent or Oxford Nanopore, you take a sweetened offer from Roche. If you think ILMN has the tech to stay on top, you probably hold your shares (or, if Roche, increase your bid.)

All of this says to me that we should be on the watch for a public unveiling of ILMN's future NGS tech, or their roadmap as such. (Via a press conference or an analyst day, or the like.) ILMN is currently touting NGS prices of ~$5,000 per genome. If they can demonstrate a technology (or path) that drives this number down into ONP's ballpark (~$1,000), expect ILMN to stay independent. If not, ILMN will take Roche's best offer.

Roche has already played their role in this game, as they played the "you know you're not the only fish in the sea" card - even though the whole world knows that there isn't an equivalent alternative NGS investment available. (Unless you think PACB or GNOM make for good back-up plans.) I interpret this as Roche saying that they're open to paying a bit more for ILMN - otherwise, they'd play either the "take it or leave it" card.

Nearly six weeks have passed since Roche's hostile bid and yet Illumina hasn't shown off any reason for shareholders to expect ILMN stock to pop as an independent company. Be on the lookout for either a sweetened Roche bid or a big ILMN tech exposé.


While ILMN is looking for paths to increased valuation, eBioscience must be looking for how to avoid too much decrease in valuation. It looks like AFFX can't do the current $330M deal, as lenders are pulling their financing. They could seek another bidder, but presumably they held an auction before accepting AFFX's bid, and know the possible range of offers. At 4.7X trailing revenue, the AFFX offer is very rich.

As a mostly-commodity provider, eBioscience probably still wants to get a deal done, even if AFFX can't honor the proposed terms. (btw: there are differing reports on whether AFFX's offer is all-cash or 50/50 cash/equity.) Would eBioscience rather take a tweaked deal from AFFX at say 90% of the value, or - as they are a growing company - sell a year or two later to someone else at a reduced multiple? (say $80m in 2012 revenue x a 3.75X multiple (=$300M.)) Chances are, this offer from AFFX represents the best and most lucrative chance for liquidity for eBioscience shareholders that they are going to see for a while.

The best outcome here for eBiosciences is to negotiate a sale at a point between their best alternative purchasers' price and the $330M, or to alter some deal terms to slightly reduce the value of consideration from AFFX. eBioscience could keep the same headline number, but accept a mix heavier on equity than cash, for example. Or, eBioscience shareholders could provide the debt financing themselves, in the form of an earn out or milestone payment from AFFX.

Unlike ILMN, I don't think that eBiosciences has to worry that their suitor will have a change of heart. If the financing gap can be bridged, the deal will happen. At this point, it seems to be a matter of how much less lucrative terms eBioscience is willing to accept and whether this figure works for AFFX's bankers.

Quick hits….

• Gleevec, is there anything that you can't do?  Gleevec and Tasigna may be effective against EBOLA! (NVS' finding: Abl regulates ebola viral reproduction. I wonder how many other viruses may rely on Abl.)

• 23andme & Muhammad Ali are partnering for Parkinson's research. I'm not an Ali fan (I think he is a product of some excellent p.r. over the years, covering up the fact that he was a tremendous a$$ when active as an athlete), but I'm very excited about any initiative that draws the general public's attention to genomics.

• Apparently the Affymetrix-eBioscience deal might not be happening. It looks like AFFX's disappointing 4Q2011 financial results is making the merger financiers think twice about underwriting the transaction.  (Tell me if this makes sense: acquirer AFFX enterprise value: ~$215M. target eBioscience purchase price: $330M (all cash). Debt financing required for the deal: $190M.) I still think this deal is driven by AFFX's desire to dilute their reliance on the microarray business and to buy some sales growth, as there's still only a tenuous topical connection between Affymetrix & eBioscience respective businesses. Such a deal makes sense at a bargain price, but it looks like the lenders are realizing it's actually a premium price. (Notice the roster of lenders are more merchant lenders than traditional bankers.) Also: if you're eBioscience intending to cash out @ a very rich 4.5X sales, you've got 2 questions to consider: 1) would you be willing to give a little on the terms to get the deal done? (I would), or 2) would you be interested in buying AFFX?

Real math on bio-bucks….

The LifeSciVC takes a look at the payout rates on pharma partnerships.

We all know that pharma-biotech partnerships & acquisitions usually launch with press releases touting huuuuge potential financial implications, with the eye-popping figures referred to as "bio-bucks" - headline figures that probably won't ever be completely reached. ("Bio-bucks" aren't limited to pharma-biotech partnerships. For example, LIFE bought Ion Torrent for a headline figure of $725M, which amounted to $350M at closing, with $375M contingent on performance. (Of which LIFE might have already made good - though some reports say the milestones are based on future (2012) revenues.))

The link at the top of this post is some very clever analysis of actual versus expected payout since 2005. In summary:

-38% of the announced value is captured up front.

-the remaining 62% of value is split among paid (24%) the amount still possible will ultimately , still possible (40%), and canceled (37%).

-so, $4.3B of a possible $7.0B in milestones have been resolved - either paid or negated, with 40% achieved and 60% categorized as "nevergonnahappen." (Since the deals analyzed reach cover the 2005-2009 period, you could make a strong case that the likelihood of payout on not-yet-achieved milestones is likely much, much lower than 40%.)

