By Julius Kalvelage
Over the past years, large pharmaceutical companies have experienced a deterioration in their ability to grow organically as the investments in R&D, as well as the efficiency of in-house research, have fallen. As a result, we have seen an increasing number in acquisitions among companies in this sector which shows the consolidation that is currently underway. The majority of mega-deals hereby often come from “Big-Pharma” companies while firms in the subsector of biotechnology serve as targets in many of the acquisitions.
Facts and Figures
This trend has made the PMD (Pharma, Medical and Biotech) sector the second largest sector by value in 2019 with a 14.3% share of global M&A activity, which corresponds to over USD 477bn in deals and 7 mega-deals, thus doubling the PMB value in the US market. In Europe, it also broke new records as it made up 21.2% of total M&A volume – the highest figure on record.
Further Trend Analysis
Most drug makers are very dependent on only one or a few drugs in their portfolio which usually make up a large percentage of the company’s revenues - AbbVie’s HUMIRA, for example, made up 61% of its sales. The development and commercialisation of those drugs is also very expensive and averages at over $2bn a drug. According to a report recently published by Deloitte, the average return on R&D at 12 of the world’s largest pharmaceutical companies fell to just 1.9% in 2018, the lowest level in almost a decade, as the cost of discovering new drugs has risen sharply. This is well below the rate at which companies can borrow money and because investments in R&D have been so fruitless, many large drug makers have relatively few therapies in the pipeline to drive sales once patents run out on existing drugs. Given this business model of heavy reliance on one product for a limited period of time and the ineffectiveness of R&D, companies are left with no other option than the acquisition of new products when patents expire.
The existential threat to large parts of their revenue generators incentivise a diversification of their revenue sources. Firms can of course try to drive organic growth by investing heavily but even if a company has not been unsuccessful with R&D, the enormous costs one drug can have, coupled with the remaining risk that R&D does not yield results or that a drug is not approved, may incentivise firms opt for inorganic growth. Inorganic growth allows them to purchase new portfolios with established patents and drugs and full R&D pipelines that can strengthen their position in the current market or could allow them to diversify revenue sources towards a new category within the pharmaceuticals sector. For example, Gilead became a leading player in cell therapy for cancer treatment by acquiring Kite Pharma while its previous blockbuster drugs were treating Hepatitis C.
Who are the Main Parties Involved?
In addition to this, the high-end pharmaceuticals market is an industry with enormous growth and development as new innovative and disruptive treatments are developed at a constant rate. This comes particularly from companies in the biotechnology field that are seen to have a much more innovative culture than big pharma and a leaner structure in development that pharma companies want to access. As a result, large firms have a great incentive to use the cash generated by past blockbuster drugs for acquisitions that stock up their product portfolios and pipelines.
Deals to Know About
Bristol-Myers Squibb buys Celgene
Announcement date: 03/01/2019
Acquirer: US-based company engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical and nutritional products
Target: US-based biopharmaceutical company engaged in the discovery, development, and commercialization of therapies designed to treat cancer and immune-inflammatory-related diseases
Advisors: N/A
Value: $89,48946m
Rationale:
The transaction significantly expands Bristol-Myers’ phase III assets, which represents greater than USD 15bn in revenue potential.
It will provide strong returns and significant immediate EPS accretion to Bristol-Myers.
The transaction will enable significant investment in innovation by Bristol-Myers as it provides a strong balance sheet and cash flow generation.
It will also enable Bristol-Myers to realize run-rate cost synergies of approximately USD 2.5bn by 2022.
Consideration: 35,012 Cash and 36,714 Equity
Premium paid: vs. share price 1 day before: 53.71%, vs.share price 1 month before: 39.51%
AbbVie buys Allergan
Announcement date: 25/06/2019
Acquirer: US-based biopharmaceutical company engaged in research and development of treatment across immunology, oncology, virology and neuroscience
Advisors: Morgan Stanley, PJT Partners
Target: Ireland-based pharmaceutical company engaged in developing, manufacturing, marketing and distributing brand pharmaceutical products
Advisors: Evercore, Goldman Sachs, JP Morgan
Value: $86,270m
Rationale:
The combined group will consist of several franchises with leadership positions across immunology, hematologic oncology, medical aesthetics, neuroscience, women's health, eye care, and virology.
The transaction is expected to be 10% accretive to adjusted earnings per AbbVie share over the first full year following the closing, with peak accretion of greater than 20%. ROIC is expected to exceed AbbVie's cost of capital within the first full year.
The combined group generated USD 19bn in operating cash flow in 2018. Funding capacity will be used in investment, debt reduction and return to shareholders. AbbVie is expected to generate significant annual operating cash flow, which will support a debt reduction target of USD 15 to USD 18bn before the end of 2021. AbbVie remains committed to a Baa2/BBB or better credit rating and continued dividend growth.
