FRENZY: The Life Science M&A in 2015 Compared to 2005
October 26, 2015
By Mark Terry, BioSpace.com Breaking News Staff
According to Dealogic, from the beginning of January 2015 to September 4, there were 302 mergers and acquisitions in the U.S. biotech and pharma industries for a total of $235 billion. In 2014, the number was around $202 billion.
Going back a decade to 2005, we can see, according to an HBM Pharma/Biotech report, there were about $25.5 billion in transactions in the pharma and biotech markets, with about $81.4 billion in 2006.
“Has this trend truly ever stopped?” says Harry Glorikian, a Boston-based senior executive, board director and healthcare consultant. “The numbers change or the deal sizes change, but the trend has been this way for some time now.”
There appears to be several key drivers behind the most recent M&A activity, although it’s doubtful if all of it is new.
Five Long-Term Factors
There are—at least—five factors that have been driving M&A in the biopharma industry for many years, and likely drive M&A in every industry.
1. Buying Innovation.
Time and time again, the key aspect of a larger pharma company buying a smaller pharma company or a biotech company is to acquire the smaller company’s technology or promising drug. Sometimes they even get several marketed products in the deal.
One example from this year is Dublin-based Shire ’s acquisition of Bedminster, N.J.-based NPS Pharmaceuticals for $5.2 billion in January. In addition to the company, Shire picked up Gattex, a drug to treat short bowel syndrome in the U.S. NPS was also working to get it accepted in Europe. Another of NPS’s products, Natpara, was approved in Europe for hypoparathyroidism (HPT) and is under review in the U.S. In essence, Shire invested in the company in order to better market NPS’s products worldwide.
“Big pharma continue to move to buy biotech companies with promising drugs in development, later stage development, typically,” says Dane Hamilton, U.S. Healthcare Editor for Mergermarket. “For example, Sprout, which just got bought by Valeant . Valeant’s strategy, like Shire, is they don’t develop anything in-house, they basically buy companies and sell their products.”
Valeant may be the poster child for such a strategy, having been involved in at least seven acquisitions this year alone (so far) and over 100 since 2008.
Baxalta , which spun off from Baxter in July, recently indicated that it’s business strategy is essentially to buy promising companies or technology. John Orloff, Baxalta’s chief scientific officer, told Boston Business Journal, “We’re kind of a ‘small R, big D.’ Our whole approach is one based on external innovation.”
2. Patent Cliff.
It’s not new that patents for drugs are expiring, and in many cases, there are generic companies waiting to launch generic products the instant they do. In a 2014 article on Drugs.com by Leigh Anderson, it was reported that drug spending in the U.S., as part of global drug spending, was projected to drop from 41 percent in 2006 to 31 percent by 2016. The primary causes were patent expirations and slower brand growth.
For example, in 2012, patents for brand name drugs Plavix, Singulair and Viagra all expired.
Well known expirations in 2015 include Gleevec and Avodart in the U.S., Symbicort and Spirita in Japan, Cymbalta in Japan, France and Germany, among others.
In 2016, well known drug expirations will include Crestor, Benicar and Cubicin.
Anderson wrote, “Patent expirations up to 2016 will reduce brand spending in worldwide developed markets by $127 billion, but will be counterbalanced by generic spending, resulting in a five-year global savings of close to $106 billion.”
The generics and biosimilars market is growing and several of the biggest acquisitions have revolved around it. The biggest acquisition in 2015 in this area was Israel-based Teva Pharmaceutical Industries Ltd. buying Allergan 's generic drug business for $40.5 billion on July 27, 2015. The deal is expected to close in the first quarter of 2016.
On Sept. 3, 2015, Philadelphia-based Lannett Company announced it was buying Kremers Urban Pharmaceuticals for $1.23 billion. Kremers Urban is the U.S.-based specialty generic pharmaceuticals subsidiary of Belgium-based UCB S.A.
“There are a fair number of multi-million dollar drugs going off-patent,” says Hamilton, “and companies like Perrigo Co. and Teva and Mylan are right on the heels of those companies with generic versions of best-selling drugs.”
3. Focus on Core Areas.
In some cases, companies either are attempting to unload portions of their operations that aren’t as profitable as other areas, and vice versa, companies may attempt to acquire companies or business units that bolster their core activities. Perhaps the biggest—and possibly most complicated—example of this is the three-part transaction that was announced in late January between UK-based GlaxoSmithKline and Swiss-based Novartis .
