In the first seven months of 2007, the life sciences and healthcare sector witnessed the initiation and/or completion of 133 M&As. Taken together, these deals span the gamut – from diagnostic assays and research tools to specialty and generic pharma companies, from contract manufacturing and genetic analysis to product lines and business units. The pace seems to be slower than it was in 2006 (with nearly 300 M&As initiated and/or completed) and the landscape has shifted. This year, huge diagnostics-related deals have trumped major drug-focused acquisitions. Big pharmas have slowed their purchases of biotech firms. Irate shareholders have forced several companies to put themselves on the block. And a new class of buyer has emerged.

By Jennifer Van Brunt

Big pharmas seem to have backed off their two-year campaign to acquire new drug candidates and state-of-the-art discovery technology to fill their empty pipelines – at least for a while. The number of biotech/big pharma M&As in 2005 and 2006 topped out at 23 and 24, respectively – far exceeding the average annual tally of five to seven deals. This year, the number of biotech/big pharma M&As will probably end up somewhere in between: In the first seven months of 2007, big pharmas announced six drug-related acquisitions of biotech firms and another four deals that focused on diagnostics.

Importantly, diagnostics-related M&As have seen the most action so far this year – and Swiss giant Roche is leading the charge. In June, for instance, it plunked down $600 million in cash to acquire BioVeris Corp., a company using electrochemiluminescence detection technology in diagnostics. Through a long-standing (and often contentious) relationship between the two, Roche had licensed the technology for use in human diagnostics – which by itself generates about $1 billion in revenues – but was prevented from applying it more broadly. With the acquisition of BioVeris, Roche now owns all rights to the technology, and can expand its immunochemistry business into new markets, such as drug discovery, clinical trials, veterinary assays and basic research.

In late May, Roche paid $155 million in cash for 454 Life Sciences Corp., a majority-owned subsidiary of CuraGen Corp. established in 2000 to develop and commercialize next-generation DNA sequencing technology. Roche and 454 were already partners under a May 2005 agreement that appointed Roche Diagnostics as the exclusive worldwide distributor of 454’s genome sequencers and associated reagents. Through the acquisition, Roche gets access to future sequencing products and can use current high-throughput technology (which was used by researchers at the Max Planck Institute to sequence the Neandertal genome) in regulated in vitro diagnostics.

Selected M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M. The valuations cited here are based on best-case scenarios, and include not only upfront payments but also all possible future contingent payments (e.g., milestones, earn-outs, royalties). The list does not include M&As that involved business units, divisions, subsidiaries, products, product lines, or facilities. It also excludes pure-play medical device deals.

Roche is also beefing up its high density DNA microarrays through the $272.5 million purchase of NimbleGen Systems Inc., which closed in early August. Through this deal, Roche Diagnostics strengthens its position as a major player in the genomics research market. And NimbleGen, which had filed for a $75 million IPO in mid-March 2007, now presents its venture investors with a liquidity event far sooner than it would have done through an IPO.

But Roche is most anxious to get its hands on Ventana Medical Systems Inc., which analyzes human tissue to help in the diagnosis and treatment of cancer and infectious diseases. Roche has been after Ventana for some time, but all its friendly overtures were snubbed. So in late June, the Swiss pharma launched a hostile $3 billion cash tender offer for Ventana’s outstanding shares. Unsurprisingly, Ventana’s board rejected this unsolicited offer in mid-July and urged stockholders not to tender their shares – but the battle is far from over. This is a strategically important deal for Roche, one that will establish its dominion in the rapidly growing area of personalized medicine.

The Swiss giant’s huge appetite for diagnostics companies, however, is nothing when compared with that of Inverness Medical Innovations Inc., which has already acquired six outfits this year. Based in Waltham, MA, Inverness Medical develops consumer and professional medical diagnostics, with a focus on women’s health, infectious diseases and cardiology.

Its $326 million pending purchase of Cholestech Corp., for instance, fits neatly into the cardiology niche: Cholestech’s assays are used to assess cardiac risk and diagnose cardiac conditions. They could also be used to monitor an individual patient’s condition and response to therapy. And Inverness is also getting tests for heart failure and acute myocardial infarction through its acquisition of Biosite Inc. – although that fact was overshadowed by the extensive battle for Biosite waged by Inverness and Beckman Coulter Inc. this spring. Biosite was already in merger discussions with Beckman Coulter when Inverness crashed the party, and the two large firms started a bidding war that catapulted Beckman Coulter’s original tender offer of $85 per share to Inverness’ winning bid of $92.50 per share or a total value of $1.69 billion.

Selected M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M. The valuations cited here are based on best-case scenarios, and include not only upfront payments but also all possible future contingent payments (e.g., milestones, earn-outs, royalties). The list does not include M&As that involved business units, divisions, subsidiaries (with the exception of 454 Life Sciences), products, product lines, or facilities. It also excludes pure-play medical device deals.

