Report: Biopharma dealmaking set to level off
- Dealmaking activity in the biopharma and life sciences sectors will likely moderate in 2017 to recent historical norms despite optimism for an uptick, according to a new report from contract services firm InVentiv Health.
- Results from a survey of 107 executives involved in buying and selling decisions suggest M&A momentum has slowed a step from 2015's high water mark, driven by a push to focus pipelines around core therapeutic areas on the part of buyers and a mismatch in supply and demand for assets on either end of the development spectrum.
- But the fierce pushback on drug pricing and increased political scrutiny of the industry appear to weigh less heavily on companies' eagerness to strike a deal than headlines might suggest. Internal abilities to finance an acquisition and a broader set of options for sellers to access capital ranked as higher factors among respondents.
Expectations that the Trump administration would push quickly on corporate tax reform or map out a path for less costly repatriation of off-shore cash drove up hopes 2017 could see higher M&A levels. So far that hasn't come to fruition as the ongoing battle to pass a replacement to the Affordable Care Act has sapped legislative momentum elsewhere.
U.S. pharma companies, particularly giants like Pfizer and J&J, keep much of their cash in off-shore holdings. A lower repatriation rate for that money or broader progress on reforms to corporate tax law could lead to a large influx of capital that companies might use to buy up promising assets. (At least in principle — a 2004 tax holiday under President George W. Bush didn't lead to higher U.S. investment or more jobs, according to an analysis from the U.S. Department of Treasury.)
Absent such a macro-level shift, pharma and biotech dealmaking looks set to continue regressing back to its five-year average from the record $425 billion worth of deals seen in 2015, says Inventiv's report.
That prediction is supported by data from PwC, which found deal volume slowed considerably in the first quarter of this year from both the preceding three months and the same period a year ago. Excepting J&J's $30 billion acquisition of Actelion, deal value for the quarter was also lower than the previous two periods.
Several structural factors underpin that expectation.
Respondents to Inventiv's survey reported a greater mismatch between the assets buyers want to acquire and those sellers are interested in parting with. Fewer buyers are interested in picking up preclinical assets, while more than half of sellers are shopping those candidates. On the other end of the spectrum, buyers are more eager to add Phase 3 or marketed drugs to their portfolios — assets that sellers understandably loathe to let go.
The report's authors saw this as evidence buyers' appetite for risk may be lower, leading some to wait for more data before pulling the trigger on a deal. At the same time, higher levels of venture funding and other avenues to raise capital mean some emerging biotechs can afford to wait.
"True innovators can expect to benefit from the emergence of new buyers and more financing options from the capital markets, permitting them to retain rights longer," the authors wrote. "This market dynamic allows innovators to hold on to assets through to commercialization in some disease areas."
Looking at specific therapeutic areas, increasing interest in hepatic diseases such as NASH and CNS-neurology has driven demand past supply, creating a seller's market in those sectors. Meanwhile, an explosion of development in oncology has translated to greater supply of preclinical through Phase 2 cancer assets than currently demanded by buyers, although demand outstrips available Phase 3 or marketed assets.
Overall, though, pipeline prioritization and a greater willingness to look outside for innovation on the part of pharma bodes well for biotechs looking to land a deal.
"In many respects, this is still a seller's market as buyers narrow their therapeutic areas of focus and fiercely compete for entry and leadership in hot therapeutic areas or to gain technological advantage," the report's authors wrote.
- Inventiv Health 2017 Dealmakers' Intentions study
Follow Ned Pagliarulo on Twitter