Insight journal

Pharma pays up for scarce assets

Posted on 12 January 2012

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When it comes to healthcare deals, the new motto may be “too expensive to
fail.”

Drug companies have been forced to pay massive premiums on acquisitions as  the selection of target companies with viable prospects narrows and the need to  fill out their portfolio of medicines intensifies, industry executives and  bankers said at the JPMorgan Healthcare Conference this week in San  Francisco.

Bristol-Myers Squibb Co’s deal to buy Inhibitex at a 163 percent premium may be the most extreme example to date, but they are not likely to be alone as other global pharmaceutical makers compete for a small number of companies.

“There’s always been a steady wave of health care M&A. The only  difference now is there is a panicky quality to deals as companies appear to be  playing musical chairs and they are grabbing at things to avoid being left alone  when the music stops,” said an investment banker, who declined to be named  because he was not authorized to speak to the media.

Inhibitex’s lead product is INX-189, an oral hepatitis C drug in Phase II or mid-stage development. It still must go through additional clinical testing and regulatory hurdles before it can be offered to patients. In other words, Bristol paid a hefty price tag for a drug candidate that may never see the light of day.

MKM Partners analyst Jon LeCroy said the firm views “the valuation of this deal as quite aggressive considering the historical failure rates of Phase II assets (18-28 percent).”

“While hepatitis C is an exciting space right now, we think paying $2.5 billion in cash for Phase II assets seems excessive,” LeCroy said in a research report.

The deal comes on the heels of Gilead Sciences Inc’s $11 billion acquisition in November of Pharmasset Inc, which has its own promising hepatitis C therapies in development. That deal was at an 89 percent premium.

Charles Bancroft, Chief Financial Officer of Bristol-Myers, said the company had little choice but to pay up for Inhibitex.

“It was a very competitive bidding process,” Bancroft said, without elaborating on other suitors.

The deal, however, met the company’s criteria for acquiring products that address an unmet medical need, he said.

Read the full story at Reuters.

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