A Covid-19 threat to business acquisitions

Even if the coronavirus pandemic wasn’t directly to blame for today’s scrapping of Aurobindo’s $900m buyout of Novartis’s generics brands it might have been the straw that broke the camel’s back. How many other pending acquisitions might face a similar fate?

To answer the question Vantage analysed open M&A deals on EvaluatePharma, and identified 20 healthcare-related transactions dating back to November 2018 that have been announced but have not yet been completed. Clearly not all risk being scrapped, but at the very least a delay or renegotiation are scenarios investors must now consider.

In terms of value three pending transactions stand out: Abbvie’s $63bn buyout of Allergan, Stryker’s $5.4bn bid for Wright Medical, and UCB’s pending acquisition of Ra Pharmaceuticals, worth $2.1bn.

The first is due to close in May after Abbvie agreed with the US FTC to divest brazikumab to Astrazeneca, and Zenpep and Viokace to Nestlé. For it to be completed on time relies on finalisation of paperwork, which during a global lockdown cannot be dismissed as a mere formality.

The Stryker/Wright deal is on shakier ground; after drawing the attention of the FTC the companies looked like struggling to meet a second half completion date – and that was before Covid-19 hit the west. The Ra takeover was to have closed in the first quarter, but as of today Ra remains listed on Nasdaq.

The more recent deals in this analysis, such as Gilead’s takeout of Forty Seven and Thermo Fisher's of Qiagen, will not necessarily be under threat since they were signed during the reality of Covid-19. The extent of the threat was perhaps not yet fully understood, however.

But for a typical pending transaction perhaps the biggest worry is that the pandemic will lead to a lengthy delay, by the end of which the target business’s valuation will have departed from the reality that had existed at the time the deal was struck.

The Novartis/Aurobindo termination could be a case in point. That deal, involving the Indian company paying $900m for some 300 US oral and dermatology brands in the Sandoz portfolio, had been signed all the way back in September 2018; 14 months later the FTC asked the companies for more information.

Today the deal was terminated by mutual agreement. The reason given was that FTC approval was not obtained within expected timelines, implying that it was no longer realistic to rely on a price agreed on so long ago. Covid-19 was not cited, but the prospect of it delaying completion even further cannot have helped.

Amendments?

Given the break fee that most deals carry, terminating by mutual agreement is a blessing. Failing that, the terms of a pending transaction could be amended to suit the new reality, but not without much negotiation and legal expense.

Also interesting is the imaging group Lantheus’s proposed takeover of the oncology company Progenics. That deal was struck last October, but in February its terms were amended to give Progenics holders a greater share of the combined entity. And today the Covid-19 lockdown caused the investor votes on the transaction to be postponed by two months to June.

This is the new reality that shareholders awaiting a takeover dividend have to contend with.