Pharma and biotech M&A activity to hit fresh highs in 2018

Hyesung Lim

The year 2018 is set to be an M&A heavy one for the pharmaceutical industry, as companies look to boost drug portfolios, offset revenue declines from patent expiries, and compete with innovative rivals. The U.S. tax overhaul and repatriation of overseas cash is expected to inject billions into big pharma, boosting the incentive to snap up smaller and younger biotech groups.

Pharmaceutical companies have announced a total of almost $40bn life science and biotech deals since the beginning of this year, marking the strongest start to healthcare sector M&A activity since 2007. The biggest drivers of this surge have been revenue declines resulting from patent expiries in blockbuster drugs, price pressures exerted by alternatives and biosimilars, and the ongoing race to acquire innovative precision therapies. “The pressures at big pharma look to be increasing, with 90 percent of prescriptions in the U.S. now for generics… so that pushes companies to look at cutting-edge therapies,” says Andy Smith, a former fund manager. The deals announced so far have been on an average 81% premium to the undisturbed share price of acquisition targets, far above the 42% seen in 2017. The willingness of big pharma to pay such hefty prices underscores their need to revive R&D and boost their mid-late stage pipeline portfolios.

The drive for M&A activity is likely to be fuelled by a tax overhaul in the US. The dramatic reduction in corporate tax, from 35% to 21%, and repatriation of offshore cash is expected to inject excess money into the pharma sector. There is widespread anticipation that the cash will be used to fund share buybacks, higher dividends, and acquisition of promising drug assets from top biotech firms. According to hedge fund Case Equity Partners, “U.S. companies with lots of cash trapped overseas can now put capital to work in the global M&A market… 2018 is therefore expected to be immensely active with multiple competitive auctions at significant premiums.”

The biggest players so far in deal negotiations have been Sanofi and Celgene, whose acquisitions have added up to more than $26bn combined. In January, Sanofi finalised an $11.6bn deal to acquire Biorativ, securing the haemophilia focused group at 64% premium to the closing price of $64.11 per share. This was followed by another $4.8bn deal to buy Ablynx, a Belgian biotech group that makes Caplacizumab, a drug for the blood disorder acquired thrombotic thrombocytopenic purpura (TTP). Growing competition and pricing pressures on established medicines were a major reason for the French pharmaceuticals giant to pursue dealmaking within niche disease areas. Celegene also directed its focus on haematology and oncology, striking a $1.1bn deal upfront with Impact Biomedicine to acquire Feratinib, a drug in development for haematological cancers such as myelofibrosis and polycythemia vera. Impact will receive up to $4.5bn more in additional milestone payments depending on the success of late stage trials and regulatory approval by the FDA. Celgene also finalised a $9bn deal with Juno Therapeutics to buy the latter’s chimeric antigen T-cell therapy (CAR-T), which is in phase II trial for refractory diffuse large B-cell lymphoma (DLBCL) and non-Hodgkin lymphoma (NHL). The blood cancer drug is projected to hit global revenues of $3bn following an expected approval in 2019. By joining the race for immunological oncotherapies as a late market entrant behind Novartis’ Kymriah and Gilead’s Yescarta, Celegene hopes to counteract a predicted fall in revenue resulting from patent expiry in its blockbuster cancer medicine Revlimid in 2022.

The dramatic rise in January’s M&A activity is forecast to continue throughout this year, with Merck, Pfizer, and Amgen anticipated as the next big players in biotech dealmaking. With regard to acquisition targets, interest is strongest in companies that lead pioneering R&D in haematology, oncology, rare diseases, and gene therapies. Spark Therapeutics is one such company, with its $850,000 gene therapy Luxturna winning FDA approval as a one-off treatment for blindness. BioMarin is another pioneer in gene therapy, developing a highly anticipated pipeline drug for haemophilia A. In the field of cancer, Clovis Oncology and Puma Biotech are those best positioned for M&A deals. The former is an Arizona-based life science group with an ovarian cancer drug Rubraca and a market cap of $3.32bn. The latter won FDA approval for a breast cancer drug Neratinib and has a slightly larger market cap of $3.59bn. Bluebird Bio’s CAR-T therapy and Sage Therapeutics’ antidepressant brexanolone are also considered strong candidates.

With US FDA drug approvals hitting a 21-year high and 46 novel medicines now awaiting acquisitions, the global healthcare industry is poised to see a 50% rise in M&A activity this year, up from the $200bn seen in 2017 and with North America accounting for the biggest chunk of transactions.

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