March 2019 Issue
Following strong levels of M&A activity over the last few years, the biotech industry is poised for another year of regular dealmaking in 2019.
Activity has been driven by a number of factors. One is the pharma industry’s ongoing need to replace aging blockbuster drug franchises, improving their product pipelines with new biotech acquisitions. In addition, weaker returns on R&D investment will likely result in companies divesting non-core assets to free up capital for further research. The US’ Tax Cuts and Jobs Act of 2017 has also had an impact on dealmaking, freeing up cash flow by allowing US companies to repatriate cash at a 15.5 percent tax rate rather than the previous 35 percent rate. According to EY, in 2018, life sciences companies used just 16 percent of their $1.2 trillion of outstanding capital to finance acquisitions.
The anticipated raft of deals, however, comes on the back of a surprisingly subdued end to 2018, particularly when compared to earlier in the year. Some acquirers were perhaps hesitant to pursue targets on account of high valuations in the biotech space. Additionally, the volatile state of both the global and US economies has also been blamed for the downturn in activity. The prospect of rising interest rates in the US, as well as the uncertainty surrounding potential Sino-US trade wars, seemed to spooked investors.
The total number of biotech M&A deal announcements in 2018 came to 111, according to The Pharma Letter, compared with 101 in 2017, but still below the boom years of 130 in 2016 and 155 in 2015. Within this total, there were 26 deals with a potential value of over $1bn, versus 15 in 2017.
“Patent expiry of a number of leading drugs in 2020 could also have a bearing on deal activity this year.”
According to PwC, biotech accounted for six of the top eight deals in the wider pharmaceuticals industry. These included Sanofi’s $11bn acquisition by Bioverativ, Celegene’s $9.3bn deal for Juno Therapeutics, Novartis’ $8.6bn acquisition of AveXis, Celegene’s $7bn deal for Impact Biomedicines, Sanofi’s $5.4bn deal for Ablynx, and GlaxoSmithKline’s $5.4bn acquisition of Tesaro. Takeda’s $62bn acquisition of Shire Plc, which was announced in May 2018, was also significant, as it will lead to divestitures of non-core assets worth around $10bn over the next three to five years. Takeda pursued Shire as it requires greater access to cutting-edge treatments. The company has seen declining revenue from older drugs in recent years.
Private equity activity was also notable, with four transactions crossing the $100m threshold. Elevated levels of investor capital were also reflected in record-high venture capital (VC) activity. According to a PwC and CB Insights report, the first quarter of 2018 saw an all-time quarterly high for biopharma VC investment of $4.1bn across 106 deals – 14 percent more in dollars, but six fewer deals, compared with Q1 2017.
Early dealmaking in January 2019 provided a morale boost following the slow end to 2018, with Bristol-Myers Squibb agreeing to acquire Celgene for $74bn, the biggest merger in the industry since Roche bought Genetech in 2009. January also saw an $8bn merger announced between Eli Lily and Loxo Oncology.
The oncology space, as highlighted by deals such as Bristol-Myers/Celegene, as well as Roche’s $1.9bn acquisition of Flatiron Health, is an increasingly attractive segment of the biotech industry. According to Credit Suisse, cancer drugmakers Clovis Oncology and Incyte, and gene therapy developers Sarepta Therapeutics and BioMarin, could be targeted this year. According to Vantage, interest in immuno-oncology may be tempered somewhat by failures of combination therapies in 2018, but there are still a number of combination catalysts which could boost this segment of the industry.
Patent expiry of a number of leading drugs in 2020 could also have a bearing on deal activity this year. Once these treatments – including therapies for HIV and cancer – drop out of patent, they will be susceptible to lower-cost copycat versions, posing significant competition challenges.
Furthermore, the US Food and Drug Administration (FDA) is planning to streamline the way certain products come to market. This could provide a welcome boost to the biotech industry, particularly in the medical device sector, where the existing approval process has hindered innovation in consumer health and wellness products. The FDA approved 59 new drugs in 2018 via its Center for Drug Evaluation and Research, mostly in the orphan and cancer drug categories.
Looking forward, 2019 has the potential to be another buoyant year for M&A in a biotech industry already renowned for consolidation. Though potential legislation limiting drug pricing in the US may dampen expectations, and the industry’s natural tendency to endure peaks and troughs may have a bearing on activity, pipeline pressures and R&D requirements are set to drive dealmaking forward.
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Richard Summerfield