Biotech M&A: will the 2018 surge last?

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ver the last 20 years, the pace of mergers and acquisitions (M&A) in the biotech and pharma industries seems to ebb and flow in waves. Identifiable surges in M&A activity have been seen in 1999-2002, 2004-2009 and, most recently, between 2014 and the first quarter of 2016. With biotech deal counts dipping in the second half of 2016 in the run-up to a momentous US presidential election and remaining low in 2017, analysts are now predicting a potential bounce-back over the course of this year.

2018 has certainly kicked off with a bang for biotech M&A. The headline news was made in January by heavyweight biotech Celgene and pharma giant Sanofi, which announced two multi-billion dollar acquisitions. Celgene acquired Impact Biomedicines for up to $7bn to add myelofibrosis treatment fedratinib to its portfolio, before spending a further $9bn on Juno Therapeutics, which specialises in chimeric antigen receptor T-cell (CAR-T) therapies for blood cancer indications, building on Celgene’s haematology experience and expanding its presence in cellular immunotherapy.

Sanofi spent January announcing two major acquisitions of its own, starting with its $11.6bn deal for recent Biogen spin-off Bioverativ, the company’s largest acquisition since its $20bn purchase of Genzyme in 2011. With the acquisition, Sanofi is enhancing its presence in haemophilia and rare blood disorders, and will look to leverage Bioverativ’s expertise to develop and commercialise recently-acquired RNA interference therapy fitusiran for haemophilia A and B.

Later that month, Sanofi beat out Novo Nordisk to acquire Belgian biotech Ablynx for $4.8bn, further building its blood-related assets with caplacizumab, a treatment for thrombotic thrombocytopenic purpura, for which Ablynx announced positive Phase III trial results in October last year.

“The signs are good for biotech deal activity in 2018,” KPMG global life sciences head Christopher Stirling told Reuters in January.

Positive signals have continued through this year’s first quarter and into the beginning of the second, including Alexion Pharmaceuticals’ announcement of its $855m acquisition of Swedish biotech Wilson Therapeutics in April, as Alexion looks to rebuild its portfolio after cuts last year, and bring to market Wilson’s principal drug candidate WTX101, which is currently in Phase III trials for rare congenital disorder Wilson disease.

The industry saw $47bn in M&A activity in the first quarter – up from just over $40bn in Q1 2017 – and the transactions announced in the first half of April alone amount to more than the deal value for the whole of last year’s second quarter. So what are the major drivers spurring this latest biotech M&A push?

The first factor to consider is one that has plagued big pharma for years, and is as big a problem now as ever: the patent cliff. With many blockbuster treatments now facing patent expiry, price pressure is sharp in many therapeutic areas. Lilly Diabetes and Lilly USA president Enrique Conterno noted during an earnings call that the company was feeling the squeeze on pricing “across all of our diabetes products”, while Merck president of global human health Adam H. Schechter echoed similar concerns on another call, as reported by The Street.

These pressures have been exacerbated by significant consolidation in the US healthcare sector, with payers coming together and new players such as Amazon looking to disrupt the market. With the time and money it takes to develop innovative R&D projects, large pharma firms will be looking out for biotech deals that could pad out portfolios in the meantime.

“It takes a long time to introduce technology that makes a significant difference, and in the interim CEOs are looking at any way to get their hands on product where they believe they can make a decent return,” Stirling told Reuters. “They’ve got to be seen to be doing things, otherwise they really struggle to convince investors.”

Major tax reforms implemented in the US by the Trump administration could also be fuelling a surge in large firms snapping up biotech innovators. With corporate tax reduced from 35% to around 21% and companies incentivised to repatriate cash held abroad, reticence over making big deals – especially as the industry waited to see how tax reforms would shake out – could now be a thing of the past.

“In 2017 and into 2018, the market eagerly anticipated biotech M&A, while uncertainty over tax reform held back deal making,” ClearBridge Investments healthcare analyst Marshall Gordon told Forbes in January. “Now that Congress has passed tax reform, buyers and sellers have clarity on tax rates and unfettered access to cash.”

As Sullivan & Cromwell partner Frank Aquila told the Financial Times: “The new US tax law puts more cash in buyers’ hands and lower rates make more deals accretive. It’s a powerful combination.” While some companies will focus more on their own businesses with the influx of cash – Pfizer ended 2017 with an increased dividend and the start of a $10bn share buyback scheme, for example – the availability of ready cash and the need to achieve growth in a challenging market is likely to continue spurring acquisition bids and merger prospects.

From a drug development standpoint, the US Food and Drug Administration under commissioner Scott Gottlieb has been pushing hard to both accelerate the drug approval process and create clearer guidelines for developers, which helps mitigate the regulatory risk involved in biotech deals.

Many big pharma executives have expressed enthusiasm for making big deals in the coming months, with Eli Lilly CEO, chairman and president David A. Ricks noting that “pre-proof-of-concept earlier clinical assets [are] the main target” and Pfizer CEO Ian Read remarking that his company has “the capacity to do both the small deals and the big deal when the moment arises”.

“I think everybody is looking at potential combinations and consolidations,” said Read on the same investor call at the end of January. “I can’t tell you when it will start but there will be moments when there’s a key detonator to initiation of further consolidation.”

With President Trump’s tax reform something of a detonator in itself, the market may be waiting for a massive merger or acquisition to kick off an M&A feeding frenzy in the biotech space. All eyes have swivelled to Dublin-headquartered Shire, which is currently fielding Takeda’s fourth merger offer of $61.6bn in cash and shares – could this be the detonator that sets off a new rush of deals in the second half of 2018 and beyond?

Only time will tell, but the biotech M&A scene seems set to bounce back strongly from a restrained 18 months.