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Big Pharma, Meet Big Biotech

25-February-2011: Venture firms traditionally have seen big pharmaceutical companies as the most likely buyers for their biotechnology start-ups, but lately they've been selling more of them to pharma's smaller biotech rivals.

Top biotech player Gilead Sciences Inc. said Tuesday that it planned to buy Calistoga Pharmaceuticals Inc., for example, and has struck deals to acquire two other venture-backed companies recently. Another, Cephalon Inc., this month secured an option to buy the assets of venture-backed Alba Therapeutics Corp. Meanwhile, Alexion Pharmaceuticals Inc. snared VC-backed Taligen Therapeutics Inc. in January.

While the largest drug companies have been buying each other to replace the revenue they will lose as products come off patent, their smaller competitors have been snapping up venture-backed biotechs to stock their pipelines. Since their own patent expirations are further off, they're willing to buy companies, like Calistoga, whose drugs are in early to mid-stage clinical studies.

"Big biotech as much of a player as pharma these days," said Ed Hurwitz, a director with Alta Partners, which backed Alba, Calistoga and Taligen. "There is more large-biotech interest on the acquisition than we've seen historically, it's not just a pharma game anymore."

Pharma remains in the acquisitions game, of course, but biotech contestants are playing it more aggressively. By spending relatively small sums for early-stage drugs now, these companies hope to avoid the need to pay top dollar for revenue-generating products later, said Brian Skorney, an analyst with ThinkEquity LLC.

Being smaller than their pharmaceutical brethren, these companies are less likely to have the in-house expertise they need to move into new markets. Gilead, best-known for its HIV medicines, is using its acquisitions of Calistoga and venture-backed Arresto Biosciences Inc. and CGI Pharmaceuticals Inc. to expand into cancer and inflammatory disease. Through Calistoga - which it's buying for up to $600 million cash and milestones - it gains a drug, CAL-101, that shows potential against blood cancers, solid tumors and inflammation.

Biotech companies are less able to make blockbuster deals than bigger players, but they can be quick and decisive. And since they already have the biotech culture, they are easy for venture-backed drug companies to approach.

"The companies that did grow up from biotech tend to be the easiest to talk to about M&A because they understand biotech than pharma," said Patrick Latterell, founder of Calistoga investor Latterell Venture Partners.

Venture investors hope activity from these companies will lead to more and better exits, but counting on them carries risk. Being smaller and less stable than large drugmakers, they're less able to weather setbacks, which means an aggressive acquirer now may be pulling back later.

It's also unclear if these players will continue to find enough attractive drug candidates from small companies, said Alan Carr, an analyst with Needham & Co., who said he does not expect a surge of acquisitions by publicly traded biotech companies.

"The comments I get from midcap biotech there's a limited number of attractive acquisitions targets out here," Carr said. "I don't think we're going to see explosive growth. I think we'll see a steady level" of deals.

Source: Wall Street Journal

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