-If you optimistically assume that milestones TBD follow this same pattern, $1.1B of milestones will likely be realized, and $1.7 are nevergonnahappen.

Extrapolating this:

38% paid upfront
25% milestones likely to be paid.
37% "vapor," likely nevergonnahappen.


That's actually a LOT better than I expected. To think that most deals are likely to pay out 63% of their headline value is a surprise to me.

Accounting for the time value of money makes for a simple rule for pharma acquisitions ~50% of value realized on a net present value basis, 50% vapor.

(Note: connected to my post of 2 days ago regarding changing business models for early stage biotech, I suspect that the asset-lite, specialized biotech companies being developed may experience a better milestone payout rate, since their specialization would suggest more focus and understanding of milestones in a given therapeutic area. However, a by-product of the specialization is that there are likely to be less deals; more focus = a smaller target market of potential acquirers.)

What I would be curious to know is how milestones fall into the nevergonnahappen category. How much of the milestone failure is related to management of the acquiree taking their eye of the ball post-deal? How much of the milestone failure can be attributed to cultural & communication divisions between pharma and biotech? How much of the failure is related to pharma screw-ups and changing priorities? And finally, how much milestone failure can be explained by pharma being snookered by high expectations into buying crap assets. Any guesses?

Genzyme: one less hope for a biotech to graduate to big pharma status

Add Genzyme to the list of biotech companies that made it to scale, and could have ultimately "graduated" to big pharma status. While I am happy for GENZ shareholders (and employees), GENZ's fate further confirms that all biotechs - even the successful ones - are due to be acquired by big pharma.

Genzyme joins Genentech, MedImmune, ImClone, and OSI, as operating companies with revenues in excess of $1B that have been absorbed by Big Pharma.

Why this matters? Because building a company to be acquired and building the best company are two different strategies. Given the developments with the companies above, one could question the wisdom of adopting any strategy but building to sell.

Who's left:


Amgen - there were loud rumors about PFE buying AMGN 3-4 years ago after reimbursement for Amgen's Epo was reduced. The emergence and success of D-Mab (osteoporosis drug) has kept Amgen an independent company - and there is still hoped for sales growth from personalizing Vectibix, but there doesn't seem to be either another exciting late stage product in development, nor much talk of AMGN acquiring companies or drugs to build and diversify their portfolio.

One factor surprisingly prominent in driving M&A discussions is the age of the selling CEO (GENZ's Termeer is 64), and AMGN's Kevin Scharer turns 63 on Wednesday, Mar 2. CEOs generally don't put their companies up for sale because they hit a certain age, but rather they are a little more receptive to acquisition overtures and because CEOs on the metaphoric "back nine" of their careers don't hold acquisitions hostage to demands for a significant role in the resulting merged company.


Biogen - which has previously been put in play by Carl Icahn, so you can't expect it to stand-alone for too long.


Celgene - I think the one to watch. They have the resources (i.e. cash flow) to reinvest in expanding the product portfolio, their CEO is hungry, and they might not be viewed as attractively by acquirers simply because Celgene is not the product of a novel technology platform. (Revlimid is a fantastic drug, but it's technical roots go back to the 1960's.)


Cephalon -  Strong with almost $3B in annual revenue, CEPH has the added advantage of a diverse business. The company has a new CEO as of December 2010 following the death of their founder and CEO, so I'd assume that the new CEO will want to stay independent for the immediate future, while the company climbs a steep growth curve from a number of new product releases over the last 2-3 years. As of now, CEPH lacks a blockbuster drug, which often drives acquisition interest.


Gilead - made further steps towards the big leagues by buying Calistoga last week, which not only adds scale, but also gets the company into a new, large market (oncology.)


Onyx - no way they're independent 3 years from now. Either Nexavar's growth continues and their partner Bayer decides to buy them, or Bayer's follow-on (son of Nexavar) makes the company put themselves up for sale.


Vertex - The company of "Billion Dollar Molecule" fame has lived many lives, and probably rebuffed many suitors, but the future of this company is completely tied to it's late-stage HepC drug. The drug, a potential blockbuster, is partnered with JNJ ex-US, meaning one of 3 things is likely to happen to VRTX:

1) The drug is a smashing success - JNJ decides to buy VRTX to get 100% of the growth, especially since they'll have a great view of sales performance, as they distribute the drug in Europe and elsewhere.

2) The Hep C drug is a middling success, but ultimately shares the market with one or more of the competing emerging HepC drugs. In this scenario, VRTX becomes valued at whatever option value the market perceives JNJ to place on VRTX, at least until VRTX gets another non-HepC product to the late stage.

3) drug not approved, Vertex leaves a big, smoking crater. (Clinical data released so far indicates the drug is strong and that this scenario isn't likely.)

Keep in mind: VRTX's current $9B valuation is ~5% of JNJ's valuation. To an acquisition-driven company like JNJ, VRTX would be a snack.


Are there any other candidate companies that could grow into multi-billion dollar competitors to big pharma?