4 big biopharma deals we might see in 2015
In 2000, UK-based Glaxo Wellcome joined forces with SmithKline Beecham in a $74 billion merger that birthed the global pharma giant GlaxoSmithKline. It was, far and away, the biggest biopharma deal of the year.
What a difference 14 years makes.
In 2014, there were more than 180 M&A deals in the biotech and pharmaceutical spheres, totaling $212 billion. And if the breakneck pace of biopharma deals in just the last three months is any indication, the sector doesn't plan on slowing down consolidation anytime soon.
From Pfizer-Hospira to Valeant-Salix and AbbVie-Pharmacyclics—not to mention one of the most historic days in healthcare deals ever in late March, including acquisitions by Teva and Horizon—merger mania is alive and well.
Deal or die
There are three big takeaways from the current M&A wave, Dan Mendelson, president and CEO of healthcare consulting and analytics firm Avalere Health, told BioPharma Dive.
"First, you see branded manufacturers interested in expanding or diversifying into biosimilars and acquiring the knowledge that is necessary to not only field biosimilars, but also to compete in a world where biosimilars are going to be emerging in the market over the next couple of years," he said. "Second thing is that you see a lot of interest in molecular diagnostics and, you know, kind of what [President Obama] called, 'precision medicine...' In other words, sequencing, or the discovery of biomarkers, to help target therapy.
"And then I think the last thing is, you've got some companies that are all of a sudden sitting on a lot of cash, like Gilead. And when you're sitting on billions of dollars of cash, you're usually going to deploy that for acquisitions. Because if you can get a better return on that cash than you could either by purchasing back shares or returning the money to shareholders, that's what the shareholders want you to do."
Jacob Plieth, a senior editorial analyst with life science market intelligence firm Evaluate, emphasized just how critical consolidation is in the industry's—and investors'—psyche right now.
"I think what we're seeing is that the current market is rewarding deals—companies that just do deals, doesn't matter what you do, just do something," he said.
This compulsion toward dealmaking makes intuitive sense for smaller operations focusing on more specialized assets. If these R&D guppies can't attract the bigger pharma sharks, their funding pool could dry up. For larger firms, an inability to make deals in the current landscape could raise questions of competence.
"No one in this market wants to get left behind. No one wants to be seen as being a laggard," said Plieth. "Even companies like Roche—which said early on, 'valuations are really stretched, we can't see how the market adjusts for these valuations'—and yet they've done a couple of really high-priced deals.
"I think everyone realizes that you just have to do deals. If you see an asset, you've just got to do it, you've just go to outbid everyone else and buy it," he said.
So what are some of the other deals that may transpire in what's shaping up to be a historic 2015? Here are four to consider, why they may happen—and what might hold them back.
The Synergizer: Merck-Jazz Pharma
Jazz Pharmaceuticals has perennially been on investors' lists of prime acquisition targets. Could this finally be the year that it happens?
"I think it's possible," Mendelson said. "I think with a lot of these companies, it's a matter of the perception of the price. And sometimes it takes some time for the company that is being acquired to kind of get comfortable with the price levels, [but] I do think that it's possible that this would be the year for Jazz."
One potential suitor is pharma giant Merck. Some industry observers argue that Merck's recent approval of an additional $10 billion in buybacks might foretell a reluctance to spend money on even more acquisitions after its deal with antibiotics maker Cubist.
But Plieth says that isn't necessarily the case. The buyback "does send a negative signal to the M&A hopefuls, but I probably wouldn't read too much into it," he said. "Companies are doing big, big buybacks all the time, but they still have plenty of leverage for M&As, so I'm not sure that necessarily discounts" Merck doing another deal.
Why it might happen: The logic behind a Jazz acquisition for Merck boils down to one word: Synergy.
