2006 saw acquisitions continue to replace licensing agreements as price tags on licensing deals have increased to a point where many potential acquirers value the company at less than the cost of the license.
There have been 73 acquisitions of biotechnology companies by pharma and biotech firms in 2006, a 22 per cent jump from 2004.
And according to a biotech report released by Ernst & Young recently, the proportion of merger and acquisitions (M&A) compared to alliances in Europe has almost doubled in the past six years. In 2000, M&A deals represented 10 per cent of the total amount of deals while this figure climbed to almost 20 per cent last year.
"In many cases it has become cheaper to buy the company than license the product," said Martyn Postle, director of Cambridge Healthcare & Biotech.
Postle was speaking at a bioscience policy update forum hosted by Chesterford Research Park and the BioIndustry Association (BIA) in Cambridge last week.
He said that as a result, big pharma tend to acquire an entire biotech company rather than cherry picking the most promising drug candidates or technologies - for the same price - giving the acquirer the option of asset-stripping or maintaining the acquired company.
Postle went on to describe the increasing tendency of pharma firms to try and snap up small UK biotechs with high potential from the control of venture capital (VC) investors, a task made easier by "the difficulties that these investors have had over the past few years in effecting an exit through public markets."
But big pharma seems to be a victim of its own success as Postle quoted AstraZeneca's executive director John Patterson who recently said: "Big pharma wants to license a product and the VC [investor] sniffs an exit and starts an auction!", suggesting that big companies like his have little choice when it comes to deciding between in-licensing and buying.
Historically, big pharma has always looked to biotech companies as a key source of new products, with licensed drugs accounting for approximately 30 per cent of revenue.
But now M&A seems to be on everybody's lips in the industry. Last month, delegates at a biotech forum in London were told that biotech companies should prefer merger and acquisition strategies rather than raising cash and relying on organic growth to achieve success.
Nick Lowcock, managing director at investment bank Warburg Pincus, said the main challenge facing biotech companies is how to make good returns for investors.
"There is plenty of money available but returns for venture capital (VC) investors on their private capital are poor," said Lowcock.
Lowcock was speaking at the Sachs' Biotech forum held at the London Stock Exchange earlier this month.
Furthermore, opting for an M&A strategy can now attract not only big pharma but also large biotech companies who are also following the large pharma trend, threatened by the potential arrival of 'biogenerics' on the market.
"Large pharma companies but also large biotechs need to fill their product development pipelines as key patent expirations of blockbuster drugs and subsequent generic competition looms closer," said Karl Keegan, global sector head of Life Sciences Equity Research at CanaccordAdams, during the Sach's conference.
In addition, big biotech companies are following the big pharma steps in the way they are targeting companies with products in a variety of stages of FDA approval.
The main drivers behind this increasing trend are not only patent expirations on highly profitable drugs, but also easier access to capital markets for biotech companies. This has allowed large-cap biotech firms to build "war chests" of cash for acquisitions.
"Buyouts are a cheap and efficient way for companies to cut both time and costs," said Keegan.