A few more diagnostics-based acquisitions also came with hefty price tags this year: In late May, Quest Diagnostics Inc. shelled out a cool $2 billion for AmeriPath Inc., a national diagnostic testing company. According to Quest, this acquisition established it as a leader in cancer diagnostics, with a focus on dermatopathology, anatomic pathology and molecular diagnostics.

And when the $6.2 billion merger between Hologic Inc. and Cytyc Corp. is completed, it will create a global leader in women’s healthcare, according to the companies. A major part of the business will concern diagnostic and medical imaging systems for mammography, cervical cancer screening, osteoporosis assessment, MRI imaging and other applications in women’s health.

Most therapeutic-based M&As pale next to deals of the magnitude cited above – but every once and a while one will come along to break the record. In recent times, we’ve actually witnessed several of these. Eli Lilly and Co., for instance, paid $2.3 billion to acquire its Cialis partner Icos Corp. in a deal that closed in January 2007. That same month, Merck KGaA closed its $13.9 billion acquisition of Swiss biotech Serono SA.

It was AstraZeneca plc, though, that pulled off the priciest biotech acquisition of 2007: In mid-June, it finalized its $15.6 billion, all-cash offer for MedImmune Inc. Prodded by dissident shareholders to put itself on the block, the biotech firm finally acquiesced to their demands in mid-April. (For details, see the Signals article, “Shareholders Flex Their Muscles.”)

Selected M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M. The valuations cited here are based on best-case scenarios, and include not only upfront payments but also all possible future contingent payments (e.g., milestones, earn-outs, royalties). The list does not include M&As that involved business units, divisions, subsidiaries, products, product lines, or facilities. It also excludes pure-play medical device deals.

AstraZeneca jumped at the opportunity, for the acquisition would give a big boost to its strategy to create a fully integrated biologics and vaccines business. Together with the assets of its subsidiary Cambridge Antibody Technology, which AstraZeneca acquired in August 2006, the pharma said it has now achieved a critical mass in R&D, regulatory, manufacturing and global sales and marketing.

AstraZeneca acquired another biotech this year, too: In early March, it bought U.K.-based Arrow Therapeutics Ltd. to broaden its portfolio of anti-infective therapies. In particular, Arrow has been developing two drug candidates for hepatitis C virus (HCV) infection (one of which is in early-stage clinical trials) and one clinical-stage small molecule drug for respiratory syncytial virus (RSV) infection, which is partnered with Novartis.

With two therapeutics-based biotech acquisitions under its belt this year, AstraZeneca comes out on top of the big pharma list. GlaxoSmithKline plc hasn’t made any biotech buys in 2007, nor has Novartis. Merck & Co. Inc., which acquired three firms in 2006, has held itself to one purchase this year: In late July it bid $350 million to acquire NovaCardia Inc., which is developing drugs for cardiovascular diseases. The San Diego firm, which was in registration for an IPO when Merck made its play, had already started Phase III clinical trials of its lead compound, an adenosine A1 receptor antagonist that is being tested in patients with acute congestive heart failure.

Selected M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M. The valuations cited here are based on best-case scenarios, and include not only upfront payments but also all possible future contingent payments (e.g., milestones, earn-outs, royalties). The list does not include M&As that involved business units, divisions, subsidiaries, products, product lines, or facilities. It also excludes pure-play medical device deals.

Eli Lilly’s only acquired one company this year, too: In early April it paid $315 million in cash for Hypnion Inc., a neuroscience drug discovery outfit that is focused on sleep disorders. Like Arrow Therapeutics and NovaCardia, Hypnion was in the clinic with its lead drug candidate by the time it entered into merger discussions. In this case, drug candidate HY10275, a dual-acting H1/5HT2a compound, is being tested in a Phase II trial in adults with transient insomnia.

Japanese pharma Eisai Co. Ltd. joined the M&A game in 2007, too, buying Morphotek Inc. for $325 million in April. This acquisition gives Eisai a foothold in the competitive field of therapeutic monoclonal antibody development. Two of Morphotek’s product candidates are in early-stage clinical trials for ovarian cancer and pancreatic cancer, and several others are in preclinical development.

And last, but not least, Roche managed to acquire one therapeutics-based company in 2007. In early April, it shelled out $56.5 million to buy privately held Therapeutic Human Polyclonals Inc., whose transgenic mammalian platform (transgenic rabbits with a human antibody repertoire) is able to create both monoclonal and polyclonal human antibody therapeutics. Roche intends to integrate the California company, which also has a German subsidiary, into its Center of Excellence for Protein Research in Penzberg, Germany.

