Encouraging 2011 M&A trends seen but big pharma inactivity concerning
Merck & Co’s $430m acquisition of Inspire Pharmaceuticals is the only takeout of a pure play drug developer struck by big pharma so far this year, an analysis of M&A activity across the sector reveals. Although big biotech and specialty pharma remain active on the acquisition front, concerns about worrying signals of inactivity from a group which offer one of the main exit routes for private biotechs and their investors appear well placed.
More encouraging, however, is the continued increase in average deal values, although the impact of recent stock market turmoil has yet to be realised – the average M&A deal of $628m so far in 2011 is almost comparable with the pre-credit crunch average of $664m from 2007. Significantly bolstering that average is Takeda’s $13bn purchase of Nycomed, which accounts for a third of the total $38.3bn in M&A deals so far this year (see tables below).
No big deal
The table below, extracted from EvaluatePharma, shows annual totals for M&A activity related to pharmaceutical or biotech targets. It does not include transactions in other sectors such as medtech, diagnostics or animal health – for example it excludes Johnson & Johnson’s $21bn purchase of Synthes.
The count and value of M&A all deals are assigned to the year in which the deal was initiated, not completed, as this reflects more accurately the driving forces and strategies in place at the time a given company makes such a major decision.
For example Sanofi’s $20bn acquisition of Genzyme, which finally completed in April, was initiated by the French pharma giant in August last year and is therefore classified as an M&A deal in 2010 – this reflects the time at which Genzyme’s share price was struggling due to major manufacturing issues, prompting Sanofi’s opportunistic move.
|Annual Pharmaceutical M&A Activity|
|Deal Date||Total Deal Value ($bn)||Total Deal Count||Total Deal Value ($bn), excluding mega-mergers *||Mega-merger deal count|
|* Mega-mergers: Pfizer+Wyeth, Merck & Co+Schering-Plough, Roche+Genentech, Novartis+Alcon (3 parts)|
While the number of M&A deals, 90 so far, looks set to match the annual totals set in recent years, at face value the total dollar amount being committed in 2011 seems low.
However, excluding the mega-mergers from the totals – such massive deals which skew and obscure underlying trends – and the $38bn recorded so far is more encouraging and could match the increase seen last year, which itself was significantly higher than the credit-crunch era of 2008-2009.
While there may not be a really chunky M&A deal this year to get the juices flowing – the Takeda-Nycomed deal is decent at $13bn but well short of mega-merger status and fails to capture the imagination quite like Sanofi-Genzyme did – average deal values show encouraging signs.
The table below, which again excludes the mega-mergers, shows the average values using only those deals with disclosed terms. Of the 90 deals so far in 2011, deal terms were disclosed in 61 transactions which account for the $38bn in total value. This generates an average value of $628m, a further improvement on the significant increase seen last year (Deal values show signs of recovery in 2010 as M&A drive continues, January 18, 2011).
|Average deal values for disclosed deals|
|Deal Date||Value ($bn)||Disclosed deal count||Average deal value ($m)|
|*excludes Pfizer+Wyeth, Merck & Co+Schering-Plough, Roche+Genentech, Novartis+Alcon (3 parts)|
The number of disclosed M&A deals in each year has stayed remarkably consistent, yet the average values show a logical trend from before, during and after the credit crunch.
Since the lows of 2008 and 2009, global stock markets posted decent gains through 2010 and most of this year which undoubtedly helped drive up the valuations of public and private companies. However, the dramatic stock market declines over the last few weeks threatens to undo a lot of this progress so it will be interesting to see how deal values fare for the rest of the year.
What’s happening at big pharma?
While deal volumes and values look encouraging, one intriguing twist is that big pharma has played virtually no part so far. This is reversal of the trend seen last year (Big pharma continues M&A spending spree in 2010, January 18, 2011).
None of the top ten pharma-related M&A deals initiated so far this year have come from a big pharma company, as the table below shows. Indeed, Merck’s purchase of Inspire only ranks as the 20th biggest deal.
Possible explanations include cash being redirected to major share buy-back programs, internally-focused cost-cutting initiatives and a dwindling number of viable targets (Sanofi-Genzyme deal leaves few biotech targets standing, February 16, 2011).
The last few years have seen major shifts in the strategic direction of big pharma companies, forced upon them by the patent cliff and drying pipelines. This has produced a flurry of M&A, from mega-mergers to bolt-on deals to fill pipeline gaps and secure new technology platforms.
Most of these companies, many with new chief executives, could now be considered to be in consolidation or ‘wait and see’ mode to give time for newly embedded strategies to work. The decline in M&A activity is mirrored by a drop off in product licensing deals executed by big pharma so far this year (Product deal slow down continues into 2011 - phase II assets remain popular, August 1, 2011).
Of course a major deal by a big pharma company could be just around the corner, but the signs are that appetite for M&A amongst this peer group is dwindling.
Indeed, investors and biotech companies are increasingly turning to big biotech and specialty pharma companies, which are increasingly cash rich and also have maturing portfolios which need refreshing (BioEquity - Big pharma slowing the pace of deals, May 23, 2011).
Amgen’s purchase of BioVex, Shire’s acquisition of Advanced BioHealing and Gilead Sciences’ buyout of Calistoga Pharmaceuticals are examples of this so far this year.
Otherwise the list of top M&A deals so far this year contains further evidence of Japanese pharma’s desire to expand into Western and emerging markets and Teva’s insatiable appetite for companies it needs to acquire if it is to meet its ambitious revenue target for 2015 (Teva strives to meet growth targets with Cephalon buy, May 3, 2011).
|Top 10 Pharma M&A Deals YTD 2011|
|Rank||Acquiring Company||Target Company/Business Unit||Deal Target Type||Total Deal Value ($m)||Deal Status||Financing Structure|
|2||Teva Pharmaceutical Industries||Cephalon||Company Acquisition||6,800||Open||Cash|
|3||Kohlberg Kravis Roberts (private equity)||Capsugel||Business Unit||2,375||Open||Cash|
|4||Forest Laboratories||Clinical Data||Company Acquisition||1,270||Closed||Cash|
|6||Nestlé||Prometheus Laboratories||Company Acquisition||1,000||Open||estimated deal value|
|7||Alkermes||Elan Drug Technologies||Business Unit||960||Open||Share Exchange + Cash|
|8||Daiichi Sankyo||Plexxikon||Company Acquisition||935||Closed||Cash|
|9||Teva Pharmaceutical Industries||Taiyo Pharmaceutical Industry||Majority Stake||934||Closed||Cash|
|10||Shire||Advanced BioHealing||Company Acquisition||750||Closed||Cash|