Big drug deals expected to return in 2013

Get ready for the return of the $10 billion-plus drug deal.

Pharmaceutical companies including Pfizer Inc., Bristol-Myers Squibb Co. and Eli Lilly and Co. have spent the last several years digesting earlier acquisitions, refocusing their product development and setting aside cash in anticipation of expiring patents. Now, the expectation is they’re ready to start buying again.

Led by Pfizer, in New York, and Whitehouse Station, N.J.-based Merck & Co., five of the largest U.S. drugmakers had more than $70 billion in cash, near cash and short-term investments at the end of the third quarter.

“We’re through many cost-cutting programs, restructurings and portfolio arrangements,” said Henry Gosebruch, managing director of health-care mergers and acquisitions at JPMorgan Chase & Co. “When you put that together with record levels of cash available and improving, but still moderate, R&D productivity, we think there will be more big pharma M&A activity in 2013.”

Johnson & Johnson, Abbott Laboratories, Sanofi, Pfizer and Merck have already shown interest in one purchase that may top $10 billion: Bausch & Lomb Inc., the eye-care company, is for sale by Warburg Pincus LLC. The private equity firm is seeking at least $10 billion for the business and those companies may be bidders, according to people with knowledge of the matter.

This week will set the year’s dealmaking agenda at JPMorgan’s annual health-care conference in San Francisco. Almost 8,000 attendees and more than 400 companies will gather to make public presentations, have one-on-one meetings and get a sense of available and competing assets.

“It’s like a circus bazaar for business development,” said Geoff Meacham, JPMorgan’s biotechnology analyst. “It’s at the beginning of the year, the time when everyone sets the stage; there are crowded hallways, lots of buzz. And there’s probably a million 10-minute cups of coffee between companies.”

Big drugmakers will probably be on the hunt for assets to fill revenue holes left by expired patents.

Pfizer’s Lipitor, which drew more than $12 billion in annual revenue at its peak, lost marketing exclusivity in November 2011. Lilly lost patent protection on its top-seller, the antipsychotic Zyprexa, in October 2011. The drug had drawn more than $5 billion in peak sales. New York-based Bristol-Myers faced generic competition last year to Plavix, its best-seller with more than $7 billion in revenue.

At the same time, they’ve got deep pockets. Pfizer ended the third quarter with $23 billion in cash, near cash and short- term investments. Indianapolis-based Lilly had $6.9 billion, while Merck had $18.1 billion, and J&J, $19.8 billion.

“Many large-cap pharma companies still face a patent cliff and have the financial capability and strategic willingness to partner and acquire their way to continued innovation,” Leerink Swann analysts including Seamus Fernandez wrote in a Jan. 3 report. They cited Bristol-Myers, Lilly and London-based AstraZeneca Plc as potentially the most active acquirers.

Still, they’re likely to be careful buyers, avoiding purchases where valuations have risen too high, Gosebruch said.

Some biotechnology companies dependent on a single product have seen their stocks triple or quadruple in the last couple of years, to market values from $2 billion to $5 billion, as those products have seen success. While those companies are attractive, big pharmaceutical firms may look elsewhere for acquisitions, such as to larger firms trading at more digestible multiples and with more established products, he said.

Biotechnology companies with market valuations of more than $10 billion include Amgen Inc., Gilead Sciences Inc., Biogen Idec Inc., Celgene Corp., Alexion Pharmaceuticals Inc. and Regeneron Pharmaceuticals Inc. Celgene, the maker of $3 billion-a-year cancer drug Revlimid and other oncology drugs based in Summit, N.J, fits the focused profile that may draw bigger drugmakers’ interest. Regeneron, based in Tarrytown, N.Y., with efforts in ophthalmology, cancer and high cholesterol, is more diversified.

To be sure, big pharmaceutical companies may face pressure on their buying power, with valuations below 2006 levels giving stock transactions less leverage and patent expirations squeezing cash flows, according to Ernst & Young.

“Each of these potential currencies is now under increased pressure,” Ernst & Young said in a report released Monday. “Big pharma’s firepower has fallen.”

Still, the accounting firm emphasized big drugmakers’ need for deals to boost revenue. “With sales declining for the first time in 2012, it is only a matter of time before shareholder returns follow suit, unless pharma can find new sources of growth,” Ernst & Young said. “With few options for organic growth, pharma needs transactions.”

Big drugmakers may see competition from large biotechnology firms and specialty-drug makers as buyers.

“The pool of potential suitors that could pay up to $20 billion has swelled,” Ernst & Young said.

Excitement over acquisitions of biotechnology companies at the end of 2011 and beginning of 2012 contributed to skyrocketing valuations, said Ziad Bakri, a biotechnology analyst with T. Rowe Price Group Inc.

Gilead, the second-largest biotechnology company, announced in November 2011 that it was buying Pharmasset Inc., a company with no marketed products, for $11 billion to gain its hepatitis C assets. Bristol-Myers followed in January, the weekend before the JPMorgan conference began, with a $2.5 billion purchase of Inhibitex Inc., another drugmaker in hepatitis C.

“Last year, what dominated the conference was hepatitis C,” Bakri said. “It was hepatitis C and M&A in general. Both of those ended up contributing to the outperformance of the biotech sector in the beginning of 2012.”

Companies such as Pharmacyclics Inc., the developer of an experimental blood-cancer drug, and Medivation Inc., maker of a medicine for prostate cancer, have seen their market valuations multiply many times over in the last two years on optimism for their products. Pharmacyclics, based in Sunnyvale, Calif., has a market value of about $4.4 billion, while Medivation, in San Francisco, is about $4 billion.

Acquisitions of similar sizes followed those of the hepatitis C companies last year. Bristol-Myers bought Amylin Pharmaceuticals Inc. for $5.3 billion, while GlaxoSmithKline Plc bought partner Human Genome Sciences Inc. for $3 billion.

There have been 676 takeovers of biotechnology and pharmaceutical companies in the last three years, according to data compiled by Bloomberg. The average disclosed deal size was $328.7 million, and the average premium, 38 percent. The largest acquisition was Sanofi’s takeover of Genzyme Corp. in 2011 for $20.1 billion. Only two deals topped $10 billion; the other was Foster City, Calif.-based Gilead’s purchase of Pharmasset.

AbbVie Inc., the drug unit that split from parent Abbott on Jan. 1, is seeking treatments for unmet medical needs, such as Parkinson’s and endometriosis, to increase sales in 2015, Chief Financial Officer William Chase said last week.

Bristol-Myers is looking to buy a new type of Alzheimer’s disease drug to restock its pipeline after the failure of its experimental compound avagacestat, said Mark Day, who heads the company’s neuroscience business development.

Merck will consider “targeted deals” while seeking to avoid a big merger, CEO Kenneth Frazier said last week at a Goldman Sachs Group Inc. conference. Frazier said further industry consolidation is likely, considering pricing pressures, the costs and risks of clinical studies, and a “certain redundancy of infrastructure” in the industry.

“With cost restructuring and portfolio realignments largely behind us, pharma is now more ready to make bigger moves again,” Gosebruch said. “They are going to be back in a more aggressive way.”