Pharma M&A on the up as R&D slides

June 2016  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

M&A activity in the pharmaceutical sector has enjoyed a bumper last few years, with many companies embarking upon dealmaking splurges, including mega-mergers. In total, between the beginning of 2014 and Q3 2015, more than $850bn worth of pharma transactions were announced. Last year was phenomenal for pharma M&A, giving rise to the biggest-ever announced pharma transaction at $160bn.

However, while big ticket deals have grabbed the headlines, activity has not been restricted to mega-mergers; smaller and mid-market pharma companies have also gotten in on the act. Biotech firms have been popular with pharma companies looking for their next profitable product. Dealmaking in the pharma sector reached a record $395bn in 2015. Thirty-one biotech M&A deals worth $18.2bn were completed last year, and though there were some fears that pharma dealmaking would peter out this year, activity has continued.

Deal drivers

Much of the activity seen in the last two years has been driven by a combination of inversion deals, diminishing product pipelines and heightened competition from the biotech space. Pharma firms have pursued deals across the sector hoping to lock down attractive product pipelines and beat their competition to the punch. Big Pharma has utilised the ever controversial inversion deal to reduce tax. By taking the opportunity to re-domicile in jurisdictions with markedly lower taxation rates, US firms have saved themselves billions of dollars in tax revenue – and attracted the ire of politicians and the public alike.

However, recently announced measures by the US Department of Treasury have seemingly brought an end to the inversion gravy train. The Obama administration has, for a number of years, attempted to close the inversion loophole which has denied the country trillions of dollars of tax revenue. Until recently, the measures employed by the administration have been unsuccessful. However, new tax rules announced in early April have taken aim at ‘repeat offenders’ and already scuppered one mega-merger – Pfizer’s $160bn proposed merger with Irish rival Allergan. Though it is too early to tell, the latest moves by the Treasury may have closed the inversion route to many US firms permanently. Yet dynamic firms will undoubtedly be working on an alternative route around the inversion roadblock. In the short term, the flood of inversion deals we have seen in recent years will likely dry up.

That is not to say that pharma dealmaking itself will subside; indeed, much of the transactional frenzy of the last few years has been driven by companies ‘buying growth’. Mid-level companies and biotechs have been ramping up the pressure on traditional and Big Pharma organisations; with their own pipelines developing rapidly and the patent protection of several blockbuster products expiring, smaller and more dynamic biotechs have emerged in recent years as genuine threats to Big Pharma. The patent expiry of these blockbuster products should not be ignored when factoring in the glut of recent transactions in the pharma space. Oncology and autoimmune areas in particular have proved popular with acquiring firms looking to strengthen their offerings.

The pharma industry’s response to the patent challenge has been to acquire biotech companies, many of which have their own products either on the market or in the final stages of testing. AstraZeneca has successfully used this tactic, acquiring several biotechs in 2015 to strengthen the company’s pipeline of respiratory, cardiovascular and oncology products.

Companies with deep pockets are prepared to allow smaller and more focused biotechs to develop products and acquire them at a later date. Access to capital is one of the most important features of these deals, and Big Pharma is in a strong financial position. The commercial platforms available to some of the industry’s bigger players – including AstraZeneca and GSK – position them to market some of the industry’s newest and hottest products.

Moving forward

The pharma space has changed considerably in recent years and the remainder of 2016 and beyond will likely see that transformation continue. The scrapped Pfizer/Allergan deal may have an impact, too. Allergan, a global specialty drug and generic-drug maker, will likely return to the market a more attractive proposition to investors as it begins the process of pursuing fresh M&A deals. The company’s coffers will have been boosted by the $4.5bn it received following the finalisation of the sale of its generics division to Teva Pharamceuticals. Since the company has relied on M&A to build growth, it is unlikely to change course now.

As trends and tastes change, and regulatory efforts look to curtail certain types of deals, expect the industry to respond. Though investor sentiment around pharmaceutical dealmaking is wavering – data from the Financial Times suggests that in the second half of 2015, more than 50 percent of pharma deals worth more than $1bn facilitated a drop in the share price of the acquirer company in the next day's trading – buying small biotech firms is the most efficient means by which Big Pharma will be able keep their future product pipelines well stocked, and stay ahead of the competition.

© Financier Worldwide

BY

Richard Summerfield