The impact of large alliances on share prices
Our attention was drawn recently to an analysis called "Why Investors don't like Biotech Alliances" produced by In Vivo. The article is here.
The article took nine large biotechnology alliances and examined the impact of alliances on the share price of the biotechnology companies involved. Among the the alliances examined were Isis Pharmaceuticals' mipomersen deal with Genzyme, Merck's with GTx on its Phase II SARM and two backups and Sanofi Aventis' multi-antibody arrangement with Regeneron. The company's analysis demonstrated that the median share price of the the nine biotechnology companies is down 15% from the day the deal was signed.
The analysis came up with a couple of explanations for this effect. Amongst the most important reasons given were that investors do not like the loss of control resulting from a large alliance and that large alliances make the already mind-bogglingly difficult job of calculating the value of a biotechnology company even more difficult. Needless to say we thought that this analysis was very interesting and so we decided to take a deeper look at the issue.
A couple of things immediately struck us about this analysis. To begin with, the small number of alliances examined all seem to have been signed over a three to four month period at the end of 2007 and beginning of 2008. No comparative analysis was done with companies signing alliances at other periods, companies that have never signed large alliances or indeed the sector overall. As it happens the companies examined saw their share prices fall by the same degree as other biotechnology companies (overall around 9%) in the same period. So the analysis cannot be used to demonstrate that alliances reduce the value of biotechnology companies. The most that can be shown is that over the short period in question, a period of unprecedented turmoil and when markets in general were falling, a handful of large alliances did not significantly increase the market value of the companies in question. A poor basis for a generalised conclusion about alliances overall.
We were also puzzled by analysis based on the change in the share price of the company at the point of signing an alliance and subsequently because, unless the event is completely unexpected, factors that may impact the share price of a company have been taken into account by the time of the signing. An appropriate analysis would take the change in the share price of the companies months before the alliance was signed rather than the date of signing the alliance. As it happens many of the companies saw a significant run up in their share price in the months before signing the alliance only to see it fall back after the alliance had been signed. This is normal.
One further thing occurred to us. The biotechnology industry is an industry built on partnering and we suspect that the valuation that many, many biotechnology companies trade at is based on the assumption that they will sign alliances with larger, better capitalised, companies. If that is indeed the case, then we would not expect an individual alliance to have a significant impact on the share price of a biotechnology company.
The analysis is correct in pointing to the challenges presented by issues of control in partnerships, but all companies in all sectors that have partnerships, alliances and joint ventures face exactly the same issues every day of the week. Talk to any software company dealing with Microsoft or Oracle, talk to any construction company undertaking work in foreign countries. Indeed, talk to an energy company with interests in Russia.
The analysis is also correct in pointing out the challenges presented by the valuation of biotechnology companies. But why would a biotechnology company with alliances be easier to value than a biotechnology company without alliances?
So, all in all, an interesting analysis but we are far from convinced.
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