Jazz's biggest product is Xyrem, a drug for the treatment of patients with narcolepsy-related daytime sleepiness and narcolepsy-related acute muscle fatigue. It had net sales of about $950 million in 2014 and could definitely clear the symbolic blockbuster threshold of $1 billion this year, judging by the fact that sales spiked 37% year-over-year in 2014.
The company also has more modest, though by no means negligible, oncology and psychiatry franchises, including the acute lymphoblastic leukemia (ALL) drug Erwinaze (more than $200 million in net sales in 2014) and several other products related to cancer imaging and dealing with the adverse effects of chemotherapy.
For Merck, this product franchise is a perfect complement to its own sleep disorder and oncology medications. Those include the promising Keytruda (which is facing hefty competition from Bristol-Myers Squibb's fellow PD-1 inhibitor Opdivo) and the insomnia medication Belsomra, which analysts expect to reach about $300 million in 2017 sales.
Merck's current bestsellers are spread across therapeutic categories such as diabetes, CVD, and HIV management, as well as various vaccines such as HPV flagship Gardasil. That means a Jazz buyout could add some oomph to the company's cancer and sleep franchises.
The question is: How much would Merck be willing to pony up in order to nab a slate of drugs that offers obvious horizontal integration benefits? And what number would be acceptable to Jazz's board and shareholders?
Jazz's share price has hovered between $170 and $180 for the past three months and its market cap is pegged somewhere around $10.5 billion. Particularly lavish premiums have been a consistent undercurrent in biopharma deals as of late (Merck boosted Cubist's value 35% at the time of acquisition), which means Jazz would probably want to see an offer of at least $13 billion to $14 billion before contemplating a sale.
Why it might not happen: The biggest counterpoint against this deal taking place may be the very fact that it seems so obvious—and yet has failed to materialize.
"You have to wonder, why would that buy happen now?" asked Plieth. "Why wouldn't it have happened at any other point given those synergies with Merck... You must have thought that Merck would at least have considered them already and turned them down."
The Longshot: Shire-BioMarin
Of all the potential deals that BioPharma Dive discussed with analysts, none elicited more eye rolls than the prospect of a deal between Shire and BioMarin.
That's understandable. Many analysts have floated the prospect of Shire trying to buy out BioMarin and its rare disease franchise, but it hasn't happened. And in an episode that underscores some investors' fears about the sugar-high nature of the current biotech market, a blog post by Ben Harrington contending (with little evidence) that Shire was actually considering making such a move sent BioMarin shares soaring 15% on March 27.
But longshot or not, there's a relatively simple case for the deal.
Why it might happen: Shire wants to become the rare disease drug maker and has shown it's willing to spend cash to do it. BioMarin is a strong orphan drug firm with a promising pipeline, including its Duchenne muscular dystrophy candidate. That, in a nutshell, is the impetus for a such a deal.
But this would likely have to be structured as a merger in order to work at all. Shire's market cap is around $31 billion while BioMarin's is a more "modest" $20 billion. Even with the sizeable breakup fee that Shire nabbed from AbbVie after that deal fell through, Shire would have to assume a likely unsustainable level of debt in order to finance such a deal.
"They'd have to agree to some kind of merger, and in that scenario you'd kind of have to see a clash between which company, which management team would seize the upper hand," said Plieth.
Why it might not happen: The case against the deal is equally clear-cut.
"I think it's possible, but it would be a stretch," said Mendelson. "BioMarin is doing well, you know? I'm thinking that Shire's currency would have to be better in order to acquire a high-flying asset like that... The other thing I'd say about a company like BioMarin is that they're enjoying operating independently. So there's no indication that they're 'on the block.'"
Plieth largely agrees with that argument—but proposes a provocative alternate scenario. "I think BioMarin is too big for Shire," he said bluntly. "I think it'd be very hard to see that one come off. BioMarin obviously is a buyout candidate."
"But I would expect BioMarin to fall to someone much bigger—a company that, for instance, had been looking at buying Shire and failed (except now it's snapped up Pharmacyclics)," he said, laughing, referring to AbbVie.