In that deal, GSK acquired Novartis’s vaccines business, except its influenza vaccines. They also created a consumer healthcare joint venture. GSK sold its oncology portfolio and related research and development activities to Novartis, as well as the rights to two pipeline AKT inhibitors.
4. Tax Inversions.
A tax inversion is when a U.S.-based company acquires a company headquartered in a country with a lower corporate tax rate. The merged companies then shift their domicile to the country with the lower tax rate.
The most prominent example of this is an “almost-happened” deal—Chicago-based AbbVie made a $54 billion takeover bid of U.K-based Shire in July 2014. However, in September 2014, U.S. Treasury Secretary Jacob Lew laid out new rules to discourage those types of deals. At least partly as a result of the new rules, the deal fell through.
Other prominent deals included a 2014 acquisition of Irish company Covidien by U.S.-based Medtronic , and a 2013 deal where Perrigo acquired Irish company Elan .
Another, slightly more complicated example, is the February acquisition by Pennsylvania-based Mylan’s acquisition of Abbott Laboratories ’ non-U.S.-developed markets specialty and branded generics business. They then formed Mylan N.V., which is headquartered in Amsterdam, the Netherlands. That deal cut the company’s U.S. tax rate from about 25 percent to 21 percent this year, and it will drop into the teens over the next three to five years.
This deal has its irony. It was announced in 2014, and closed in 2015, but when Mylan became the target of a potential hostile takeover by Israel’s Teva Pharmaceuticals, Mylan asked the U.S. Federal Trade Commission (FTC) to investigate Teva’s stock purchase for violations of antitrust regulations. U.S. regulators and politicians were not particularly sympathetic.
Although tax inversion deals are likely still part of the strategy, they seem to have slowed down. “I’ve talked to a couple of companies,” says Hamilton, “and they’ve said they would be happy to do an inversion or some kind of inversion deal.” After all, he points out, “For a company looking at an inversion, the Treasury Department can’t really block it from buying an overseas company. You can discourage it. Treasury can say it’s going to really look at the deal’s tax structure, or the IRS is breathing down your neck, but Treasury can’t block it any more than they would say they were going to stop the mergers and acquisitions market here. Companies will continue to do inversions, but probably not as high profile as when AbbVie was looking at buying Shire.”
5. Earnings.
Not exactly a revelation, but companies, especially publicly-traded companies, exist to increase revenue and to drive up their share price. Every industry utilizes mergers and acquisitions to bolster earnings. What is at least partially behind the latest explosion in the U.S., the drug industry is facing a fair amount of backlash from payers over the costs of drugs.
“The U.S. is by far the most lucrative market for drugs, but there’s a certain amount of pushback on drugs, and public outcry about expensive drugs like Harvoni and Sovaldi, that affects the whole political environment,” says Hamilton.
Those two drugs, for example, both marketed by Gilead , run about $1,000 per pill, or about $85,000 per annual course of treatment. As Hamilton points out, the companies argue that drug research is extremely expensive and unpredictable, and the high costs of certain drugs are a way of paying for that research. Then a consumer group will rebut, presenting a study that shows that most of that research money is spent on acquiring companies and marketing. “The truth lies somewhere between these competing groups,” says Hamilton, “but the fact is there’s some pushback by major payers and funders of drugs. So that’s also driving acquisitions.”
Two Short-Term Factors
Actually, one of the short-term factors is mentioned above—a certain degree of uncertainty about reimbursement and the healthcare environment. As the Affordable Care Act (ACT) continues full implementation, there is still some concern about drug reimbursement and a push toward pay-for-performance as opposed to fee-for-service, which is still very much the status quo in the U.S. healthcare system.
Speaking recently with the Swiss magazine Le Temps, Joe Jiminez, chief executive of Novartis discussed the company’s attempts to try a pay-for-performance pricing model for its cardiovascular drug Entresto in the U.S. The idea was to sell the drug to some customers at a discount, but if the drug reduced the need for hospital visits, Novartis would receive additional payment.
“In the United States, we proposed to insurers a differentiated price calculated according to length of stay,” Jiminez said. “Few insurers entered the field. They told us that the system was too complicated.” Instead, the drug price was set at about $4,500 per year.
