Insiders often refer to mergers and acquisitions as the lifeblood of the biotech and pharmaceutical industry. If that's true, then drugmakers may be in poor health following an unusually slow year.
In 2021, biopharma M&A dipped to one of its lowest levels on record, according to a report released this week by financial services provider EY. At $108 billion, the total value of these deals was only about 40% of what was seen in 2019. EY also estimates that, when looking at all the cash, debt and equity they could use to fund transactions, biopharma buyers deployed just 9% of the nearly $1.2 trillion at their disposal last year.
Still, the pressure to pursue acquisitions is mounting for many would-be buyers. Key patents protecting major products from Merck & Co., Bristol Myers Squibb, Pfizer, Novartis and others are set to expire before the end of the decade. Notably, AbbVie's $63 billion purchase of Allergan back in 2019 was made, in large part, because of the impending threat of generic competition to its blockbuster drug Humira.
Patent protection is only one concern, however. Competition in research areas like oncology, immunology and rare disease is dramatically increasing. At the same time, intense public and congressional scrutiny of drug prices has stifled one of the industry's long-used methods for lifting sales.
"To stay competitive, bigger biopharma companies have no choice but to be aggressive in their pursuit of external innovation," EY's deal experts concluded in their new report. "Simply put, they need to transact if they want to transform their businesses."
Here are five of the top questions facing biopharma dealmakers over the next year:
How much will M&A rebound?
Analysts expect that, following the recent quiet period, M&A engines are ready to start firing again. The team at investment firm SVB Leerink, for example, predicts the number of deals in 2022 will be the same or larger than in 2021, while their overall value will be "significantly higher."
"We don't see this year's preference for small tuck-in deals as a permanent shift in M&A strategy for large biopharmas; rather, it is an anomaly year with several contributing factors," SVB analyst Geoffrey Porges wrote in a December note to clients.
Of course, deals require not only an interested buyer, but also a willing seller.
For the past couple years, smaller biotechs have had a relatively easy time raising money from venture capital backers as well as the public markets, thereby making deals with large pharmaceutical companies less necessary. Yet, biotech stocks took a downward turn in the back end of 2021, stoking fears that some investors may retreat from the sector. If these concerns persist, and the market value for biotechs remains suppressed, it could result in more dealmaking.
"We expect financing options to remain open for attractive technologies, but continued challenges in the public markets could lead to a greater number of smaller companies being willing sellers in 2022," Mizuho Securities analyst Vamil Divan wrote in a recent note to clients.
Are megadeals really on the table?
Pfizer, for one, forecasts at least $65 billion in sales from the coronavirus shot it markets with partner BioNTech across 2021 and 2022. Novartis also just sold off $21 billion worth of stock in Roche, and may free up even more money through the sale or spinoff of its generic drug business.
Across the industry, SVB Leerink has identified more than a dozen large pharmaceutical companies that should have at least $20 billion in cash on hand by the end of this year.
To some, that many deep pockets raises the odds of a megadeal. Porges and his team have argued that it wouldn't be surprising to see one or more tie-ups between big drug companies in the coming months. The last such deal came in late 2020, through AstraZeneca's $39 billion purchase of the rare disease-focused Alexion Pharmaceuticals.
Additionally, several larger drugmakers have recently run into setbacks, lowering their market value and making a deal to acquire them seem less aspirational.
Perhaps the most talked about among these companies is Biogen, shares of which have been nearly cut in half since June. Last month, a Korean news outlet reported that Samsung was in talks to acquire Biogen, a story the biotech division of Samsung later denied.
Can brain drugs steal the spotlight?
For the past 20 years or so, many of the world's most powerful drug companies shied away from the brain and central nervous system, or CNS. Setbacks and failed programs were exceedingly common in neuroscience, which led drug developers to believe they didn't have a strong enough grasp of the biology and that money would be better spent on other areas of research.
But some now believe a sea change is underway. Last year saw GlaxoSmithKline mount a return to brain drugs through a deal with Alector, a biotech trying to fight neurodegeneration by harnessing the immune system, worth at least $700 million. Pfizer and Novartis also inked deals, with the former securing sales rights to a migraine drug developed by Biohaven Pharmaceuticals, and the latter teaming up with Belgium-based UCB on an experimental pill for Parkinson's disease.
Overall, the number of strategic collaborations focused on neurology was up about 50% in 2021 compared to the year before, according to the investment bank Jefferies. More deals may be on the way, too, given the renewed interest of some big pharmas and the steady crop of neuroscience biotechs that are entering the public markets.
"We predict CNS [and] neuro will remain a more investable space in 2022," wrote Jefferies analyst Andrew Tsai in a Jan. 2 note to clients.
Tsai added that his team thinks Bristol Myers Squibb, Johnson & Johnson, Eli Lilly, Roche, Takeda, AbbVie, Novartis and Biogen appear to be the "most keen" on pursuing neuroscience deals.
How much of an impact will the FTC have?
Notably, the big pharmas that have expressed interest in neuroscience seem to be preferring small- to medium-sized deals in the space — a strategy Tsai suggested may be partially shaped by a desire to avoid scrutiny from the Federal Trade Commission.
As the government body responsible for signing off on corporate mergers, the FTC holds considerable power over the pace of dealmaking. So, last March, when the agency and some of its counterparts abroad said they would be reexamining how biopharma deals are reviewed, alarm bells sounded across the industry.
"This is a pretty clear signal that the lights are no longer green," antitrust attorney David Balto told BioPharma Dive last year, adding that "companies need to be much more cautious about the deals they consider." Balto represented unions and consumer groups that objected to AbbVie's acquisition of Allergan, which was one of the deals the FTC homed in on before deciding to reassess its review process.
Since then, the FTC has gotten a new head in Lina Khan. Khan previously served as counsel to the House Judiciary Committee's Subcommittee on Antitrust, Commercial, and Administrative Law, and as a legal adviser to former FTC Commissioner Rohit Chopra.
Khan's background and her critique of big tech monopolies means it would be "reasonable" to expect deals might take longer to close or receive a greater level of inspection, Jefferies analyst Michael Yee wrote in a client note published shortly after Khan was sworn in on June 15. Even so, Yee and his team argued that "deals should still be fine" overall, upticking in the second half of 2021 and first half of 2022.
Indeed, there were 21 biopharma acquisitions worth $50 million or more in the back end of last year, compared to 14 in the front, according to data compiled by BioPharma Dive. Some of the more sizable deals of late include Merck's $11.5 billion purchase of Acceleron, Pfizer's $6.7 billion acquisition of Arena Pharmaceuticals, and CSL's $11.7 billion bid for Vifor Pharma. Should deals like these keep going through, the perception of greater regulatory scrutiny may ease.
What's going on with blank-check companies?
Initial public offerings are a typical stepping stone for many growing biotechs, but they aren't the only means of reaching the public markets.
Blank-check companies, also known as SPACs or special purpose acquisition companies, offer another option. They're created with the sole purpose of going public and then merging with a promising company in a particular industry. For biotechs, the main draw to SPACs is that they've already taken care of the often long and arduous task of running an IPO, and therefore come equipped with a deep pool of available cash.
Last year saw a step up in biotech mergers with SPACs. SVB Leerink had tallied 15 of these transactions by November, compared to six across all of 2020. In December, another drugmaker, Alvotech, agreed to a SPAC deal with gross proceeds expected to exceed $450 million.
While these deals have become common, their performance has likely left some investors wanting. Porges, of SVB Leerink, noted that SPACs achieved lower cumulative returns than IPOs in both 2020 and 2021.