The Old Dog Learning New Tricks: Gilead-Seattle Genetics
A little drug named Sovaldi (and its younger, stronger cousin Harvoni) has left Gilead Sciences with a wonderful problem: The company is sitting on a mountain of money.
Some industry experts think that could foretell a pipeline-diversifying expansion, most likely in cancer. "Beyond hep C, Gilead charts its course for a bigger presence in oncology, including deal-making," predicted Actera Pharmaceuticals co-founder and managing partner Sean Dalziel in an interview with BioPharma Dive in January.
Mendelson agrees. "Gilead is flush with cash and has a range of strategic possibilities," he said. "As a company primarily focused on hep C, with great scientific and commercial resources in specialty markets, some measure of clinical diversification seems attractive at this point."
"Gilead is interesting because obviously it's tried to get into oncology and not done very well," added Plieth. "That CLL drug that they launched, Zydelig, that's really struggled against [AbbVie/Pharmacyclics'] Imbruvica."
That's not the only road bump for Zydelig and Gilead's fledgling oncology ambitions. For instance, a German price watchdog recently spurned Zydelig, arguing the drug did not provide significant added benefit for CLL patients considering its exorbitant price tag.
In order to get into the cancer game, Gilead could consider a deal for a company that likely won't soak up too much of its cash while giving Gilead access to proven products with label expansion potential. One such company is Seattle Genetics.
Why it might happen: In terms of both size and therapeutic specialty, Seattle could be a strong fit for Gilead, according to Plieth.
"If Gilead is serious about oncology, I would expect some small-ish moves first rather than trying to go for a big oncology merger," he said. "So in that respect, I think Seattle might make sense. Hematological cancers are much more of a focus for Gilead, so I guess that, on that score, Seattle would make sense. It's interesting... I wouldn't rule it out."
Seattle's market cap is a (relatively) modest $4.5 billion, so even an outsized $7 billion bid wouldn't break the bank for Gilead. And Adcetris is a drug that's likely to keep growing in sales as it nabs more indications in more countries. Adcetris soared to more than $170 million in sales last year and has won approval in nearly four dozen countries, gaining 11 new approvals between October 2013 and October 2014. The company anticipates sales of about $205 million for the drug in 2015.
What's more, those sales are likely bumping against a ceiling imposed by the fact that Adcetris isn't yet approved for Hodgkin's lymphoma patients unless they've already had stem cell therapy and relapsed. A lot of the driving force behind the drug's sales stems from off-label use on Hodgkin's patients, and the company is gunning for the FDA's blessing for use of the drug on post-transplant Hodgkin patients at high risk of relapse.
Why it might not happen: One big obstacle to a Gilead-Seattle deal might be interest from other pharma companies with bigger oncology footprints. For instance, Bristol-Myers Squibb is already in a clinical collaboration to test Adcetris in combination with the company's surefire blockbuster anti-PD-1 drug Opdivo.
There's also the remote possibility that Gilead could proceed in another direction altogether and quash any potential future threats to its HCV franchise by buying such companies out. But as Plieth points out, given Gilead's utter dominance in that space (even under intense pricing pressure from payers like Express Scripts), such a deal might be a waste of time.
The Mega-Merger: Pfizer-Celgene
One of 2014's juiciest M&A stories was Pfizer's failed $116 billion hostile takeover bid for British pharma giant AstraZeneca. AZ CEO Pascal Soriot successfully swatted Pfizer away, arguing that his company had the pipeline and the moxy to stand on its own.
Some industry observers have posited that AZ hasn't exactly impressed with its revenue forecasts since Soriot presented his bull thesis, and that a second Pfizer bid this year isn't totally outside the realm of possibility—or if not that, then perhaps a bid for a different UK-based mainstay by the name of GlaxoSmithKline.
