Creative dealmaking trends in the biopharmaceutical sector 

May 2015  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The global biopharmaceutical sector was worth an estimated £145bn in 2014 and is growing exponentially. This eye-watering figure, compiled by BioPlan Associates, provides compelling evidence of a sector generating considerable value. Accentuating BioPlan’s value deposition is data from leading research and advisory firm IMARC, which states that the biopharmaceutical sector will have an approximate worth of $150bn by the end of 2015.

Undoubtedly, the biopharmaceutical sector has played an important role in the prevention and treatment of many life threatening diseases over the last 30 years and at present there are more than 300 approved biopharmaceuticals, with many more at the latter stage of the approvals process and waiting in the wings to hit the market. This is certainly a long way away from when the first genetically engineered drug – the insulin Humulin (Recombinant Human Insulin) – was approved by the US Food and Drug Administration (FDA) back in October 1982.

Today, the biopharmaceutical sector is truly a global phenomenon, a multibillion-dollar concern involving myriad research & development, mergers & acquisitions, partnership agreements, and extensive market penetration analysis. Dealmaking in the sector is currently on a high with 2014, featuring a high number of major transactions, particularly in the US and Europe, involving biopharmaceutical companies and venture and private equity investors.

Creative biopharmaceutical dealmaking

According to HBM Partners in its ‘Pharma/Biotech M&A Report 2014’, an in-depth analysis of trade sales in the therapeutic drug sector of US and European biopharmaceutical companies backed by venture and private equity investors, 2014 was a record year for dealmaking in the biopharma sector.

The report made a number of key findings. In 2014 there was $219.4bn in worldwide biopharma M&A transaction volume, including completed and announced deals, asset deals and acquisitions of divisions. There was $81.8bn worth of upfront transaction volume of completed US and European biopharma company trade sales, up from $48.5bn in 2013. Overall deal value including contingent payments reached $87.7bn. There was an additional $78.8bn worth of announced US and European transactions, including the $66bn acquisition of Allergan by Actavis and the $8.4bn purchase of Cubist by Merck & Co. A further $45.6bn worth of transactions involved assets or divisions of US and European companies. Deal volume of biopharma acquisitions outside of the US and Europe reached $13.3bn. Mid-sized biopharma companies spent substantially more on acquisitions than traditional large pharma firms. Finally, 2014 was the best-ever exit year over the last decade for venture capital-backed US biopharma companies.

“Big Pharma are still striking big deals in order to remedy recent or approaching patent cliffs and high premiums are speaking to deal desperation,” suggests Surani Fernando, acting editor at the news and intelligence provider, BioPharm Insight. “Pfizer bought Hospira for $17bn in a bold move to steer its business heavily into the generics space, whilst Abbvie paid $21bn for Pharmacylics in a deal which highly overvalues its lead cancer drug Imbruvica.”

Diversification: AbbVie and Pharmacyclics

As the HBM Partners report attests, the past 12 months has been an extremely potent time for high profile biopharmaceutical deals – approved, rejected, and pending – with many of these demonstrating a degree of creativity in both intent and execution. Case in point is the acquisition of cancer biopharmaceutical company Pharmacyclics by its rival AbbVie – a deal worth in the region of $21bn and described by Richard A. Gonzalez, chairman and chief executive of AbbVie, as a “strategically compelling opportunity”.

As far as this transaction was concerned, AbbVie was actually a late entrant to the race and vied with Johnson & Johnson (as well as another as yet unidentified competitor) to secure the deal. The three way contest to acquire Pharmacylics was driven, in the main, by interest in the company’s crown jewel – Imbruvica – a cancer drug which many analysts believe will make an important impact on the oncology sector in the years to come. Indeed, AbbVie expects US sales of Imbruvica to hit $1bn in 2015 and forecasts worldwide sales to reach $5.8bn by 2020.

“The addition of Pharmacyclics’ talented and innovative team will add enormous value to AbbVie,” said Mr Gonzalez. “Its flagship product, Imbruvica, is not only complementary to AbbVie’s oncology pipeline, it has demonstrated strong clinical efficacy across a broad range of hematologic malignancies and raised the standard of care for patients.”

Delving into the detail of the deal reveals that AbbVie’s interest in Pharmacyclics, and Imbruvica, stemmed from the need for AbbVie to diversify its product portfolio as almost two-thirds of its revenues is generated by sales of its drug Humira, which is used to treat various autoimmune diseases and is the world’s best-selling medicine. Additionally, Humira’s patent protection is due to expire in 2016, potentially opening the floodgates to fierce competition from biosimilars.

A biopharma deal bonanza

Other high-profile deals completed in February within the biopharmaceutical sector include Pfizer’s purchase of Hospira for $17bn, Valeant’s acquisition of gastrointestinal drugmaker Salix for $14.5bn, and Shire’s $5.2bn deal for NPS Pharma. By the beginning of March 2015, M&A in the biopharmaceutical and biotechnology sector reached a staggering $70bn – more than double the level of activity seen in the same period last year.

