Healthcare M&A

By Mustafa Bayramli (UPenn), Gurneek Gill (UCL), and Abilash Prabhakaran (MIT)


I. Industry Background

Despite the global pandemic’s strain on resources and supply chains, healthcare activity continues to be very strong. It is expected that global healthcare spending as a proportion of GDP will be around 10.3% between 2021 and 2022. Some of the drivers for continued high healthcare spending include an ageing population, investment into improving public health systems, an increased focus on more advanced and personalized solutions across pharmaceuticals, medical technology, and services.

While deal volume dropped from 2019 to 2020, activity had a massive rebound as healthcare deal value rose $204 billion in 2020 to $431 billion in 2021 so far. This rebound has been driven by high investment from strategic acquirers to patch areas hurt by the pandemic, low-interest rates, and high cash reserves from both strategic and financial sponsors.

For strategics in pharmaceuticals, the market has changed to significantly reward growth prospects or growth in revenue over profit, and this is evident by many valuable deals where the target is pre-revenue and still in clinical testing. Thus, in the current environment, high growth prospects seem to be enough to justify multi-billion dollar deals. For private equity firms, healthcare has demonstrated itself to be a perfect fit, especially for medical technology firms, providers, and healthcare IT firms. This is because these verticals are defensible, highly profitable, and non-cyclical, enabling financial sponsors to pursue both highly leveraged transactions or growth deals in more innovative areas.

II. Merck - Pandion

On April 25th of this year, the pharmaceutical company Merck (known as MSD outside the US) announced that it would fully acquire Pandion Therapeutics, a clinical-stage biotech company developing therapeutics for patients suffering from autoimmune diseases, in a tender offer to acquire all outstanding shares of the target. The transaction, which has been conducted through a wholly-owned subsidiary, values Pandion’s equity at $1.85 billion, or $60 per share. Pandion’s expertise in precision immune modulators will significantly improve Merck’s existing portfolio of medical solutions designed to acquire patients with rare autoimmune conditions and enable the firm to capture a higher market share. For instance, PT101, an IL-2 mutein engineered by Pandion, has the potential to alter the competitive landscape in the autoimmune disease space, which is slated to grow from $53.2 billion in 2019 to $90.7 billion by 2024 at a compound annual growth rate (CAGR) of 11.2%. PT101 stands out from the competing candidates due to its high degree of safety and tolerability.

The deal, which was executed in less than 2 months, reflects the speed at which leading Healthcare companies are taking action to capitalize on cheap financing during the post-pandemic recovery phase. Rising potential use cases for tech in the medical sector, which have given birth to scores of MedTech startups challenging established players during the last 2 years, have compelled pharmaceutical giants such as Merck to actively consider inorganic growth opportunities and integrate solutions with promising future.

Credit Suisse Securities (USA) LLC acted as financial advisor to Merck and Covington & Burling LLP as its legal advisor. Centerview Partners LLC acted as financial advisor to Pandion and Skadden, Arps, Slate, Meagher & Flom LLP as its legal advisor.

III. Amgen - Five Prime Therapeutics

On March 4, 2021, Amgen announced that they would acquire Five Prime Therapeutics in an all-cash transaction for $1.9 billion. Trading on NASDAQ under the AMGN ticker symbol, Amgen as a multinational biotech firm is renowned for its oncology portfolio. Focusing on developing immuno-oncology and targeted cancer therapies, Five Prime poses big revenue synergy opportunities and fosters innovation through the complementarity of product portfolio and R&D operations. According to Robert A. Bradway, CEO and chairman of Amgen, the Five Prime teams will significantly help Amgen consolidate its innovative pipeline of cancer treatment solutions. Meanwhile, the target will benefit from Amgen’s manufacturing capabilities to realize the full potential for its lead assets. The most notable example of Five Prime’s lead asset is Bemarituzumab, a first-in-class, Phase III-ready anti-FGFR2b antibody that showed a lot of promise in a Phase II trial for gastric or gastroesophageal junction (GEJ) cancer.

The $1.9 billion acquisition supports Amgen’s ambitions to expand internationally. Gastric cancer has been found to be one of the most common diseases in the Asia-Pacific region, and access to the Asian market will fill up the cash coffers of Amgen, which will collect a percentage of royalties from sales in Greater China. Access to the supply chain and sales capabilities will further enable Amgen to grow sales and increase profit margins in the Asia-Pacific region.

Goldman Sachs acted as financial advisor to Amgen and Sullivan & Cromwell LLP as its legal advisor. Lazard acted as financial advisor to Five Prime and Cooley LLP as its legal advisor.

IV. Sanofi - Translate Bio

In early August 2021, Sanofi acquired Translate Bio for $3.2bn (on a fully diluted basis) in a key mRNA impetus. Sanofi is a global biopharmaceutical company focused on human health and was advised by Morgan Stanley; Translate Bio is a clinical mRNA therapeutics company that was advised by Evercore.

In 2020, Sanofi had sold half its stake in Regeneron for $6 billion, providing capital and enabling Sanofi to make an acquisition. Subsequently, in June, Sanofi planned to invest 400 million euros a year into mRNA vaccine research and opened an mRNA Center of Excellence; this made sense for Sanofi to acquire a specialist therapeutics company to assist with this.

From a strategic standpoint, this deal will help Sanofi keep pace with key competitors and unlock the potential of mRNA in crucial markets such as immunology, oncology, and rare diseases. mRNA has become popular through its use in COVID-19 vaccines, so it has strong potential to be applied for other viruses and diseases. Thus, the firm paid a 56% premium to Translate Bio’s average closing share price over the last 6 months, showcasing Translate Bio’s desirable technology and Sanofi’s clear vision of the synergy between their expertise in development and commercialization alongside Translate Bio’s raw mRNA technology.

This plays with the overall trend of healthcare pharma deals because established pharma companies, like Sanofi, have abundant cash reserves for M&A and with these excess cash reserves, they will continue acquiring cutting edge biotech companies focused on next-generation cell/gene therapeutics. High valuations and premiums are likely to continue into Q3 and 4 of 2021 as smaller niche therapeutic firms will continue to command higher valuations due to their high growth prospects and unique technology.

V. Blackstone, Carlyle, and Hel