Another slow quarter for biopharma takeovers

The summer lull proved even quieter than normal in 2017, as transaction volumes slumped to a decade low.

Third-quarter data confirm that biopharma companies are keeping the brakes on deal-making, with transaction volume dropping way below the decade’s average over the summer.

Only 31 M&A deals were announced between July and September, according to EvaluatePharma, way below the quarterly average for the decade – 56 – and only a touch above the 29 registered in the second quarter. True, Gilead Sciences lifted spirits with its takeout of Kite Pharma, and investor sentiment remains far from subdued, but 2017 is shaping up to be a quiet year for takeovers.

Of course this probably only matters to deal bankers or companies hoping for a rich suitor. Backers of private companies are also no doubt eyeing the stats nervously, although there are few signs that takeouts of start-ups have notably declined.

In fact a buoyant venture capital market suggests that this section of the industry is feeling far from pessimistic. Transactions this quarter such as Bristol-Myers Squibb’s move on IFM Therapeutics, for $300m up front, or Merck & Co’s swoop on Rigontec, for an initial $135m, show that acquisitions of private oncology players remain a bright spot.

The graph above shows how steeply transaction volumes have dropped this year – the last two quarters are the slowest recorded this decade. Many have blamed an uncertain US political climate for slowing the hand of those hoping to seal some really big deals, and it is true that lack of clarity on tax reform makes the job of valuing future revenue streams even more fraught.

Recent proposals from the Trump administration look pretty friendly to the pharma industry; when they will get through Congress or what the final package might look like are entirely separate questions (Pharma-friendly tax reform is a tall order, September 28, 2017).

As a result, few expect any really big deals to materialise in the final quarter of the year. So far in 2017 only J&J’s buyout of Actelion and the Kite takeover have surpassed the $10bn mark, helping boost the first and third-quarter numbers respectively.

With only three months of the year remaining, it is hard to see 2017 surpassing last year, with the heady heights of biotech boom retreating further into the distance. 

Five-year M&A
Period Combined deal value ($bn)  Deal count 
3Q 2017 67.7 123
2016 104.2 200
2015 188.9 290
2014 219.3 229
2013 79.5 226
2012 48.3 220

An important question for investors is the extent to which heady valuations are acting as a brake on activity. It is notable that many of the private takeouts getting done involve a relatively small up-front fee, and then bio-dollars into the billions. For example, Merck could end up paying another $410m to the owners of Rigontec, while the IFM deal was valued at a huge $2.3bn – a sum that Bristol-Myers is highly unlikely to end up paying.

Perhaps owners of private companies are able to structure transactions to get them done, and are willing to accept terms that would be more difficult for an owner of public equity to swallow. And a look at licensing deals paints a picture of a sector that remains highly motivated to do deals (Deal hungry biopharma remains happy to pay up, September 6, 2017). 

But last week the Nasdaq Biotechnology Index hit a high for the year, reaching a level not seen since the tail end of 2015. True, sky-high valuations did not hold back deal activity in the midst of the biotech boom. But with price tags of public companies so high, it is hard to see buyers enthusiastically jumping back into the M&A market any time soon.

Five biggest pharma and biotech M&A deals announced in Q3 2017
Acquirer  Target Value* ($bn) Month announced Deal status
Gilead Sciences Kite Pharma 11.9 Aug Closed
Mitsubishi Tanabe Pharma NeuroDerm 1.1 Jul Open
Sanofi Protein Sciences 0.7 Jul Closed
Clinigen Quantum Pharma 0.2 Sep Open
China Regenerative Medicine Obagi Medical (Valeant unit) 0.2 Jul Open
*Up-front portion only, where relevant.

To contact the writer of this story email Amy Brown or Edwin Elmhirst in London at news@epvantage.com or follow @ByAmyBrown or @EdwinElmhirston Twitter

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