Another factor, that is presumably short term, is the low cost of money. In discussions with bankers, Hamilton notes that they are encouraging companies to get loans now while the interest rates are low. “Get the deals done before interest rates rise,” he said. “They’re at a historical low now. So the bankers are pushing these deals, saying, ‘Dare to be great!, you’ve got the resources to do this now! It generates more earnings, you get a better rating from the investor community, earnings grow,’ they say. And CEOs are under a lot of pressure to generate revenue.”
Nicole Fisher, president of HHR Strategies, and a contributing writer to Forbes, says, “We’ve seen a lot of things collide in the last few years, collisions with markets, with technology, with healthcare reform, all kinds of incentives. Patent expiration is a piece of it. I think companies are starting to experience a lot of new risk and having to spend more money to mitigate that risk.”
Compared to 2005?
In a survey by HBM Pharma/Biotech published in 2009, comparing the M&A activity in biopharma from 2005 to 2008, the authors wrote, “Since 2005, the number of trade sales of U.S. and European biotech and specialty pharma companies has steadily increased. Each year, at least 20 venture-backed life science companies were sold. The number of other private companies sold (family-owned and previous buyouts) showed a steady increase. Most striking was the doubling of larger public transactions from around 10 annually during 2005 - 2007 to over 20 in 2008. It seems that, during 2008, buyers took advantage of the low valuations of some public biotech companies.”
The overall upfront transaction volume was $21 billion in 2005, according to that study, $27.5 billion by another study. Either way, it’s only about 10 percent of this year’s $235 billion to date.
The biggest deals of 2005, according to The PharmaLetter, are listed below.
Biggest M&A Deals of 2005
*In fact, the J&J-Guidant deal fell through and litigation has dragged out into 2015. J&J agreed to buy Guidant in 2004 for $25.4 billion. Before completion, Guidant recalled products, and J&J renegotiated at a price of $21.5 billion. Under terms of the deal, Guidant couldn’t seek a better offer, but could consider one if offered. Just before J&J was to close, Boston Scientific offered $25 billion. Because of antitrust regulations, Boston Scientific agreed to divest Guidant’s vascular business, eventually finding Abbott Laboratories as a potential buyer. Meanwhile, J&J twice raised its bid. Boston Scientific eventually paid $27 billion for Guidant. J&J sued Abbott over violations of the merger agreement. In 2015, Boston Scientific paid J&J $600 million, well under the seven billion in damages that J&J sought.
Looking at a few of these deals, it’s clear that some things haven’t changed. For example, Teva’s acquisition of IVAX created the largest generic drug company at the time. Novartis AG’s acquisition of Hexal and later Eon Labs, also helped to bolster the company’s presence in the generics market.
Allergan’s acquisition of Inamed strengthened its market position in cosmetics. Inamed manufactured breast implants, facial wrinkle treatments and obesity treatments such as Lap-Band. Allergan is best known for selling Botox.
Pfizer’s acquisition of Vicuron also brought along two of Vicuron’s products, anidulafungin for fungal infections and dalbavancin for Gram-positive bacterial infections. The deal was intended to strengthen Pfizer’s position in the anti-infectives market.
Shire’s acquisition of Transkaryotic Therapies was intended to expand the company’s market for specialty pharmaceutical markets, bringing in two approved products, Replagal and Dynepo, and two late-stage clinical development products, Iduronate 2 sulfatase and Ga-GCB.
There were numerous small deals in 2005, which seem to be more indicative of companies acquiring potential products and technology. For example, Cephalon, Inc. acquired Salmedix for $164.8 million. Salmedix had a product, Treanda (bendamustine hydrochloride), and it was in Phase II clinical trials in the U.S. and Canda for indolent non-Hodgkin’s lymphoma (NHL) at that time.
The More Things Change...
It’s quite possible that the only real differences between 2005 and 2015 is the pace at which the deals seem to be occurring. Certainly many of the factors haven’t changed at all—strengthening position in the market, buying technology and potential products, bringing on companies or products to replace products that will be facing competition, consolidation of the generics market, to name a few.
“The drivers tend to be a number of factors,” says Glorikian. “Filling the pipeline is one, consolidation is another and then divestitures to allow the organization to focus is another. So there is no one driver. Strategies to each organization tend to be unique.”
But one thing is clear—M&A activity is in a frenzy and the year isn’t over yet.