By Gurneek Gill (UCL), Nihat Anwar (SSE), Mustafa Bayramli (Wharton)
I. Industry Background
The pharmaceutical industry researches and unearths new drugs that can be brought to market. Companies in this industry tend to be involved in most aspects of that process -- everything from development and production right up until marketing and distribution. These drugs then go on to be used as medication which can be prescribed or self-administered to patients. The purpose of these pharmaceutical drugs is generally to cure an illness; however, they are also commonly used to alleviate symptoms and to vaccinate people, a use which has greatly risen in popularity as of recent.
Subsequently, the pharmaceutical industry is one of the biggest worldwide and has experienced substantial growth over the past two decades, with pharmaceutical revenues worldwide equalling 1.25 trillion U.S. dollars in 2019. Beyond this, the industry is expected to grow at a compounded annual growth rate (CAGR) of 13.74% from 2020 to 2027. Nearly 50% of this figure comes from the USA’s market. Global pharmaceutical sales show that oncology, antidiabetics and respiratory based remedies top the list when it comes to therapeutic classes. However, it was the autoimmune therapeutic class that experienced the greatest consumer spending growth from 2014-2018.
Roche (Switzerland), Novartis (Switzerland) and Pfizer (U.S.) were the top three prescription sale earners in 2019. However, with regards to Research and Development spending, Bristol Myers Squibb (U.S.) and Johnson & Johnson (U.S) competed alongside Roche (Switzerland) in pioneering this segment of the industry.
Investors have retained high levels of interest in the pharmaceuticals industry. This has been particularly true since the start of the pandemic as many investors turn to this industry in economic times of uncertainty for financial safety. However, even before the pandemic, pharmaceuticals M&A activity was soaring, with an all-time high of $414 billion worth of deals in 2019, where deal volume was driven by increasing popularity in medical devices and biotech as companies sought to gain new platform technologies, digital talent and increased operational capabilities. M&A motivations should remain high as the industry has always been driven by innovation to make successful vaccines and also drugs that can capitalise upon lucrative markets that exist; such as in the field of oncology for example and there has never been a greater need for that than now.
Although the global market for medicines is growing alongside new and emerging medical needs, the industry does face some issues. There are clear inefficiencies in the functionality of the pharmaceutical industry. Low laboratory productivity is slowing down the speed at which the industry was once accelerating. What’s more, increasing expenditure on sales, marketing, and R&D are not yielding results and instead increasing unattractive cyclical cash flows for companies who are struggling to adapt to shifts in globalisation.
II. Gilead - Immunomedics
On the 23rd October 2020, Gilead Sciences announced the acquisition of Immunomedics, Inc. for a fee quoted to be around $21 billion. Gilead Sciences, the acquirer, is a research-based biopharmaceutical company focused on the discovery, development, and commercialization of innovative medicines. Contrarily, their counterpart, Immunomedics is a highly focused, science-driven biopharmaceutical company. The firm is dedicated to discovering, developing, and delivering new and innovative therapies for cancer. By acquiring Immunomedics, Gilead is confirming their commitment to strengthening and diversifying their cancer-drug portfolio. This deal gives Gilead access to Trodelvy, Immunomedics’ treasured breast-cancer drug. Together they will be able to increase its accessibility around the world and continue to delve into Trodelvy’s potential in many other types of cancer; giving Gilead a foothold in the fast-growing cancer drug market. For years now Gilead has been leading the way in terms of antiviral drugs and this deal has allowed for them to expand their therapy portfolio.
This deal consolidates the lucrative nature of the cancer drug market. Oncology has been a key driver in this industry and it is easy to see why. This market has become one of the most valuable therapeutic classes in pharmaceuticals, as a result of the excellent R&D that has led to key advancements being made in understanding the disease. This has uncovered new exciting opportunities for drug makers to find treatments that can assist patients, with therapies that demand high prices
III. Bristol Myers Squibb - MyoKardia
On November 17th, 2020, a definitive merger agreement was announced under which MyoKardia will be acquired by Bristol Myers Squibb (BMS) for $13.1B. With the closing of the transaction, MyoKardia now operates as a wholly-owned subsidiary of BMS. Myokardia is a clinical-stage biopharmaceutical company aiming to develop and commercialize targeted therapies for the treatment of neglected, rare and serious cardiovascular diseases. BMS is a global biopharmaceutical company involved in the discovery, development and delivery of innovative and cutting-edge medicines for serious diseases.
The acquisition will enhance the acquirer’s strengths within their leading cardiovascular franchise as well as adding market-leading scientific capabilities including a new promising pipeline of potential candidates. More specifically, BMS will have access to MyoKardia’s mavacamten which is a cardiovascular medicine that can potentially treat obstructive hypertrophic cardiomyopathy (HCM). During the first quarter of 2021, a New Drug Application for mavacamten for the treatment of HCM is expected to be submitted to the U.S. Food and Drug Administration. Moving forward, BMS hopes to utilize the significant commercial potential of the medicine to strengthen their strategic outlook and gain MyoKardia’s capabilities to expand and bolster their cardiovascular portfolio.
