Breakingviews: Huge biotech M&A premiums narrow perception gap

The premiums needed to seal biotechnology acquisitions have always been high, but they’ve reached the stratosphere this year. Astellas Pharma’s $3 billion deal to buy U.S. firm Audentes Therapeutics at a 110% premium is the fifth time this year a biotech company has been sold at more than twice its stock-market valuation. Buyers will have to continue paying up to convince sellers they’re not surrendering at fire-sale prices.

It’s an intriguing dynamic because investor pessimism about standalone firms, especially in speculative but promising areas such as gene therapy where Audentes operates, is making target companies look cheap. That’s encouraging bigger acquirers to go shopping, but it’s not enabling them to snap up bargains – instead, they have to pay bigger premiums to convince sellers they’re not surrendering at a price that will look foolish in, say, a year’s time.

Over the past year, the iShares Nasdaq biotechnology exchange-traded fund has underperformed the S&P 500 Index by a few percentage points. But it’s weighted toward bigger firms, and smaller players have fallen into bigger pits. Audentes was trading 40% below its April valuation before its sale was announced. Spark Therapeutics and Immune Design, which both agreed to sell in February, were trading well below their 2018 peaks before selling at premiums of 122% and 300%, respectively.

Big pharmaceutical outfits like Japan’s Astellas have to be willing to pay high prices because they have farmed out a large chunk of drug discovery and development to smaller biotech firms. They either license new therapies or just buy the companies that discovered them. If a treatment succeeds, bigger players have the marketing and distribution clout to make the most of it. They pay big premiums to stay in the game, and because they have the means to reap the maximum cash flow.

That helps explain the purchase of five gene therapy-focused firms this year at an average premium of 90%. And having in-house manufacturing – as Audentes does – attracts additional interest. Without it, there’s a wait time of about 18 months to outsource production of the modified viruses used in gene therapy, according to Reuters’ sources.

Add it up, and there will be more eye-watering premiums to come – at least until the stock market values potential targets more highly.

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