Both of these scenarios seem unlikely. First, the tax advantages of such a deal have eroded appreciably since last year thanks to new Obama administration rules aimed at curbing domicile-shifting inversion mergers.
And then there's the matter of politics. "[K]nowing what Pfizer went through, and how it was hauled over the coals by committees in AstraZeneca, I mean, you have to see that [with] GSK, that would only be worse," said Plieth. "You could argue that AstraZeneca is a UK-domicilied company that's very much U.S.-focused. But I mean, GSK is the flagship UK pharma company. Can you see that falling to Pfizer of all companies? It's so politically charged, I wonder whether Pfizer would even want to go down that route, despite the clear rationale that they might get from it."
But that doesn't mean that Pfizer shouldn't—or won't—make a big time play for some other company that could help shore up its weaknesses. "Pfizer is one of the companies most in need to do big M&As to keep its position," said Plieth. "[Pfizer CEO] Ian Read says, 'Oh we don't need to do anything, I don't know why analysts assume we're desperate to do a move.' They obviously do need to do a move, they do need to do something. The AstraZeneca bid last year demonstrated that perfectly."
With that in mind, a much more tantalizing option for Pfizer might actually be a company that's based right here in America: Celgene.
Why it might happen: A Pfizer-Celgene merger would set the corner of the Internet that harbors biopharma investors and reporters ablaze (particularly analysts who salivate at the thought of a traditional pharma giant making moves for a big name biotech). But it makes sense for several key reasons, especially Pfizer's lackluster cancer franchise.
Genentech/Roche dominates this field, while Pfizer is bested even by companies with relatively mediocre cancer sales.
"Pfizer probably is aware that it needs to do something in oncology," said Plieth. "Oncology is an area that's so hot at the moment, and Pfizer definitely is lagging. It even lags AstraZeneca, it clearly lags companies like [Bristol-Myers Squibb], and it's let a couple of what now look like promising oncology assets go."
That's what makes Celgene such an interesting target for Pfizer. The company's multiple myeloma therapy Revlimid is one of the hottest cancer drugs on the planet (it could top $7 billion in annual sales by 2017), and Celgene's blood cancer pipeline is a thing to behold. What's more, Revlimid has the potential to become an even bigger seller thanks to potential future label expansions in cancers ranging from leukemia to lymphoma, and as BioPharma Dive has previously reported, Celgene is a nearly unmatched master when it comes to making licensing deals.
"I think I would expect Celgene to continue to be very much on the buyout radar for some of these big pharma companies," said Plieth. "I went to the [American Society of Hematology] conference in December, and so many presentations I went to were either on Celgene drugs, on drugs where Celgene has a vested position, or drugs that are being developed by biotechs with which Celgene already has a deal. Its presence in hematological oncology is just unbelievable—it's huge. If Pfizer can raise the money, then yeah, Celgene would be up there [on the list of targets]."
Celgene could also benefit from the deal by massively diversifying its product line (65% of the company's 2014 sales were from Revlimid alone), transforming the biotech into a powerhouse with a wide reach and utter dominance of the multiple myeloma market.
Why it might not happen: Some experts, including Mendelson, think that Pfizer will want to take a bit of a break from massive deals after its recent acquisition of Hospira.
"Pfizer is and remains a capable acquirer, despite the fact that they will be focusing on digesting Hospira in the near term," he said. "My expectation is that there will be a cooling off period before they doing anything really big, but the smaller deals are of course possibilities."
The other obvious factor is price. Celgene's current market cap is around $96 billion, and the company certainly knows its worth.
"[Pfizer would] have to go at least, I guess, a 30% premium or something at least," said Plieth. "It would come down to a case of justifying that, you know? And whether Celgene management would want that, and whether Celgene investors would see that as the best way of realizing their future potential. Even that [price point] might not be enough."
A 30% premium would come out to an approximately $125 billion mega-merger, more than half the value of all 2014 biopharma deals combined.