M&A: Year of the megadeal

Deal-making experienced a lull over the winter period last year, but this was the calm before the storm. A January 3 announcement from US pharmaceutical company Bristol-Myers Squibb (BMS) reignited a stream of mergers and acquisitions (M&A) activity in the life sciences space.

BMS revealed it would purchase Celgene, a drug manufacturer focusing on new cancer and inflammation treatments, for $74 billion.

It marked the start of a busy 2019, and was the first of seven megadeals (deals valued at $5 billion plus) announced in the first half of this year, according to PwC.

PwC’s report, “Global Pharma & Life Sciences Deals Insights” noted that the megadeals so far this year have brought the industry to just one shy of the total number of megadeals in all of 2018. So far this year, the seven megadeals have totalled approximately $240 billion.

Deal-making in the second quarter, when four megadeals were announced, was highlighted by AbbVie’s announced acquisition of Allergan, the Ireland-headquartered maker of Botox, for $63 billion. The combined company is expected to produce annual revenues of approximately $48 billion.

Stephen Doom, partner at Taylor Wessing in Frankfurt, says that there’s been a lot of activity out of the US and China in particular, adding that “there has been a focus on deals involving companies creating novel drugs and devices”, particularly in oncology.

PwC reported that the US made up 28% of deal value for targets in the second quarter ($34.4 billion), with the number of US targets (34) higher than other regions. And, aside from the blockbuster deal for Ireland-based Allergan, all the top ten largest transactions during the second quarter had targets based in the US.

What’s driving this spate of acquisitions and, given the current economic uncertainty, will activity soon abate?

Blurred lines

Life sciences M&A has always been strong—an aging population and growing disease burden are the underlying drivers that power this dynamic industry. Its resilience was highlighted when an expected a big slowdown in activity did not materialise.

The UK’s planned departure from the EU and the impact of US President Donald Trump pushing lower pricing for drugs had analysts spooked but the deals kept being signed, says Amar Shah, life sciences M&A lead for Deloitte, based in London.

“The slowdown hasn’t happened. Prescription spending looks to be growing faster this year and next than it has previously. M&A is being driven by new therapies (such as CAR-T and gene therapy) and there’s a real boom in the market,” Shah says.

Worldwide prescription drug sales are expected to rise from $900 billion in 2019 to $1.2 trillion by 2024, according to Deloitte’s 2019 outlook.

"M&A is being driven by new therapies (such as CAR-T and gene therapy) and there's a real boom in the market." - Amar Shah, Deloitte

Joel Harris, senior director, IP at InCube Labs (a life sciences lab focused on developing and commercialising breakthrough innovations), says: “Larger companies are trying to acquire new technology to get access to new markets, particularly in the areas of pharmaceuticals/biologics, digital medicine, drug delivery systems and artificial intelligence (AI)/machine learning.”

Innovative therapies and new markets are not the sole driver of this hive of activity. Big pharma is facing challenges—products are being squeezed by competition from generics and biosimilars, says Shah. Deloitte’s report notes that it’s estimated that $19 billion in prescription sales may be at risk due to patent expiries, with approximately half resulting in lost sales, this year.

Larger companies are trying to shed their less profitable divisions and/or divisions which are perceived not to be part of their core business, adds Harris.

Tech takes over

The M&A activity comes as a profound change sweeps over the life sciences sector, as businesses fight to stay relevant in an increasingly patient-centric and digitally-enabled world where traditional business models are challenged, says Doom.

He explains that there’s been a focus on restructuring of portfolios and divestments driven by specialisations in a fragmented therapeutic marketplace, as well as an emergence of cross-sector deals driven by tech-backed investors making acquisitions.

“Many of these deals have been driven by the blurring lines between technology and healthcare with the ongoing entry of consumer-focused digital companies into the life sciences market,” adds Doom.

A good example is Dassault Systèmes’ $5.8 billion acquisition of Medidata Solutions, a US firm focused on clinical trials, in June this year.

Medidata’s cloud-based platform, which allows clients to build their own clinical trials and perform medical research, comprises more than 17,000 clinical trials and a clinical data repository with more than 4.8 million patients.

"We have seen a strong M&A pipeline in the recent past with a multitude of megadeals." - Colin McCall, Taylor Wessing

Penny Powell, counsel at Hogan Lovells in London, adds: “The interest in AI-driven solutions, for early stage drug discovery in particular, is growing steadily among pharmaceutical companies (for AI-based medical imaging, diagnostics, personal AI assistants, drug discovery, and genomics).”

She adds that there’s an increased interest in new technologies impacting digital health products such as mobile applications and novel wearable sensors.

“The last couple of years have been marked by a wave of new research and development (R&D) collaborations between key biopharmaceutical players and technology-driven companies, which are primarily startups,” concludes Powell.

Doom expects to see increasing market fragmentation driving deals. “This is already apparent across several therapeutic areas. However, data is the new currency, and business models are still being challenged by new tech entrants and it is likely that really successful deals will be driven by big data and analytical capabilities that technology can bring,” he says.

Powell adds: “As clients seek to advance the digital health ecosystem, they will need to draw on the experience, assets and services available from other industry sectors to move quickly to optimise their market share.”

Future gazing

Shah doesn’t expect as many large deals to be made for the rest of the year, although he believes that midsize companies will make smaller acquisitions (hundreds of millions of dollars, rather than billions) to help keep pipelines strong.

