M&A shows signs of recovery

Insights

First-half data suggest that M&A activity in the pharma industry looks set to pick up in 2013 after three years of retrenchment. Deals worth $28.7bn have been announced so far, compared with the $42.9bn struck last year, suggesting that 2013 could outstrip 2012 if investment bankers remain busy.

This year would have been looking even healthier if Royalty Pharma’s $8bn pass at Elan had come to anything – the collapse of this deal removes what would have been the third-biggest transaction of the first half. But with rumours of big biotech takeouts doing the rounds, with the likes of Onyx Pharmaceuticals and Alexion Pharmaceuticals in the frame, other sizeable acquisitions cannot be ruled out.

Last year was the first since 2000 in which the pharma industry did not see a takeover in excess of $10bn – the biggest deal was Bristol-Myers Squibb/AstraZeneca’s $7bn purchase of Amylin. With big pharma largely absent from the M&A game – at the top end of the market at least – it has been left to the mid caps with the relatively more modest firepower to keep bankers' commissions flowing.

The league table below shows that this is still the case, with serial acquirer Valeant showing no sign of slowing down and Actavis and Warner Chilcott providing action in the generics space. Behind these two deals the transactions are much more modest.

Top 10 takeouts of 2013 so far
Rank Acquiring company Target company or business unit Deal status Deal value ($bn)
1 Valeant Pharmaceuticals International Bausch + Lomb Open 8.7
2 Actavis Warner Chilcott Open 8.5
3 Royalty Pharma Elan Terminated 8.0
4 Mylan Agila (division of Strides Arcolab) Open 1.9
5 AstraZeneca Pearl Therapeutics Closed 1.2
6 Johnson & Johnson Aragon Pharmaceuticals Open 1.0
7 Allergan MAP Pharmaceuticals Closed 1.0
8 Elan AOP Orphan Pharmaceuticals Terminated 0.7
9 Auxilium Pharmaceuticals Actient Pharmaceuticals Closed 0.6
10 Cipla Cipla Medpro South Africa Open 0.5

Should Onyx fall prey 2013 could get its $10bn-plus acquisition; the company rejected a $120 per share bid from Amgen that valued it at just over this mark. Whether any company is prepared to better this offer, and whether Onyx would accept this, remains up in the air (Coles presses home Onyx’s advantage, July 1, 2013).

As the table below shows, the combined $28.7bn has been spent or pledged over 72 transactions – a run rate that, conversely, seems to be slowing. As such, it seems that the outcome for M&A activity this year could still disappoint.

Pharma and biotech acquisitions of last decade
Deal announcement date Deal value ($bn) Deal count
2013 YTD 28.72 72
2012 42.92 183
2011 55.21 189
2010 108.96 189
    2010 (excluding Novartis-Alcon) 71.28 188
2009 151.93 170
    2009 (excluding mega-mergers) 42.83 168
2008 109.08 185
    2008 (excluding mega-mergers) 62.28 184
2007 70.23 163
2006 100.21 150
2005 61.53 141
2004 97.60 96
    2004 (excluding mega-mergers) 34.60 95
2003 39.08 91

If the second half of 2013 exactly equals the first half, $57.4bn in M&A transactions will have taken place, putting the year well above 2012 and slightly above 2011. In 2011 M&A was driven by two moderately significant transactions in Takeda-Nycomed and Gilead Sciences-Pharmasset, both of which came in the $10bn-$15bn range.

Thus, it might not take much to see that trend accelerate – an Onyx or an Alexion takeout, for example, would fall in that range. The trouble in the pharma and biotech M&A scene today is valuations, however.

The Nasdaq biotechnology index burst through its previous 13-year-old record high in early March and hits a new high nearly every day. Good values are hard to find, and companies pursuing M&A can expect to pay top dollar – witness the rumours last week that Pfizer had pulled out of the Onyx bidding war, news of which caused shares of the California-based oncology group to fall back to 7% below their record high of $136.03.

The next six months is looking slower than the fast-paced first half of the year in terms of product approvals for unpartnered drugs in the hands of independent companies. Likewise, many of the products with all-important phase II and III readouts have already been claimed by big pharma.

Those unencumbered candidates include some very speculative propositions like MannKind’s inhaled insulin Afrezza; less dicey propositions include Synergy Pharmaceuticals constipation drug plecanatide and Insmed’s cystic fibrosis treatment Arikace (A few stars shine among the most valuable unpartnered assets, May 31, 2013).

The combined market capitalisations of the top five companies named in EP Vantage’s coverage of unpartnered candidates equals slightly more than $3bn. Thus it might be that the M&A scene in the second half will look a lot like the first, driven less by innovation and more by speciality and generics manufacturers looking to grab new growth.

The sector could always surprise, of course, by showing that there is a party willing to cough up well in excess of $10bn for Onyx, or that a successful bid for the likes of frequently named targets Alexion, Medivation or Ariad Pharmaceuticals could emerge. Buyers will need cool heads to keep from overpaying.

To contact the writers of this story email Amy Brown or Jonathan Gardner in London at news@epvantage.com or follow @AmyEPVantage or @JonEPVantage on Twitter

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