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Analysis: Replay of energetic deal-making seen for drugmakers in 2014

By Deena Beasley and Ransdell Pierson

(Reuters) - The torrid pace of deals in the pharmaceutical and biotechnology sectors through 2013 is not expected to let up this year, thanks to new technologies to address unmet medical needs.

Between 2011 and 2016, patents in developed markets will expire on brand-name drugs that would otherwise have generated sales of $127 billion, according to data firm IMS Health. To replace some of the lost revenue, larger drugmakers are looking to bring in new products, often in areas of significant scientific advancement such as treatments for cancer, rare diseases and drugs designed to turn off the activity of rogue genes. Much of the breakthrough science is coming from biotechnology, meaning drugs derived from living cells.

There were 10 major M&A deals involving publicly traded biotech companies last year, led by Amgen Inc's $10 billion buyout of Onyx Pharmaceuticals. That was up from nine the previous year and six in 2011, according to JP Morgan.

"I think deal making this year will be even better because there was a lot of validation last year," said Joseph Gulfo, chief executive officer at Breakthrough Medical Innovations LLC, a consulting company to drug and medical device companies. "The new discoveries and data have sparked a tremendous amount of interest from the bigger companies."

Rather than the mega-mergers typically done to achieve big cost savings through layoffs and factory closings, most drugmakers are aiming for deals that increase sales. Many of them detailed their strategies this month at the annual JP Morgan Healthcare Conferenceare.

Those strategies included acquisitions of smaller companies as well as risk-sharing through product licensing and drug development partnerships.

AbbVie Inc, maker of top-selling arthritis drug Humira, is interested in a "gradual buildup" of its pipeline of experimental drugs, having forged a dozen collaborations with other drugmakers in the past three years, most involving drugs in mid-stage trials, said Chief Financial Officer Bill Chase.

"We don't have the need to go out and do a big deal. Large synergy deals are not overly attractive," he said.

HIGH VALUATIONS

With the 65 percent run-up in the Nasdaq Biotechnology Index last year, valuations of companies have gotten so high that licensing and partnership deals are becoming a more popular way to share financial risk.

"Biotech companies realize that developing a drug these days is economically and mathematically different than 20 years ago," said James Sabry, global head of partnering at Roche unit Genentech. "Most don't have that level of sophistication. Partnering with a pharma company is the only way to create long-term value."

Companies like Amgen and Roche performed well last year and don't really need to acquire new assets, beyond companion diagnostics to complement their products, said Anne O'Riordan, global managing director of Accenture Life Sciences.

According to Accenture's analysis, drugmakers that rank in the mid-tier in terms of growth prospects from new drugs and geographic expansion would include GlaxoSmithKline, Novartis and Sanofi.

A third clump of companies have relatively weak late-stage drug development pipelines and are still in the midst of dealing with expiring patents on top-selling drugs.

But most still have high profit margins and generate robust cash flows. "A lot of them can afford to buy something," O'Riordan said.

AstraZeneca, which recently paid $4 billion to buy Bristol-Myers Squibb's share of the two companies' diabetes joint venture, probably falls into that third camp, O'Riordan said.

Israel-based drugmaker Teva Pharmaceutical Industries, recently named turnaround specialist Erez Vigodman as its CEO and agreed to buy NuPathe Inc to expand its portfolio of medicines to treat conditions affecting the central nervous system.

Israel Makov, chairman of Biolight Israeli Life Sciences Investments Ltd, and a former CEO of Teva, said he believes deal flow among healthcare companies will be just as robust in 2014 as last year: "Why? Because there is a lot of money in the system and few places to invest it."

He predicted "more and more Big Pharma buying biotech because the problem with Big Pharma is the pipeline, and biotech can provide them the pipeline. Its even more expensive to develop a drug on your own and fail."

Companies like Teva, Merck & Co, Eli Lilly and Pfizer are avidly on the lookout for deals to supplement the flow of drugs from their own laboratories.

Eli Lilly CEO John Lechleiter said his company is "very active in the animal health space; we're gonna be buyers not sellers there."

He also said Lilly will look for ways to bolster its existing strengths in therapeutic areas such as neuroscience, diabetes, oncology, autoimmune diseases, or to widen its geographic presence.

"Growth is a challenge ... we have to take risk," Merck CEO Kenneth Frazier said in comments at the conference, while noting that the company still needs to build shareholder value and protect its capital.

Roger Perlmutter, head of research at Merck, said there are no longer many undervalued late-stage pharmaceutical product candidates. "There are earlier-stage products and we intend to exploit that opportunity," he said.

(Reporting by Deena Beasley and Ransdell Pierson; Editing by David Gregorio)

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