In the CAR-T space, trials are coming through this year, so the industry is expecting results. “A slowdown is likely to occur only if there are negative or less successful results than expected,” Shah says.

Colin McCall, senior counsel at Taylor Wessing in London, is of a similar mind. “Although we have seen a strong M&A pipeline in the recent past with a multitude of megadeals with company valuations widespread in the double-digit billions, this trend has already begun to slow down,” he says.

He adds that valuations have risen in the last 12 months and that, from the firm’s point of view, it is unlikely that such levels will be repeated in the 12 months ahead.

Uncertainty, both political and economic, is playing some kind of part, although there’s no consensus on exactly what role it’s taking.

Powell adds that while it’s difficult to predict megamergers, these kind of deals “can sometimes spring from the sort of market uncertainty we are currently experiencing”.

Chaos and opportunity

It seems that nothing is immune to Brexit, and this topic is no exception. The political uncertainty of the UK’s planned exit from the EU and the rise of protectionist US trade policies should not be ignored, says Doom.

“Uncertainty typically breeds stagnation in deals and there may be a storm ahead to weather. However, we have had five years of unprecedented market liquidity and we expect there will be numerous opportunities in the future,” he explains.

Doom adds: “This holds true from our perspective, especially for those market players who embrace change as one of the new business imperatives, if one intends not to be left behind and stay ahead of the future curve.”

Powell also cites Brexit, noting that the UK’s impending departure from the EU has resulted in a slight slowdown in M&A in recent months, again due to uncertainty in the market.

“Whether M&A activity will pick up post-Brexit has yet to be seen and will depend on whether we leave and on what terms—if any,” she says.

The new EU Commission, taking office on November 1, will have competition law enforcement in the digital space very high on its agenda, adds Powell.

She says: “According to recent reports, the new Commission is likely to launch a sector enquiry next year which may need consideration on AI, data and mobility, in order to identify systematic competition law issues.”

Particularly energetic M&A activity is expected to stem from the US and China in particular, adds Doom, continuing the current geographic trend.

How to buy right

As is clear from “failed” acquisitions, there are many nuances that the acquirer must be aware of when making the decision to buy.

Traditional big pharma is used to focusing on certain therapies with large molecule products, so moving into, for example, CAR-T is a “very different science and very different cultural fit”, says Shah. He adds: “You have to be comfortable that you’re buying a platform business and not a bolt-on.”

For companies with money to spend, top of the agenda must be a review of the target’s IP situation and key assets. Harder to establish but growing in importance is how the IP may play out in future markets.

“A portfolio review will be a strategic priority; it is one of the best paths to sustained growth. As the life sciences sector becomes ever more patient-centric and the market continues to converge with technology, the companies that can exploit that junction will be the most successful,” says Doom.

Harris adds that IP is absolutely vital—it’s the instrument that allows the purchaser to protect the markets to which it seeks to gain access.

“In particular IP acts as a sword and a shield: a sword in that it allows the acquiring company to assert the IP against would-be competitors (or at least threaten to), and a shield that provides the acquirer with a basis to negotiate (by means of cross-licensing) with a competitor who tries to assert its own patents,” he explains.

The larger the IP portfolio the acquirer obtains, the stronger the sword and the shield functions of the portfolio become, says Harris.

While big-ticket numbers command the headlines, behind the billions there are tectonic plates moving as a market is reformed. To be successful, players will need to sell or acquire businesses that best understand the patient-driven, technology enabled future. To win, they will need to pivot more towards tech companies. Given where the IP is owned in that world, and the speed of the race, we can expect this deal-making to be followed by more licensing as the main players enact their plans to survive.

Behind the scenes

Robert Reading, London-based director of custom and managed solutions at CompuMark, a Clarivate Analytics unit, is well aware of the nuances behind the industry’s biggest deals.

“Acquisitions with existing large trademark portfolios may aim to gain market share, or access to a new complementary product range or new markets,” he explains.

Conversely, targets that have small IP portfolios may not offer much in the way of revenue initially, says Reading, but they may “work in a specialised area with considerable potential, or have made discoveries that make them market leaders, or have won the invention race and own a valuable patent”.

These targets could offer shortcuts to market that avoid expensive R&D, he notes.

Mark Markley, patent analyst at Derwent, a Clarivate Analytics business, adds: “Smaller entities are often laser-focused on small therapeutic areas, where large companies tend to be more risk-averse, diversified, and focused on more sure things.”

These smaller entities may receive funding from private entities or universities, so are less concerned with short-term gain, he adds.

According to Markley, IP by definition has to play a role, particularly with the long lead time in therapeutic development.

He concludes: “I would imagine that many of these companies have few products on the market, but are probably still in clinical trials. Because of this, the sole assets in play are IP.”

As a general rule, and affirmed by Clarivate’s statistics, the acquirer has a significantly larger portfolio than the target company. However, that’s not true for all acquisitions.

Bucking the trend is AbbVie’s $63 billion acquisition of Allergan. The acquired (Allergan) owns more trademarks and patents than the acquirer (AbbVie). While Allergan’s trademark portfolio amounts to 9,800 trademarks across 154 registers, AbbVie owns 3,000 trademarks in 144 registers.

Similarly, Allergan’s amount of live patent families, 1,441, vastly outweighs AbbVie’s own total of 862 families.

Fact file

Second quarter of 2019: