What’s Driving M&A Among Pharma Sponsors?

M&A Feature Introduction
An Industry Stacked: Mergers & Acquisitions
in Discovery, Manufacturing and Fill/Finish

As the supply chain shrinks, it has grown far denser. 
There is no segment of the industry that has been untouched by the 
deep internal layering caused by M&A activity. In this Executive Issue 
feature, we explore how research, manufacturing and packaging have 
shifted with consolidation. 

Part 2: Contract Development and Manufacturing Organization Mergers and Acquisitions

M&A activity among pharmaceutical companies reached a peak in 2014-2015. It has slowed somewhat in 2016 and 2017, but companies remain active. They are seeking access to new technologies, looking to expand their pipelines and therapeutic expertise and reach both new patient populations and geographies.

Many Reasons for M&A

Merger and acquisition activity is, overall, driven by a need to improve competitiveness.¹ For public companies, shareholders expect a certain level of growth. For some, achieving those levels of growth organically is a challenge, leading to growth through acquisition. Many blockbuster drugs have lost or are soon to lose patent protection. At the same time, investment in R&D has decreased at large biopharmaceutical companies and they are faced with shrinking pipelines. The majority of new drug candidates have, in fact, been developed by small and emerging specialty pharma and biotech companies in recent years. Consequently, these innovative organizations are being acquired by big pharma and biotech firms to expand their portfolios with next-generation technologies.

In addition, those numerous patent expirations, combined with increasing pricing pressures from governments and insurance companies have led to reduced revenues for many large biopharmaceutical companies. Acquisitions can provide access to new revenue streams, particularly for companies with significant cash reserves.²

Financial factors can come into play as well, such as access to cheap financing and potential tax savings, although so-called tax inversion deals are no longer on the table for US companies. There is, however, under the current Trump administration, potential for US corporations to pay reduced taxes on money they repatriate into the country. Reduction of costs through achievement of synergies and the acquisition of new technologies (instead of making internal R&D investments) is also an important driver. In some cases, companies divest only part of their portfolio in order to streamline operations, leading to improved bottom lines for both deal partners.

Historical Perspective

Mergers and acquisitions have been an important activity in the pharmaceutical industry for many years. Over the past decade, the industry spent over $2.4 trillion on M&A deals, accounting for on average 9% of total global M&A activity, according to Mergermarket.³ The highest value for M&A deals in the pharma industry in those 10 years — $392.⁴ billion — was reached in 2015, with North America accounting for nearly $300 billion of the total.

While most of the truly megadeals — Pfizer’s acquisitions of Warner Lambert in 1999, Pharmacia in 2002 and Wyeth in 2009, Glaxo Wellcome’s purchase of SmithKline Beecham in 2000 and Sanofi’s acquisition of Aventis in 2004, for instance took place earlier, large deals continue to take place.³ Teva Pharmaceutical’s purchase of Allergan’s generics division in 2015, Shire’s acquisition of Baxalta and Bayer’s purchase of Monsanto in 2016 and Johnson & Johnson’s takeover of Actelion in 2017 are more recent examples.

Deals made by generic drug manufacturers accounted for 9.3% of the value of all pharmaceutical M&A activity from 1996 to 2016 (345 deals valued a total of $160.3 billion).⁴ The vast majority of deals took place from 2014-2016 (2014: 22 worth $1.86 billion; 2015: 34 worth $33.56 billion; 2016: 42 worth $44 billion). Notably, in 2015 and 2016 many of these deals occurred in the US, accounting for nearly 90% of the value of generic deals in those two years. In addition, it is worth noting that both the number and value of M&A deals involving generics companies increased.⁴

Value of M&A in the Global Pharma Industry ($ / billion)

Changing Headwinds in 2016

Despite the increase in M&A deals by generic pharmaceutical firms, the overall M&A activity among pharmaceutical manufacturers declined in 2016 compared to 2014 and 2015. In 2016, the value of pharmaceutical M&A activity fell to $274 billion from $392.4 billion in 2015.³ Interestingly, deal activity increased in Europe and Japan in 2016, with total value growing from $33 to $57 billion in Europe and from $2.9 to $7.3 billion in Japan. In the latter case, the purchase of Toshiba Medical Systems Corporation by Canon accounted for $5.9 billion.³

Top deals in 2016 included Shire’s acquisition of Baxter spinoff Baxalta, Pfizer’s buyout of Medivation and purchase of Anacor Pharmaceuticals, AbbVie’s acquisition of Stemcentrx and Mylan’s purchase of Meda.⁵ The nature of deals also changed in 2016. Rather than being driven largely by specialty pharmaceutical firms (e.g., Allergan, Valeant Pharmaceuticals International and Endo International), big pharma and biotech companies started to lead the way again. Compared to 2014, valuations of specialty pharma companies declined by 34% in 2016, limiting their ability to make deals.⁶

There has also been a shift in interest away from companies with approved products to early-stage development firms.³ In 2016, just under 20% of the companies acquired offered approved products, down from 49% in 2011. Possible reasons include reduced competition and thus valuations/prices, a desire to expand technologies and drug options for specific diseases, and the desire to bring next-generation technologies in-house. However, eight of the largest 10 deals completed in 2016 were for companies with approved products or products close to commercialization, suggesting that the biggest biopharma companies have a reduced tolerance for risk-taking.⁵ It could also reflect lower valuations. It is worth noting that “option-to-acquire” deals became more common in 2016. In this case, rather than acquire an early-stage company and take on the further development of unproven candidates, big biopharma companies form collaborations that include the option to acquire the target molecule if performance milestones are achieved.³

Continued Slowdown in 2017

Through October 2nd, the total value of deals in the pharma, medical and biotech sector was $207.6 billion, representing a decline of 9.9% in value (and 106 fewer deals) compared to the same period in 2016.⁷ Private equity deals were also notably lower than expected.⁸ Pharma deals have been the main culprit; biopharma transactions have remained fairly healthy. A slowdown in biotech IPOs may be part of the reason for the higher M&A activity in this segment of the biopharma industry.⁹ The overall slowdown is attributed by some analysts to the uncertainty created by the presidential administration.⁸

Notable deals have included J&J’s takeover of Actelion, Gilead’s buyout of Kite Pharma (which recently received FDA approval for the second CAR T-cell therapy in the US) and the merger of Impax Labs and Amneal Pharmaceuticals (to make the 5th largest generics firm in the US).¹⁰

Other companies looked to divest, not acquire, as a way to focus on core businesses and provide opportunities for growth for the divested operations.¹¹ One example is Biogen, which spun off its hemophilia business in 2017 as Bioverativ. Teva sold its intrauterine copper contraceptive ParaGard to CooperSurgical and its contraception, fertility, menopause and osteoporosis products to CVC Capital Partners Fund VI to pay down debt in the face of significant price declines for many of its generic products.¹² The company continues to seek a buyer for its European oncology and pain assets. Novartis had its one-third share of Roche on the block for more than a year, but decided to keep it given a lack of interest. It has also been reported that the company is looking to sell a $496 million portfolio of central nervous system meds, some respiratory drug rights and potentially its Alcon eye drugs business.¹³

For emerging and smaller pharmaceutical companies, initial public offerings can serve as an effective alternative to M&A for achieving growth.¹¹

The 10 largest transactions in the Pharma Industry

What’s on Tap for 2018?

With much uncertainty continuing, it is difficult to predict what level of M&A activity will take place in 2018. Following the failure to repeal the Affordable Care Act, however, biopharmaceutical stocks did begin to increase in value again.¹⁴  Earnings per share are also on the rise. The increased rate at which the FDA is approving drugs — 46 in November 2017¹⁵ compared to just 22 in 2016¹⁶ — is also likely contributing to the improved stock prices. Some predict a return to higher M&A levels as a result.¹⁴

M&A activity in 2018 could also pick up. According to one report, there is $1.3 trillion in overseas cash that could be brought back to the US and used by pharmaceutical companies to pay for deals.¹⁷ Despite continued uncertainty, it appears that M&A activity in the pharmaceutical industry will remain reasonably strong and could potentially increase to the higher levels in 2018.

Read Part 1: A New Landscape: M&A in the Discovery & Research Sector

Read Part 3: Getting to the Finish Line 

References

1. Giordano Righi. “Drivers Of Mergers And Acquisitions (M&A) In Life Sciences.” LinkedIn. 31 Oct. 2016. Web.
2. Seemal Patel. “Strong Outlook For Pharma And Biotech M&A In 2017.” Deal Law Wire. 6 Apr. 2017. Web.
3. “Ten Year Deal Activity In Pharmaceuticals Industry Stands At $2.4 Trillion.” Consultancy.UK. 6 Mar. 2017. Web.
4. Marc-André Gagnon, Karena D. Volesky. “Merger Mania: Mergers And Acquisitions In The Generic Drug Sector From 1995 To 2016.” Globalization and Health 13.62 (2017). Web.
5. Sy Mukherjee. “These Were The 10 Biggest Pharmaceutical Deals Of 2016.” Fortune. 24 Feb. 2017. Web.
6. Jessica Merrill.  “Big Pharma Is Back In The M&A Driver’s Seat For 2017.” Scrip. 9 Jan. 2017. Web.
7. Carly Helfand.  “Without Tax Reform, Pharma M&A’s Still Sluggish—But Biotech’s Red-Hot.” Fierce Pharma. 20 Oct. 2017. Web.
8. Jared S. Hopkins. “Biotech M&A Falls Off as Trump Dashes Hopes of a New Pharma Boom.” Bloomberg. 21 Apr. 2017. Web.
9. Peter Young. “Pharma M&A Market: Latest Challenges and Opportunities.” Pharmaceutical Executive. 3 Jan. 2017. Web.
10. Carly Helfand. “Bisaro Steers Impax to $6.4B Amneal Merger, Creating Fifth-Largest U.S. Generics Company.” Fierce Pharma. 17 Oct. 2017. Web.
11. Lydia Ramsey. “The CEO Of A $50 Billion Company Explains Why Big-Ticket Dealmaking Has Dropped.” 17 Jul. 2017. Web.
12. Eric Sagonowsky. “Teva Finishes Women’s Health Sale with Deals Worth $1.38B.” Fierce Pharma. 18 Sep. 2017. Web.
13. Tracy Staton. “No Sale For Novartis’ $14B Roche Stake, But The Revamp’s Not Done.” Fierce Pharma. 12 Oct.  2017. Web.
14. Anthony Mirhaydari. “M&A In Biotech & Pharma To Heat Up After Fall Of ‘Trumpcare’.” Pitch Book. 14 Sep. 2017. Web.
15. “Novel Drug Approvals For 2017.” U.S. Food and Drug Administration. Dec. 2017. Web.
16. “Novel Drug Approvals for 2016.” U.S. Food and Drug Administration. Nov. 2017. Web.
17. Michael S. Ringel, Michael K. Choy. “A New Wave Of Pharma Mergers Could Put Innovative Drugs In The Pipeline.” Stat News. 24 Jul. 2017. Web.