Annual pre-tax cost synergies are expected to be at least USD 2bn. Synergies will come from reducing R&D overlapping (about 50%), optimising SG&A costs (about 40%) and optimizing supply chain and procurement (about 10%). Revenue synergies have not been estimated.
Consideration: $40,603m Cash, $22,930m Equity
Premium paid: 38.91% (on share price one month before)
Takeda buys Shire
Announcement date: 08/05/2018
Acquirer: Listed Japan-based company engaged in orientated global pharmaceuticals
Advisors: Evercore, JP Morgan, Nomura
Target: Ireland-based biopharmaceutical company
Advisors: Citi, Goldman Sachs, Morgan Stanley
Value: $78,198
Rationale:
Takeda believes the acquisition will create a global, values-based, R&D driven biopharmaceutical leader incorporated and headquartered in Japan; strengthen Takeda's core therapeutic areas, bringing together complementary positions in gastroenterology (GI) and neuroscience, and provide leading positions in rare diseases and plasma-derived therapies.
Takeda Directors expect recurring pre-tax cost synergies to reach a run-rate of at least USD 1.4bn per annum by the end of the third fiscal year following completion. Cost synergies are expected to be generated by SG&A (53%), R&D (43%) and manufacturing and supply (4%).
Consideration: $28,449 Cash, $32,161 Equity
Premium paid: 28.61% (one month before)
Johnson & Johnson buys Actelion
Announcement date: 26/01/2017
Acquirer: US-based pharmaceutical company involved in the research, development, manufacture and sale of health care products
Advisors: Citi, Lazard
Target: Switzerland-based biopharmaceutical company that focuses on the discovery, development and marketing of treatments to serve unmet medical needs
Advisors: ALANTRA, Bank of America, Credit Suisse
Value: $29,592
Rationale:
The addition of Actelion's specialty in-market medicines and late-stage products is consistent with Johnson & Johnson's efforts to grow in attractive and complementary therapeutic areas and serve patients with serious illnesses and significant unmet medical need.
R&D NewCo will provide Johnson & Johnson with additional sources of innovation and value.
Johnson & Johnson estimates EPS accretion in the first full year of $0.35 to $0.40. Johnson & Johnson shareholders are also expected to realize additional value from the Johnson & Johnson ownership interest in R&D NewCo.
Further, Johnson & Johnson expects to retain Actelion's presence in Switzerland and also leverage its complementary capabilities in shaping medical paradigms
Consideration: All cash
Premium paid: 25.77% (one month before)
Gilead buys Kite Pharma
Announcement date: 28/08/2017
Acquirer: US-based biopharmaceutical company involved in discovering, developing and commercializing small molecule therapeutics to treat life-threatening infectious diseases
Advisors: Bank of America, Barclays, Lazard
Target: US-based biopharmaceutical company engaged indevelopment and commercialization of novel cancer immunotherapy products
Advisors: Centerview, Cowen Group, Jefferies
Value: $10,161
Rationale:
The transaction will accelerate Kite Pharma’s robust pipeline and next-generation research and manufacturing technologies.
The transaction will diversify Gilead’s product portfolio, thereby enhancing its revenue and creating long term shareholder value.
The transaction will leverage Gilead's core capabilities to maximize the value of Kite's portfolio.
Consideration: All Cash
Premium paid: 61.54% (one month before)
Novartis buys The Medicine Company
Announcement date: 24/11/2019
Acquirer: Switzerland-based company engaged in pharmaceutical business and operating in the areas of human health care, consumer health, agribusiness and animal health
Advisors: Bank of America
Target: US-based pharmaceutical company focused on advancing the treatment of critical care patients through the delivery of medicines to the worldwide hospital marketplace
Advisors: Goldman Sachs, JP Morgan
Value: $7,319
Rationale:
Inclisiran, TMC’s therapy to lower LDL cholesterol, has the potential to reduce both the medical and economic burden of cardiovascular disease and will provide synergies with existing global cardiovascular commercial capabilities of Novartis.
The resources and scale of Novartis will allow TMC to realize Inclisiran’s full potential.
The flexible market access strategies and value-based pricing of TMC will provide broader access to Novartis and expand its worldwide footprint of the cardiovascular business.
Consideration: All Cash Premium paid: 51.41% (one month before)
References
Neville, S. (2019). Patent panic gives green light to mega pharma deals. Financial Times. [online] Available at: https://www.ft.com/content/bc847e04-9804-11e9-8cfb-30c211dcd229 [Accessed 27 Mar. 2020]. MergeMarket. (2020). [online] Available at: https://www.mergermarket.com [Accessed 27 Mar. 2020].