Deals in a Downturn Update




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Video title: Deals in a Downturn Update
Released on: June 04, 2010. © PharmaVentures Ltd
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In this episode of PharmaTelevision News Review, Paul Larsmon talks with Dr Tibor Papp, Head of Corporate Advisory at PharmaVentures. Filmed at the PharmaTelevision studios in Oxford, UK, they discuss:

• The overall impact of the financial crisis on deal-making

• How deal evaluations are changing

• Which stage of R&D is most affected by the trends

• Changes to the structures of deals

• The common deal types as a result of the crisis

• How the crisis has affected acquisitions

• Green shoots in the market

• Dr Papp's expectations for market activity in future

The overall impact of the financial crisis on deal-making
Paul Larsmon:
Now Deals in a Downturn an investigation into new trends in biopharmaceutical deal making that have emerged as a result of the global financial crisis. With me is PharmaVentures Head of Corporate Advisory, Tibor Papp. Tibor Papp, economy has been through a major shock in the last two-years no news there, but what has been the impact on deal making?
Tibor Papp:
In overall the deal making numbers in collaborative deal making have dropped. We have seen a 47% drop since 2005 in these numbers. Now let's have a look at the PharmaVentures analysis, this chart shows the numbers of collaborative deals since 2005 going up to 2009 and it shows the gradual drop going back to 2005 in these numbers. This is just to reflect that the major pressures on pharmaceuticals and in fact on deal making originate many years back not connecting to the financial crisis. This relates to also a kind of deflation of enthusiasm and opportunities present in the industry following a boom of 2003, '04, '05, and '06 when the business development teams were growing, companies were spending more and more on licensing and acquisitions and acquiring the assets as well as expanding their focus on many different therapy areas and geographies. After this initial enthusiasm they started to drop, the number of assets have not increased that are there are in the pipelines and this is reflected in the numbers.
How deal evaluations are changing
Paul Larsmon:
Fewer deals so at the same amount of money that must be an increased pressure on everybody I mean what's changing in deal valuations?
Tibor Papp:
Individual deal valuations has certainly gone up that the same amount of cash has been spenton collaborative deals for the past two, three-years across the industry and combined it with the fewer deal numbers you end up with higher valuations. Let's have a look at the next PharmaVentures analysis and we can see in that a significant shift towards very high value deals, where as in 2000 deals in the size of $100 million or over were a rarity, now in 2009 we can see a lot more of those in fact 70%, over 70% of these deals are now over $100 million.
Which stage of R&D is most affected by the trends?
Paul Larsmon:
Now I think we'd agree that in pharmaceutical deal making the key value inflection points are the transitions between the stages of R&D, which stage is most affected by these trends would you say?
Tibor Papp:
Again we've conducted analysis on that to find out the particular phases and what that is what we can see on this chart interestingly what you notice is that there is an inflation of values of individual deals on average across all stages at all phases especially it is true for Phase I and Phase II assets to a certain instant in Phase III as well and to some extent in Phase I. This reflects the large licensee's intentions and drive to acquire and license earlier stage assets as that is less and less later stage assets and there are more competition for them overall in the industry.
Changes to the structures of deals
Paul Larsmon:
So we are talking about deals where the risk is shared, has the structure of those deals changed a lot as a result of what's been going on?
Tibor Papp:
What we have noticed is that companies are ready to pay more but they want to shift the risk more to the future. So in other words this what we can see on this analysis the upfront fees are now representing a smaller proportion of the total headline value compared to what we could see in 2005. In 2005 the average upfront fee proportion was about 20% now it dropped to 9%. This is not to say that the absolute values of upfront payments have dropped actually they have increased in the past few years but their proportion has dropped.
The common deal types as a result of the crisis
Paul Larsmon:
Okay, so better ways of sharing risks seem to be driving deals at the moment, would you say there are any deal types which you can identify which are more common now than before?
Tibor Papp:
A particular deal that we have seen more and more of is option based deals. Option based deals are those where the company, the licensee a potential licensee buys the right to make a decision later on a potential licensing deal but doesn't have the obligation to commit financially to a licensing deal at the time of the option deal. We have conducted analysis in PharmaVentures to see whether these deals are rising or not and how many of deals have actually been exercised and we went back five-years. Let's have a look at the analysis, what you can see on this chart is that only 12% of these option deals over the past five-years have been exercised and this relates to top 20 companies. Of course this is just five-years and we have to say of course that the majority of the option deals relate to one, two-year exercise period but there are many deals in this universe that are still in progression and the licensees the pharma companies haven't had the chance to make a decision, so those deals are not yet included in this one.
