Is January’s M&A a flash in the pan, or does it signal sustained dealmaking heat

January 10, 2019 | Company

Melanie senior

2019 started with a bang for pharma M&A: by January 7, $82 billion worth of shopping had been announced. Bristol Myers Squibb’s $74 billion cash and stock offer for Celgene on New Year’s day is the fourth-largest deal ever. It was followed days later by Eli Lilly’s $8 billion purchase of Loxo Oncology.

To put that $82 billion into context: 2018’s tally of $1billion-plus pharma acquisitions was about $115 billion, according to Informa’s Strategic Transactions. To achieve more than three quarters of that in the very first week of January is remarkable, even if 2018’s M&A activity ended up being relatively lacklustre.

Indeed, January shopping splurges do not always last. In the first month of 2018, four deals clocked up about $27 billion worth of M&A (including Sanofi’s acquisitions of Bioverativ and Ablynx, for $11.6 billion and $5.1 billion respectively). Celgene itself was also among the early buyers, paying a whopping $9 billion for CAR-T company Juno, and $1.1 billion up-front for Impact BioMedicines (billions more are due if Impact’s myelofibrosis candidate, fedratinib, is approved). Reporting on the Juno deal in January 2018, Bloomberg reporters speculated that “dealmaking activity may be picking up, after a sluggish 2017.”

Despite US tax cuts that left many pharma giants flush with cash, and continued pressures on prices, pipelines and patents, the anticipated M&A wave did not come. Takeda’s pained, fifth-time-lucky acquisition of Shire, in May 2018, made the biggest splash, at $61.2 billion.

This year, with biotech valuations lower than they have been for months, executives at the annual JP Morgan event in San Francisco are all talking about M&A. Gilead Sciences’ CFO said mergers were the group’s “primary focus”. Merck & Co. chief Ken Frazier says they’ve been trying to buy.

But a growing number of pharma CEOs have been downplaying mega-mergers over the last 12-18 months, and those voices are still there. Pfizer CEO Albert Bourla has shunned larger deals in favor of smaller ones, and continued to warn at JPM 2019 against a “destructive” transaction. Few pharma mega-mergers over the decades have created value. They might have plugged some short-term revenue holes, but these complex, messy transactions have more often stalled than re-invigorated R&D. Integrating large teams of scientists and commercial operations can take years. “Historically, big deals have not worked out,” said Novartis CEO Vas Narasimhan at JPM 2019.

Innovation is increasingly widely spread across the globe. Technology progresses faster and faster. These dynamics call for broad, flexible, externalised R&D networks and partnerships, rather than for ever-larger in-house activities. They call for pharmaceutical firms that are more agile and more digital, not bigger.

M&A won’t go away. But more focused, smaller deals may be the ones that build sustainable value tomorrow, even if they don’t catch the headlines today.