ATPblog

Going against the Grain: Is it time to take a stand against “Asset Favoritism”?

In his 2004 Chairman’s Letter at Berkshire Hathaway, Warren Buffet offered sound advice to those trying to find the best time to invest in equities: “be fearful when others are greedy and greedy when others are fearful”.   For equity investing, this strategy seems to work very well.  Selling at the end of a long bull run, just as others are piling in on the back of historical gains was the right strategy in 2008.  Buying up distressed assets at a time when most potential purchasers are too fearful to move, keeping prices depressed, was surely the right strategy in the years that followed the crash.  But is going against the grain also a winning strategy for private equity investors in high-risk biotech ventures?

Is Pharma's Perfect Storm Biotech's Greatest Opportunity?

Many folks within pharma lament the current challenges and look back to a gilded era when blockbusters provided rivers of cash flow and supported growth based activities - both R&D and marketing. And yet, could this present biotech's greatest opportunity as an industry?

SuperGen Acquires Astex: The Biotech Funding Relay Race

Last week witnessed an interesting M&A deal between SuperGen and Astex. Here, we look at investor returns and wonder what could be in store for the enlarged company?

Does R&D Pay? (journal article)

This month we highlight a paper published earlier this year in Drug Discovery Today. The article, "Does R&D Pay?" looks at the effectiveness of different R&D strategies. This is achieved by looking at 10 year historical financial performance of different types of drug firms (big pharma, specialty/ generic, and biotech).

And it leads to some interesting conclusions about where investors might get the best return...

The Biotech Life Cycle - Seattle Revisited

BMS is currently in discussions to buy Zymogenetics, from Seattle. While some will mourn at the loss of another regional leader, we see things a different way.

A recent article from the Seattle Times highlights why recycling is so important to building biotech into a

Biotech Funding: Feel a Breeze From the IPO Window?

What do the following biotech stocks have in common - Anthera (NASDAQ:ANTH), Ironwood (NASDAQ: IRWD), Aveo (NASDAQ:AVEO), NeoVacs (EPA:ALNEV) and Nupathe (NASDAQ:PATH)? They are all biotech companies that achieved fundings through IPOs in 2010. And ALL are underwater compared to

The New Reality Starts to Hit Home

We all know the mantra of the post-credit crunch pharma and biotech world – lean, mean and focused in the era where cost-effectiveness is king. The message is that we have learnt from our mistakes of the past, embracing now instead strategic flexibility and a global focus on delivery of healthcare to the individual. The industry has made lots of resolutions – but is it walking the walk as well as talking the talk?

Value creation: Are pure-plays better than hybrids?

In this research note, we consider the value and merits of using a pure-play business model (i.e. biotech R&D pipeline, or cash generating services business) against the hybrid approach. Several case studies from the market suggest there may be greater value in focus.

Is MYRX a biotech value play?

Myriad Pharmaceuticals (NASDAQ: MYRX), is a spin-off from Myriad Genetics (NASDAQ: MYGN) which was effected in June 2009. MYRX is focused on developing an R&D stage pipeline (with cash burn). MYGN is focused on a service business providing genetic testing (profitable). MYRX is valued at less than cash,

Look Behind the Numbers...

A recent article from FierceBiotech discusses the last year’s share price recovery of CRO stocks in the US. It refers to a panel at the recent Partnerships in Clinical Trials conference in Orlando:

And an IPO window is an even more distant panacea...

...as evidenced by two IPOs that went out in 2010, with substantial haircuts:

Anthera Pharmaceuticals, reported in WSJ:

A Pharma Stock "Stocking Filler" - LLY

Part of our remit at ATPBio is to uncover value within the healthcare sector. More usually, this is in the form of working with clients to assist with strategy, asset work-up, due diligence and identifying key value drivers. Though, as we approach the festive season and thoughts turn

M&A Trials: Importing a Culture

In March this year, Roche and Genentech agreed to a friendly acquisition of Genentech, in a deal valued at $46.8 billion. Obvious attractions for the deal included access to Genentech's lead cancer drugs and a highly regarded

Creative financing - the Vertex way

Does the current pain of financing just affect small underfunded companies, with weak pipelines? It seems not. Last month, Vertex announced it was selling its European milestone payments for its ph III program, Telaprevir for hepatitis C. Key points in the release, regarding the value of these

Is India still shining?

A recent report by the Centennial Group,  highlighted in a FT columnist article discusses "What India must do if it is to be an affluent country". Findings in the report, and my own observations from recent trips, have three quite significant implications for the life sciences and

Kinetic Concepts revisited: value or growth?

For all investors, the key to success, is to buy an asset which is priced at less than its intrinsic worth. This applies whichever style of investing one considers - either value or growth. In "The Warren Buffett Way" by Robert G. Hagstrom, Buffett even goes as far as stating

Perils of M&A: Overpaying

A recent deal in the medical devices sector illustrates one potential peril of M&A: overpaying. The deal is between Kinetic Concepts, Inc (NYSE: KCI) and LifeCell Corp (NASDAQ: LIFC). Overview deal terms are described in the Wall Street Journal:

Kinetic Concepts, Inc agreed to buy LifeCell Corp. for $1.7 billion to expand the company's reach in tissue repair with the maker of AlloDerm.

LifeCell Chairman and Chief Executive Paul Thomas said joining with Kinetic Concepts will speed the availability of LifeCell's products internationally and that Kinetic Concepts' standing in the advanced-wound-care market will help get LifeCell's line into that segment.

AlloDerm, used to repair damaged tissue in hernias and breast reconstruction, generated $167 million in sales last year and is LifeCell's best-selling product. The combined company is expected to generate sales of approximately $2 billion this year and to employ more than 7,000 people.

Kinetic Concepts, based in San Antonio, said it will pay $51 a share for LifeCell, an 18% premium to Friday's price in 4 p.m. composite trading on the New York Stock Exchange.

At first glance the deal seems to fit well since both companies sell wound management products to hospitals without real overlap in product lines (though equally, there is not huge opportunity for cost cutting).

But take a look at what's happened to KCI's share price since the acquisition was announced at the start of April 08 (see right).The price has dropped from just below $50 to around $38 (as of 2nd May).

Why could this be so? At the time the deal was announced, KCI had a trailing PE ratio (ttm) of around 15x. This has now fallen to a PE ratio of 11x. Meanwhile, LifeCell currently has a PE ratio of 64x, expected to fall to 50x in 2008. Looking at it another way, KCI paid $1.7 billion for a company with $26  million of net income for 2007, while its own valuation before the deal was announced was $3.4 billion, with $237 million net income for 2007. KCI's valuation has now dropped to $2.8 billion; there goes $600 million.

KCI claim earnings will be accretive from 2010 and that there is a strong strategic fit. Earnings for LifeCell would have to increase 6x for this to happen, so KCI management must be pretty optimistic about their acquisition. But it looks like KCI investors are voting with their feet, and feel the ticket price is just a bit too high?  I guess we'll know by 2010.