Biopharma companies have the cash and are ready to deal

PharmaVitae M&A Outlook 2018 predicts that merger and acquisition (M&A) activity will remain robust at least through the rest of 2018, due in large part to a favorable tax environment. The lower tax rate, coupled with the ability to “repatriate” untaxed profits stored abroad at a one-time rate of 10 percent, will allow biopharma to allocate capital toward higher-risk deal making.

“The availability of cheap debt and strong balance sheets has provided big biopharma companies the financial firepower they need to make these deals and overturn sluggish growth prospects in the face of patent expiration of their key drugs,” observes PharmaVitae analyst Oliver Spray.

Companies will continue to use disciplined M&A as a vehicle to sharpen strategic focus. He identifies three areas of activity.

  1. Targeted biotech deal-making: “We think that small biotechs with very highly focused development portfolios present very appealing targets for big biopharma companies,” Spray says. Through these deals, the larger companies can effectively outsource the product development, reducing the risk associated with development costs. There is a downside, however: These companies may be small, but they come with a substantial price premium. Still, it’s a price many–but not all–large biotechs are willing to pay. Some, concerned about valuations in fiercely contested therapy areas, are opting for in-house development of products instead.
  2. Manufacturing M&A: Following wider consolidation across the whole supply chain, PharmaVitae anticipates another cycle of M&A in the manufacturing industry itself. “For example, we expect Pfizer to leverage its core competency in large-scale M&A; this will spark a wider consolidation within the manufacturing industry.”
  3. Impact of Amazon and similar disruptors: The threat of incursion from large technology companies such Amazon will prompt deal making. He expects large biopharma companies to find ways to increase their capabilities and technology and “really stake a claim in a healthcare industry that is going to be swayed by technology in the future.”

On the lookout

Spray points to Amgen as an example of a major company looking to make a deaI. It has a tremendous amount of overseas cash, and it faces the patent expiration of its lead drug Enbrel.

“Its pipeline is starting to look depleted compared to the competition, and its newer offerings are unlikely to make up for the loss of the Enbrel patent,” he says.

Likely targets

The PharmaVitae M&A Outlook 2018 report identifies 27 targets across a range of sizes and assets. Spray touched on three.

“In terms of bolt-on deals worth between $2 billion and $10 billion, you have companies that own a limited number of clinically proven assets,” Spray says, pointing to Tesoro, which recently won approval for its PARP inhibitor Zejula.

Other potential targets have much-earlier-stage assets, he notes. They cost less, but come with greater risk; Cellectis, which is developing an allogeneic Car-T therapy, is one example.

Some larger companies–valued at over $10 billion–hold particular appeal for the big biopharmas that have the financial capacity to make such deals. Vertex, for instance, which has successfully launched several cystic fibrosis drugs, would be an attractive acquisition target, he says.

“M&A is proving to be an effective solution for companies looking to propel their strategic goals,” Spray says. “We expect deal-making to accelerate in 2018.”