M&A in 2016: Pause for breath in a shifting market

Are pharma groups biding their time or exercising caution? This is the question that needs to be asked when looking at 2016’s M&A totals, which fell back substantially from the free-spending days of 2014 and 2015.

The $98.7bn spent on acquisitions in 2016 was less than half that of the biotech boom’s peak in 2014 even though many biotech targets became more affordable as their valuations tumbled through the course of the year. With the expectation that there is still some way to go before biotech hits bottom, and that US big pharma could soon be awash with overseas cash thanks to a repatriation tax holiday, business development chose to practise restraint – and 2017 is shaping up to be no less volatile than 2016 (see tables below).

Some perspective is in order, however. Before the boom, $98.7bn would have been seen as a good year, particularly as 2016 only featured one megamerger, the acquisition of Baxter's Baxalta spinoff by Shire. The boom years were marked by multiple megamergers each year, three in 2014 and two in 2015.

Five-year M&A
Period Combined deal value ($bn) Deal count
2016  98.7 184
2015  189.0 283
2014  220.2 228
2013  79.6 225
2012  43.8 222

Furthermore, looking at average values from various perspectives, it appears that those who succeeded in pulling off deals did all right if one views 2014 and 2015 as outliers. Only one grouping of deals, those between $1bn and $10bn, has seen average valuations dip below 2012 numbers – the withdrawal from furious M&A of Valeant specifically and its competitors in the speciality pharma world generally has likely contributed to this trend. This analysis only includes acquisitions by pharma and biotech companies - it excludes medtech and diagnostic players, for example.

M&A totals by valuation category
<$250m $250m-$1bn $1-10bn $10-25bn $25+bn
Count Avg ($m) Count Avg ($m) Count Avg ($bn) Count Avg ($bn) Count Avg ($bn)
2016 63 58 26 590 12 2.9 1 14.0 1 32.0
2015 129 59 33 536 26 2.9 3 16.4 1 38.7
2014 87 51 36 522 23 3.6 1 16.0 2 49.3
2013 88 56 33 526 14 3.6 1 10.4 0 -
2012 87 46 22 528 9 3.1 0 - 0 -

The slackening in the number of acquisitions is probably where concerns can be raised, along with the poor performance in the fourth quarter of 2016, which saw the lowest dollar value in four years.

M&A activity in the fourth quarter was likely suppressed by the run-up to and fallout from the US presidential election, especially as key issues – drug pricing, health insurance coverage and corporate tax reform – hung on the outcome. It could be no coincidence that to find a three-month period with less activity one has to go back to the last US presidential election at the end of 2012.

Average M&A deal values
Year announced Avg for $250m-$20bn deals ($bn) Avg for deals ≤ $20bn ($m) Value all deals ≤ $20bn($bn) Total deal count ≤ $20bn
2016 1.7 660 54.3 101
2015 2.0 685 129.4 189
2014 2.0 828 121.7 147
2013 1.7 608 79.6 131
2012 1.3 371 43.8 118

Moreover, the big deals of the year were tilted toward lowered risk. Six of the top 10 were of companies with established products; a seventh was of Celator, a company that had already passed a phase III milestone; and an eighth, Anacor, had already submitted Eucrisa to the FDA when Pfizer made its play.

That leaves only Abbvie’s acquisition of Stemcentrx and Allergan’s of Tobira as truly risky transactions. The former is already looking like a high-stakes gamble (Asco 2016 – AbbVie pulls back rova-T curtain, June 6, 2016).

10 biggest pharma and biotech M&A deals announced in 2016 
Date announced Acquirer Target Status Value ($bn)
Jan 2016 Shire Baxalta Closed 32.0
Aug 2016 Pfizer Medivation Closed 14.0
Apr 2016 AbbVie Stemcentrx Closed 9.8
Feb 2016 Mylan Meda Closed 7.2
May 2016 Pfizer Anacor Pharmaceuticals Closed 5.2
Dec 2016 Lonza Capsugel Open 3.5
Sep 2016 Allergan Tobira Therapeutics Closed 1.7
Aug 2016 Pfizer AstraZeneca's small-molecule anti-infective business outside US Closed 1.6
Jul 2016 Galenica Relypsa Closed 1.5
May 2016 Jazz Pharmaceuticals Celator Pharmaceuticals Closed 1.5

A common assumption is that the big players have been keeping their powder dry as they watch valuations fall. Given that biotech has broadly fallen about 30% from its mid-2015 peak, it could be that valuations might not have fallen far enough – or enough time elapsed since the top – for buyers to jump back in in a big way.

This year has kicked off with a bang, driven as it has been by deal making around the JP Morgan conference – specifically Ariad’s takeout by Takeda and Valeant’s Dendreon sell-off. But if US President-elect Donald Trump follows through on his tweet-and-shame threat against biopharma's pricing practices it will be a difficult year for anybody trying to estimate valuations accurately – which has the potential to suppress M&A through 2017.

To contact the writers of this story email Jonathan Gardner or Edwin Elmhirst in London at news@epvantage.com or follow @ByJonGardner or @EPVantage on Twitter

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