Selected M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M. The valuations cited here are based on best-case scenarios, and include not only upfront payments but also all possible future contingent payments (e.g., milestones, earn-outs, royalties). The list does not include M&As that involved business units, divisions, subsidiaries, products, product lines, or facilities. It also excludes pure-play medical device deals.

The leading biotech companies play an active role in M&A, as well. Amgen Inc., for instance, seems to make at least one purchase every year. In April 2006, it completed its $2.2 billion buyout of long-time partner Abgenix Inc. in a move that not only provided it with full ownership of the partners’ co-developed antibody therapy panitumumab (Vectibix, which the FDA approved in September 2006 for treating metastatic colorectal cancer) but also eliminated the royalty stream on a second co-developed compound. In October 2006, Amgen closed its $380 million acquisition of privately held Avidia Inc., which is developing a new class of protein therapeutics called Avimers, which are much smaller than normal therapeutic proteins and antibodies but have higher specificity and avidity.

This year, the biotech heavyweight has continued to splurge on startups: In July, it purchased Alantos Pharmaceuticals, which is developing drugs for diabetes and inflammatory diseases. The firm’s lead compound, a dipeptidyl peptidase IV inhibitor, is being tested clinically as a treatment for type II diabetes. For its $300 million purchase price, Amgen also gets Alantos’ matrix metalloproteinase (MMP) platform for osteoarthritis. These product candidates will bolster Amgen’s expanding programs in metabolic disease and inflammation.

Amgen also bought Ilypsa this year, shelling out $420 million in July to acquire the firm’s late-stage selective phosphate binder for treating hyperphosphatemia in chronic kidney disease patients on hemodialysis. Ilypsa’s fit into Amgen’s grand scheme is obvious.

Genzyme Corp., which is also a very acquisitive company, ran into a snag this year when it decided to buy Bioenvision Inc., its partner in the development the leukemia drug clofarabine. Genzyme offered $345 million in cash to acquire Bioenvision through a tender offer, but the latter firm’s shareholders refused to sell their stock. They were led by SCO Capital Partners LLC, a New York investment company that opposed this deal from the start. The final chapter of this saga has yet to be written, but the situation does not look promising for Genzyme. (For details, see the Signals article, “Shareholders Flex Their Muscles.”)

And that reinforces a point we made earlier: Dissident shareholders (usually hedge funds) have started wielding considerable clout – enough to force or prevent a biotech company sale. As such, they have become powerful players in the M&A game.

Private Equity M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M.

While the hedge funds excel at influencing the course of events at public healthcare companies in which they have a stake, they don’t actually buy these firms themselves. That job has traditionally been handled by other healthcare-related companies. Today, however, there are new buyers in the marketplace – represented by private equity companies.

Since the beginning of the year, private equity firms have engaged in about 10 M&As, but the vast majority of acquired companies are not drug developers. Instead, the companies represent a mix of device firms, contract service organizations, and suppliers of goods and services to hospitals.

Nonetheless, these can be very pricey deals. Orthopedic device maker Biomet Inc. for example, is the subject of an $11.4 billion buyout by a private consortium that includes Biomet founder and former CEO Dane Miller and affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co., and TPG. The private equity group originally offered $44 per share, or $10.9 billion, for Biomet, but after the independent proxy adviser Institutional Shareholder Services said the price was too low, the investors sweetened their bid to $46 per share in cash ($11.4 billion). Biomet shareholders liked this price, and by mid-July, 83 percent of them had tendered their shares. The deal should close by the end of the year.

In mid-May, private equity firm Warburg Pincus offered $4.5 billion ($3.67 billion through a cash tender offer at $65 per share and the assumption of $830 million in debt) to acquire troubled eye health company Bausch & Lomb (B&L). About a month later, publicly traded Advanced Medical Optics Inc. (developer of ophthalmic surgical devices) joined the party, offering $45 in cash and $30 in stock for B&L. However, by early August it had withdrawn its bid, citing “unrealistic hurdles” set by B&L. The Warburg Pincus deal is still on, though, and is expected to close next month. And none too soon for B&L, which is still dealing with the after-effects of fungus problems related to its contact lens solution, which prompted a worldwide recall last spring.

In a rare example of a drug company buyout, newly formed investment firm Ikaria Holdings combined Ikaria Inc. and INO Therapeutics to create a company focused on critical care medicine and therapeutic gases (such as nitric oxide for treating hypoxic respiratory failure in newborns). INO Therapeutics was acquired from gas and engineering company The Linde Group, which has retained an equity stake in the new company. The merger was financed by a group of private equity and VC investors – including New Mountain Capital, ARCH Venture Partners and Venrock Associates.

Private Equity M&As In 2007*

*Selected transactions that were initiated or completed in the first 7 months of 2007 and whose value was at least $10M.

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