Monday, July 17, 2000
The biotech bull market that began in October 1999 has created
huge valuation gains for many life science companies. Indeed, companies that
ended the second quarter in the key mid-cap (>$700 million) and top tier
(>$3 billion) spaces added more than $212 billion in market cap since Sept.
But while the run has been great for shareholders, biotech
companies have yet to put significant amounts of their paper gains to work in
mergers and acquisitions. Indeed, a miniscule amount has been put into acquiring
assets. By BioCentury's tally, only $10.5 billion of that group's equity has
been used in 21 M&A transactions over the same nine-month period (see "M&A
Broadening the scope to deals by companies of all sizes, a
total of $13 billion worth of paper was doled out in 46 M&A deals in which
the terms were outlined. On average, $283 million in equity was issued in each
of those deals. Taking out the $4.9 billion stock acquisition of Centocor Inc.
by Johnson & Johnson (JNJ, New Brunswick, N.J.), that average falls to $180
Ten other M&A deals were done during the period for which
terms were not disclosed. Assuming those deals were done for stock at the $283
million top run-rate, the $13 billion figure would increase to $16 billion,
still less than 8 percent of the valuation gain by the top end of the sector.
But while the rise in stock prices has some watchers on Wall
Street looking for a summer of M&A, others say that the record amount of
cash also raised by the industry will defer the inevitable fire sale by marginal
companies. And although deal-makers may hungrily see higher valuations as an
opportunity to broker M&A, companies themselves find fault with that logic,
saying that they do not base strategic decisions on stock value or pointing
out that stock prices can fall just as quickly as they have risen.
The rationale for stock deals
Nevertheless, Deni Zodda, managing director and group head at KPMG Life Sciences, believes that high valuations combined with healthy cash reserves will drive M&A. "We expect companies with big market caps and big cash positions to be active because they have the right combination - the size to do a stock transaction and the cash to fund the operations," he said.