So what has been driving the plethora of dealmaking activity in recent times? EY’s January 2015 ‘Firepower Index and Growth Gap Report 2015: Firepower fireworks. Focus, Scale and Growth Drive Explosive M&A’ signals more of the same to come, so how do we account for these record-breaking figures continuing through 2015 and perhaps beyond?

“Driven by tax efficiencies and a desire for greater scale, mid-sized pharma companies were the most active buyers in 2014, with a 60 percent share of overall deal value,” observes Dr Emil Bujak, an analyst at HBM Partners. “Actavis led the pack with its acquisitions of Forest Labs and Allergan, which reached $94bn in deal value. This exceeds the value of all M&A deals made in 2012 and 2013 combined. Big Pharma is focused on consolidation of their portfolios, mainly through innovative asset swaps, with the Novartis and GlaxoSmithKline deal being the most notable – agreed in April 2014 but only completed in March 2015 due to its complexity. And huge interest in immunotherapy was transferred onto the M&A arena, with BMS acquiring the preclinical immunotherapy specialist Flexus Biosciences for $800m upfront in 2015.”

The competition for novel and differentiated assets is as fierce as ever, notes Ms Fernando. “Big biopharmaceutical firms are showing their anxiety by striking high premium deals for small but scarce differentiators and sealing them early to avoid bidding wars. High premiums are also being observed in licensing deals shown by the likes of BMS agreeing a deal worth $975m for Bavarian Nordic’s prostate cancer vaccine Prostvac,” she says.

According to Ellen Licking, a senior analyst in EY’s Global Life Sciences Sector: “While Big Pharmas focused on rationalising their portfolios primarily via intra-pharma transactions, specialty pharmas delivered the biggest deal headlines of the year as they sought to gain the scale necessary to be competitive in a challenging global pricing environment.”

A tight regulatory environment

The biopharmaceutical industry is tightly regulated by authorities across the globe, with scrutiny perhaps at an all-time high. The regulatory landscape is constantly evolving in response to product safety, new technologies, stakeholder and customer requirements and improved understanding of disease states – imperative given the expanding scope and global reach of the industry.

“The current regulatory environment still imposes stringent requirements and reviews for drug’s seeking approvals,” says Ms Fernando. “However, regulators are easing up requirements and lowering pre-approval bars for breakthrough therapies and drugs serving unmet needs for life threatening conditions. Companies are starting to take more diligence with gaining advice from the European Medicines Agency and FDA on approval pathways. Accelerated approvals, breakthrough designations, priority reviews, and conditional approvals are examples of pathways that help to ensure the best and most clinically meaningful research is reaching the market without unreasonable regulatory delay.”

With the number of new drug FDA approvals reaching a record 44 in 2014 – where only 3 in 10 are approved – the regulatory environment appears to be very supportive of innovation and development, suggests Dr Bujak. “Expedited approval programs, such as breakthrough therapy, priority review, together with other incentive programs set up for drugs addressing orphan, infectious, rare paediatric and tropical diseases, have been actively pursued by the industry, with two-thirds of the 2014 new drugs falling into one of these categories,” he says.

2015 and beyond

As the biopharmaceutical sector continues to flex its muscles as we proceed further into 2015, what seems certain is that things are likely to remain rosy for some considerable time. Indeed, IMARC’s ‘Research and Markets: Global Biopharmaceutical Market Report & Forecast (2012-2017)’, which projects a global biopharmaceutical market with sales in excess of $166bn by 2017, could prove to be an understatement.

So going forward, what are the transaction-related challenges facing the biopharmaceutical sector? Is the sector currently in a ‘healthy’ place and what is likely to determine or undermine future growth? Moreover, what steps can companies take to help maximise their opportunities for dealmaking success?

“We expect 2015 to be a year of robust and highly competitive M&A activity in the biopharma industry, marked by a continued rise in deal premiums,” suggests Glen Giovannetti, EY’s global life sciences leader. “This will be challenging, especially for some big pharma firms still in need of acquisitions to meet market growth expectations.”

As biopharma and biotech firms continue to deal with R&D and regulatory challenges, pricing discussions are now posing the biggest pressures, notes Ms Fernando. “Price pushback has proven to be a real setback for European drug launches with government cuts for drug spending. However, the privatised US market is expected to increase its scrutiny of unjustified premium prices. Biotech is entering an era where commercial issues are becoming a pertinent early discussion point, and more diligence is needed with R&D and manufacturing planning to ensure return on investment is a guarantee and not a gamble at drug launch,” she adds.

After the $220bn worldwide biopharmaceutical M&A transaction volume seen in 2014, the industry is likely to continue splashing out on new deals in 2015. “A strategic push towards making focused franchises backed by the drive to bolster revenue growth, either through further divestitures or acquisitions, will continue to drive the M&A biotech market,” says Dr Bujak. “The ‘hot’ market resulted in an increased number of higher upfront value deals with smaller contingent payments. However, as increased valuations might prevent some players from buying, we will probably see more option to acquire agreements for early stage assets that could drive future growth.”

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Fraser Tennant