As target company valuations surge takeover activity falls off. This pattern has played out fairly reliably over recent years, but the second quarter of 2021 suggests that other factors might be at play too.
The three-month period saw biopharma M&A activity virtually grind to a halt, with only one deal worth more than $1bn, and quarterly transaction values and deal counts come in at the lowest level in five years. Yet, while biotech is still in an overall bull market, the year so far has been decidedly choppy, which normally would have provided plenty of buying opportunities.
Though 2021 got off to a strong start the Nasdaq biotech index peaked in early February before falling off. It was largely the approval of Biogen’s Alzheimer’s drug Aduhelm that resuscitated the market last month, and though the index today stands up slightly year to date it is still below that February peak.
M&A during the second quarter has been conspicuous by its absence. Just 24 deals were struck, the latest Evaluate Vantage analysis finds, with their combined value coming in at an anaemic $3.2bn; this amount is well below not only the first quarter’s $20.3bn, which was already a slowdown, but also the first and second quarters of 2020, during which the spread of Covid-19 nearly shut down deal-making.
This analysis concerns transactions struck by pure-play drug developers only; other deal types include majority and minority stake purchases, product acquisitions and option deals.
With nothing even approaching mega-merger status since Astrazeneca’s $39bn move on Alexion last December, a mere $1.7bn was enough to secure the second quarter’s biggest biopharma deal, namely Morphosys’s peculiar acquisition of Constellation, which also saw the involvement of Royalty Pharma.
That such an unpopular move claimed the top quarterly spot should give pause; some saw the deal as Morphosys selling off a key revenue driver to buy in speculative R&D. Beyond that no single acquisition was worth over $500m.
|Biggest M&A deals announced in Q2 2021|
|Acquiring company||Target company/biz unit||Status||Deal value ($m)|
|Xeris Pharmaceuticals||Strongbridge Biopharma||Open||267|
|Brooklyn Immunotherapeutics||Novellus Therapeutics||Open||125|
|Source: Evaluate Pharma.|
It seems that $3.2bn of takeover deals makes the second quarter the worst for M&A for over a decade. The last time a three-month period came in anywhere as poor was in the third quarter of 2011, when $3.7bn of M&A was done.
But biotechs are still able to access large amounts of cash, from public and private investors alike. Large amounts of money flowing in makes it easier for companies to resist takeover approaches, even if share prices do not always reflect the implied valuation.
Then there is the rumbling threat of regulatory action to counteract M&A, on the grounds of antitrust concerns. Though the scope of these proposals could indeed threaten all pharma M&A, given that it is driven by a desire to curb companies’ pricing power and ultimately make drugs more affordable, how this might play out is still unclear.
Still, the threat is there, and many potential acquirers will look nervously at the difficulty Roche had closing its relatively small and routine-looking takeover of Spark in 2019. On the positive side, Astra’s Alexion acquisition involved some overlap, but was completed without significant delays.
It must also be stressed that licensing remains hot in biotech, with even early-stage assets generating significant up-front fees (Bristol and Glaxo’s oncology deals vault into the top five, June 18, 2021). Clearly pharma still wants access to biotech, even if M&A is not always the best way to achieve this.
Perhaps deal bankers need not panic just yet.