In a quiet year for takeouts, who was buying?

Small and mid-sized developers upped deal-making activity last year, a deep dive into M&A data finds.

Plenty has been written about big pharma’s retreat from the buyout market last year, but not so much about what the other end of the sector was up to. A deep dive into Evaluate Pharma’s M&A data reveals that, while many large biopharmas stayed at home, small groups went shopping.

Both the volume of takeovers and spend by small and mid-sized developers hit at least a five-year high in 2021. The sums involved at this end of the M&A market are usually inconsequential compared with the big caps’ firepower, but this was not the case last year.

This uptick in deal-making among smaller groups is a little discussed feature of last year’s buyout market, which was almost universally considered to be disappointing. The dismay was caused by the lack of large deals, and theories abound to explain big biopharma’s reluctance to get involved in M&A. These range from antitrust concerns to stretched valuations or business development teams being paralysed by choice.

Biopharma's small developers were apparently happy to shrug off those issues. Perhaps they could take advantage of opportunities last year in the absence of better-capitalised rivals. It is also true that the sector is cashed up after a few years of plenty, so this uptick could well be a deployment of those funds.

In fact, the small and mid-cap groups' combined M&A spend was similar to that by the sector’s much larger developers last year, something that rarely happens, as the graph below shows. The mid-cap’s bill was swelled by Jazz’s $7.2bn swoop on GW Pharmaceuticals and Horizon’s takeover of Viela Bio for $3.1bn. Among the small caps, Morphosys’s move on Constellation, for $1.7bn, stands out.

A further analysis shows that these small and mid-cap companies had to stretch themselves much more last year, compared with the recent past, to get these deals done. The size of these transactions as a proportion of the groups’ market cap reached the highest for at least five years, touching almost 12% at the median for the small caps.

Retreating public market valuations possibly helps to explain this finding. But prices remain high in popular therapy areas, a fact that remains true whatever the size of a transaction.

Another point worth noting amid complaints about 2021's M&A record is that this was far from the most disappointing total biopharma has seen recently. Deal count and spend was substantially lower in 2017, a year that really did see large developers pause, causing the median market cap of acquiring companies to fall way below last year's number. 

The need to replenish pipelines will always be a driving force in this sector. Many expect larger developers to return to M&A this year, tempted by shrinking valuations and poor sentiment that could well turn last year’s buyers into sellers. But 2021 has shown that, for all the attention turned on big pharma, activity at the small end of the sector should not be overlooked.

Note on methodology: These data concern only full company takeouts between pure-play drug developers, and for this analysis only deals with disclosed terms were considered. Buyouts struck by nano caps with a market of less than $250m and private groups were excluded.

Most of these much smaller transactions tend to have terms kept under wraps, so would not have featured in this analysis anyway, but it is worth remembering that they are very numerous. The deals that made it into this analysis represented just over a third of the total biopharma buyouts recorded by Evaluate Pharma over the five-year period.

A fuller count of biopharma buyouts can be found in our quarterly M&A stories.

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