How the crisis has affected acquisitions
Paul Larsmon:
Okay, so these collaborated deals are sharing the risk, but what's happening in the world of acquisition?
Tibor Papp:
What we have observed is a drop in M&A deal numbers and the rise in their valuations. We have conducted analysis in PharmaVentures on this as well and this is what you can see on this graph. As you can see the valuations have increased significantly and this is average values of M&A deals below the 10 billion mark but we need to emphasis that the number of deals have dropped to the extent of about 20, 30% in the past two-years and especially in the past two-years M&A activities before that were quite flat actually. The 20, 30% drop is quite aligned with the overall deal number drop of other industries so in that sense it is not a surprise.
Green shoots in the market
Paul Larsmon:
Okay lets go from the specific to the general if you like, I mean that the capital markets crashed along with Lehman Brothers, are they returning to health now The Green Shoots?
Tibor Papp:
Well if you have a look at our next analysis it is actually quite telling. In 2007 the markets were quite active and the numbers show global life sciences IPO's, 2008 there was a crash the number here shown is again global but I have to say that out of the six companies there was only one which had development stage assets and basically no cash flow they were looking at cash flows very soon. And in 2009 we have seen some recovery already but again most of these companies were those that had positive cash flow and they were not real biotech companies per say. It appears that the market is to a certain extent recovering but we have to emphasis that all biotech's that go to the market at the moment have to take discounts and launch post IPO, share prices have recovered in one or two of them but the market is still depressed and investors in general are not too interested in risky assets.
Dr Papp 's expectations for market activity in future
Paul Larsmon:
Okay Tibor Papp, so what's your overall assessment of current trends and putting you on the spot a bit I mean what are your expectations of what we are gonna see ahead?
Tibor Papp:
In PharmaVentures we were very interested in what drives deals, what is in the background which is not published this is why we conduct surveys every year among executives and that is what we see one of the outputs of that in this chart. Basically it shows that executives believe that what drives thinking behind deals now and that has been impacted by the economic crisis is risk aversion. Licensees acquirers are very concerned about quality, the quality of the assets, the data available and certain to they can see around the assets. Risk aversion drives future thinking and this practice of assessing risk remains in place even going forward. I believe that as the capital markets recover there will be more cash flowing into biotech companies, they will have more opportunities in progressing their pipelines, more assets will be available potentially for licensing as they come off from their shelves and large pharmaceutical companies will have access to these, therefore deal making numbers probably will recover to a certain extent but the fact remains that there is a gap between what is needed by the large companies to grow in the current environment and what is available from the biotech companies pipelines.
Paul Larsmon:
Tibor Papp, thank you very much for joining us.
Tibor Papp:
Thank you.
Paul Larsmon
Mr Paul Larsmon has worked as a broadcast television journalist for 25 years, covering general news, business and politics. He has been both presenter and producer in several news broadcasters, including the major British television news company ITN. He joined PharmaTelevision as Executive Producer earlier this year and has been responsible for getting PTV News launched.
Tibor Papp
Head of Corporate Advisory at PharmaVentures
Dr Tibor Papp is an experienced corporate strategy advisor having spent 18 years in the healthcare / life sciences industry in the areas of commercial and operational strategy, investment management, portfolio development, business transformation, licensing / M&A, and risk management. He has advised leading pharmaceutical, medical device and private equity clients about product, market and M&A deal strategies in pharmaceuticals, biotechnology, medical devices, drug delivery systems, and medical supplies globally. Tibor is also an experienced surgeon, with a PhD from the University of Aberdeen and an MBA from the University of Oxford.
PharmaVentures
PharmaVentures is a company that has proven success in deals and alliances. PharmaVentures offers: Over 18 years of healthcare industry experience Experience gained from working with in excess of 1000 clients in 38 countries, and conducting more than 450 assignments Over 40 specialist advisors, analysts and researchers Skills honed in many countries - 80% of its business comes from outside the UK
PharmaVentures
PharmaVentures is a company that has proven success in deals and alliances. PharmaVentures offers: Over 18 years of healthcare industry experience Experience gained from working with in excess of 1000 clients in 38 countries, and conducting more than 450 assignments Over 40 specialist advisors, analysts and researchers Skills honed in many countries - 80% of its business comes from outside the UK