Karen Andersen: I am Karen Andersen, senior biotechnology analyst at Morningstar.
With me today to discuss the biotech M&A takeout environment is Lauren Migliore, also a biotech analyst here at Morningstar.
Thanks for joining us, Lauren.
Lauren Migliore: Great to be here, Karen.
Andersen: So maybe just to set some context in going into 2011, a couple of things we saw, couple of key themes we saw in 2010: First of all, we saw continuing interest in companies that have very robust pipelines in very popular areas.
So for example, OSI and Abraxis in cancer, Crucell and Zymogenetics in infectious disease. And then also in MS, we saw Facet acquired by Abbott as well as Sanofi's acquisition of Genzyme--a lot of Genzyme's pipeline value really stems from an MS drug.
The other thing we saw was an increased focus on alternative deal structures, like contingent value rights. So this is just a way for the acquirer to do a lower-risk deal, but it also preserves some of the upside for the acquired company if the pipeline candidate is a commercial success.
So, Lauren, I was just wondering, going into 2011, what do you see particularly in terms of deal volume and how are things shaping up?
Migliore: Looking at firms with market caps over a $100 million, M&A activity grew in 2010, and we expect deal volume to remain strong in 2011. Big pharma firms are still doing with patent cliffs, and high levels of cash on their balance sheets will provide we think the motivation and means for these companies to go shopping this year.
Andersen: Okay. So, last year was actually a pretty successful year for Morningstar's proprietary biotech takeout methodology. We saw three of the top 15 firms on our list receive acquisition offers. I was just wondering if you could give our listeners just a brief overview of the factors that we look at in determining our takeout list each year.
Migliore: Sure, Karen. The first thing we look at is the strength of firm's drug portfolio, so we take a look at the therapeutic focus of the company and give extra points to firms that are making drugs to treat illnesses that target really life-threatening disease with unmet needs, which we think confers higher pricing power.
Also, we look at the novelty of a company's drug development approach and their technology platform. So high scorers is here, our firms like Exelixis and Seattle Genetics that have really interesting technologies and have drugs that focus on cancer and other diseases with high unmet needs.
And then after drug portfolio strength, our second major metric is profit-boosting power. So, here we look at the benefit of a potential profit booster to an acquirer as well as the timing--if that's five years out, 10 years out or what. Obviously, big biotechs like Celgene and Gilead score highly in this regard, as well as some profitable specialty pharma firms, like Shire.
A slightly lesser role on our analysis is collaborative fit and financial health. For collaborative fit, we take a look at if a deal makes strategic sense from both a buyer and a seller's perspective, and then for financial health, we take into account cash levels and projected burn rate over the next 12 months.
Andersen: Okay. So, now that we have an idea of the four factors that are involved in this methodology, maybe you could review some of our top takeout targets for 2011?
Migliore: Sure. Biogen Idec came in as our top pick for 2011. We think that the firm's renewed focus on its core skills in neurology really boosts its drug portfolio strength this year. We see neurology as a key area of focus for several firms, and we think Roche would actually be a logical acquirer. Roche has referred to neurology as the new oncology, and has already partnered with Biogen on the blockbuster cancer drug, Rituxan.
So after Biogen, we have Seattle Genetics, Human Genome Sciences, Dendreon and Actelion making that our top five.
Seattle Genetics, Dendreon, and Actelion are all new additions to Morningstar's coverage list this year, and all three meet our top five thanks to their novel drug development approach and focus on rare diseases and cancer. And then we also have Human Genome in our top five again this year, thanks to the firm's recent securing of approval of its groundbreaking lupus drug, Benlysta.
Andersen: Okay, great. Now thanks for reviewing those top five, Lauren.
So, for more information on our full biotech takeout list for 2011, as well as our review of M&A and other industries within the health-care space, Please visit healthcare.morningstar.com to download the February issue of the Morningstar Healthcare Observer.