This deal is an example of the rising M&A activity and the increased need of innovation-led value creation in the industry. Based on the prevalence of robust and leading-edge R&D capabilities and talent, BMS chose their target wisely and hopes to further withstand the increased competition and leverage their market position by using a brand-new portfolio of potential first-in-class medicines.
IV. AstraZeneca - Alexion
On December 12th, 2020, AstraZeneca announced plans to acquire Alexion Pharmaceuticals (Alexion) for $39B in a definitive agreement. The deal is expected to close in the third quarter of 2021 and Alexion shareholders will own around 15% of the combined firm upon completion. AstraZeneca is a global biopharmaceutical company operating in over 100 countries and specialised in prescription medicines primarily for the treatment of diseases in different therapy areas including, for instance, Oncology and Cardiovascular. Alexion is a global biopharmaceutical company and a leader within the segment of rare diseases. The company focuses on discovering, developing and commercialising life-changing medicines for patients affected by devastating conditions.
With this transaction, AstraZeneca hopes to enhance its global footprint and utilize the leading expertise and high-potential portfolio of Alexion to develop new medicines in immunology. More specifically, together with the R&D team of Alexion and their pipeline of 11 molecules across over 20 clinical-development programmes, the acquirer aims to further increase their market position in the rare disease segment. The area of rare diseases therapy is growing rapidly thanks to increased unmet medical needs as well as new innovations. Thus, combining the capabilities and talent of Alexion in the aforementioned area with AstraZeneca’s expertise in precision medicine, a brisk revenue growth and favourable strategic outlook regarding development and commercialisation are to be expected for the combined firm moving forward. Furthermore, the deal is expected to leverage AstraZeneca’s innovation-friendly operations by adding a new technology platform. In fact, the two companies share high dedication to science and innovation and see both factors as essential components to deliver life-changing medicines on a high scale to millions of people around the globe.
Apart from being an example of the surging activity within M&A in the industry, the acquisition also showcases the importance of utilizing strong technology to help patients and families. By applying the technical expertise of both companies, the combined firm will be able to meet the increased demand on innovation-driven therapeutics and advanced precision medicines.
V. Johnson and Johnson - Momenta
In a press release on August 19th, the multinational healthcare company Johnson & Johnson (NYSE: JNJ) announced it would acquire Momenta Pharmaceuticals, Inc. (Momenta) through an all-cash tender offer of $52.50 per Momenta Share. This puts the total value of the transaction at $6.5 billion.
The target specializes in novel therapies for immune-mediated diseases, an area where the Janssen Pharmaceutical Companies of Johnson & Johnson looks to broaden its leadership and drive further growth through expansion into auto-antibody disease. Autoimmune diseases driven partially or completely by autoantibodies represent a novel area where Janssen can significantly improve health outcomes for patients. As per the official sources, the transaction will give the acquirer full global rights over the Momenta’s nipocalimab (M281), a clinically validated anti-FcRn antibody that recently received a rare pediatric disease designation from the U.S Food and Drug Administration. Janssen aims at leveraging the Momenta’s expertise in FcRn mechanisms to accelerate solutions for autoantibody conditions and expects it would contribute to the sustained market growth over the mid and long term.
Moreover, Janssen will also acquire Momenta’s employees and pipeline of clinical and preclinical assets. Integration of the target assets will pose an invaluable opportunity for Janssen to expand its footprint in the greater Boston area given Momenta’s scientific capability, proprietary technologies, and sophisticated laboratories.
VI. Future Outlook
Since the pandemic first hit, the growing focus on accelerated digitization and advanced precision therapeutics has led large pharma to invest in innovation-led value creation. Although many incumbent players in the sector have shifted gears to overhaul delivery of consumer-driven health and wellbeing services, successful vaccine developers will likely earn a windfall of excess cash and market positioning that they can use to reshape the competitive landscape of the pharmaceutical industry. Driven by a significant increase in “dry powder” of big strategic acquirers, mega deals have boosted a jump in deal volume and count in the pharmaceutical industry over the last two fiscal quarters. This was mostly the result of mergers and acquisitions in the Asia-Pacific region, where deal volume for medical devices, biotech, and pharma increased by 35%, 75%, and 36%, respectively compared to the first half of the year. COVID-19-related demand has sent MedTech and pharma valuations to sky-high levels.
Mid-sized biotech companies that specialize in cell and gene therapy, oncology, and next-generation biologics, will continue to attract interest from big pharma. The most attractive targets will have strong research and development (R&D) capabilities and technical expertise. The relative resilience of the PLS sector and its strong returns could attract large chemical and technology industry players to enter, or re-enter, the pharma manufacturing space.
It also remains to be seen whether pharmaceutical companies will continue to shed non-core business units to make room for specialty platforms. If true, the trend is expected to drive accelerating deals activity from the divestment of consumer-focused businesses (such as over-the-counter products) and the acquisition of specialty pharma developers, contract development and manufacturing, and contract research organizations.