Hey AUS you think Benitec will be included somewhere?
After a bumper year of mergers and acquisitions in the Australian biotech sector in 2006-07, the post-July mood has been subdued. But, while the second half of 2007 was quiet, sector analysts are predicting a big six months on the M&A front. RUTH CALLAGHAN reports for BTN.
With the exception of Peptech and Evogenix's merger, and a few smaller consolidations, the financial year so far has been uneventful on the mergers and acquisitions front. And the deals that have been done are dwarfed by those made in the previous year.
In financial year 2007, Intersuisse counted 65 M&As, the biggest being Hospira's $2.5 billion acquisition of Mayne Pharma. Other major deals included GlaxoSmithKline's $170 million purchase of Domantis, a United Kingdom drug development company that had been 31 percent owned by Peptech, the $700 million purchase of Vision Systems by United States instruments company Danaher Corporation, and CSL's acquisition of Zenyth Therapeutics.
Since July, however, there have been only a handful of deals, led by Peptech and Evogenix, which concluded their $156 million merger and listed under their new name of Arana Therapeutics in November.
This month has seen the completion of the takeover of Panbio by US-based Inverness Medical Innovations for $21 million, while in July, Neuren Pharma made an all-scrip purchase of US-based Hampton Pharmaceuticals for shares worth US$4.4 million.
So why have M&As dropped away, and what sort of activity will the second half of the financial year bring?
Dr Darren Grubb, from Intersuisse, said the growing maturity of the Australian life sciences sector and increased internationalisation had helped lay the ground for the large number of M&As in FY07, and he saw three specific drivers behind the activity.
"A lot of mergers and acquisitions were due to the higher availability of capital, and also a number of these companies were at a high price so it was easier to make scrip acquisitions," he said.
"You also have to remember that period coincided with a large amount of capital that had been raised and that allowed companies to afford the acquisitions of licence agreements. They were probably the three main drivers."
Markets since July have been far rockier, with a general decline in share price among biotechs, but Grubb doesn't see that as a hindrance to more M&A activity in coming months.
In fact, he says there are good opportunities for companies to take on well-priced assets that can improve their local or international standing or secure their position as a global player.
"Bulking up is a very important element for most companies," he said.
"You don't want to bulk up for bulking up's sake but to grow it is important to acquire assets that are strategically aligned with your operation to become an international player."
"A lot of companies are already international players and this is cementing their position."
Despite tightening credit markets, many companies still had good cash reserves and the fall in share price meant prices were reasonable, he said.
"The quality of the science behind companies has not changed just because of the diminution of the share price," he said.
"[The price of] biotech companies has come down but biotech companies in other countries have come down as well, therefore there is the opportunity for good international acquisitions by Australian companies. And the market mostly supports the funding of good acquisitions."
Dr Ben McCaw, from eG Capital, said he was unconcerned about the apparent decline in M&As in late 2007, as the difference in activity between years could be volatile.
"I wouldn't be too concerned about it. I think that probably the difference between year to year is not based on fundamentals," he said.
But he thinks wider market conditions, particularly tightening finance, could spur more activity in coming months.
"Funding pressures will drive mergers and acquisitions and I would say that you might see a little bit more of that in 2008 because funds may be a little bit harder to come by given the prevailing global conditions for funding," he said.
"You read a lot about the debt markets and how they have closed up and how they may have a flow-on effect over to equity funding, be that through higher premiums or just restrictions on funds.
"Less funds and a higher cost of equity will drive more companies to stress and that will raise the impetus for merger and acquisition throughout 2008."
McCaw said some companies that could have been acquisition targets because of this kind of financial stress had improved their standing through capital raisings.
"BioLayer is one. They had a funding problem towards the end of the year and averted it through a rights issue. Neuren is another one that was running close to empty and got away with a $7 million underwritten rights issue which is enough to see them through their phase 3 study of Glypromate."
Still, a number of companies were sufficiently cashed up to be in the market for acquisitions, such as Progen Pharmaceuticals.
"They have deep pockets at the moment, they raised $100 million last year," McCaw said.
"Even at the time it was a good thing to do but in hindsight was even better given what's happened to funding markets and capital markets.
"The obvious one is Peptech (now Arana Therapeutics) which is sitting there with a fair bit of cash on its balance sheet. They are still, I would say, in acquisition mode. Even if they did get Evogenix there is still room to move."
Arana could also be a takeover target, particularly now it has Evogenix's technology in hand.
"They are in the middle," McCaw said.
"Given their share price at the moment and that the difference between the cash and their share price isn't that high, they are themselves an acquisition target perhaps. I could see Peptech acquiring an asset this year for cash and scrip but I could also see them being acquired by an overseas larger entity that was interested in their technology and perhaps Evogenix's technology as well."
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