The life sciences industry set an all-time record for M&A last year, according to EY, which anticipates 2020 being another busy year of dealmaking, but unlikely to surpass 2019 levels.
The consultancy on Monday released its annual report on dealmaking, timed to coincide with the start of the J.P. Morgan Healthcare conference in San Francisco, the year's biggest event for the biopharma industry. EY tallied $357 billion in 2019 deals among life sciences companies, which encompasses pharma, biotech and medtech — an "all-time record" that surpassed a previous high set in 2014.
"2019 has been a 'mega' year driven by pharma buyers," EY consultant Peter Behner said in a statement. "In 2020, firepower remains plentiful and we expect to see more activity in medtech and big biotech, with megamergers coming from companies with acute growth gaps."
Notable acquisitions in 2019
|Acquirer||Acquired||Approx. deal value||% premium*|
|Bristol-Myers Squibb||Celgene||$74 billion||54%|
|Pfizer||Array Biopharma||$11 billion||62%|
|Novartis||Medicines Co.||$10 billion||24%|
|Eli Lilly||Loxo Oncology||$8 billion||68%|
|Roche||Spark Therapeutics||$5 billion||120%|
|Astellas||Audentes Therapeutics||$3 billion||110%|
*Premium calculated over closing share price the day prior to deal announcement.
EY said it is "highly unlikely" M&A reaches the same level in 2020. But dealmaking should still be strong, with the life sciences industry holding about $1.4 trillion in financial capacity to pursue acquisitions. EY anticipates big biotechs and medtech companies that largely remained quiet in 2019 will drive more activity in 2020.
In predicting dealmaking to continue, EY shares the view of analysts at investment banks SVB Leerink and RBC Capital Markets, both of which expect M&A to continue apace through at least the first half of 2020.
Most biopharmas have the ability to complete bolt-on acquisitions in 2020 and about one-third of industry leaders could pursue megamergers, defined as deals worth more than $40 billion, EY said. But some of businesses with the capability appear uninterested, such as Roche, Novartis and Merck & Co., all of which have talked down that approach.
EY identified Johnson & Johnson, Novo Nordisk, Pfizer, AstraZeneca and Eli Lilly as other pharma giants with the capacity for large-scale deals. Takeda and AbbVie, both of which recently completed buyouts exceeding $60 billion, rank among the companies with the least firepower, as does Bayer.
Unsurprisingly, given deals brokered by Bristol-Myers Squibb and AbbVie, pharmas drove the bulk of M&A activity in 2019, while top biotechs were relatively quiet in comparison.
Instead of M&A, big biotechs in 2019 favored share buybacks and dividend payments, EY noted, echoing a warning the consultancy made in last year's report. Tracking data for the first half of 2019, EY found leading biotechs spent 39% of their capital on R&D, 39% on share buybacks, 13% on dividends and 9% on M&A.
"Such behavior may please shareholders in the short term, but it has long-term downsides, suggesting companies are uncertain about how best to invest for future growth," the report said.
Analysts at SVB Leerink are also looking for large biotech to return to M&A, predicting in a December note to investors that Gilead, Amgen and Biogen all will be active in pursuing takeovers this year.
EY's analysis flagged the lack of dealmaking around digital technologies, with drugmakers opting against using M&A to build capabilities in data analysis and artificial intelligence. Companies instead chose partnerships, such as 2019 pacts by Novartis and Microsoft or Gilead Sciences and Glympse Bio.
The authors wrote these under-resourced areas could help the industry answer difficult, yet enduring, questions on the value of the industry's products. Digital investment could also help drugmakers in areas like clinical efficiency, patient outcomes and cost measurement.
The lack of M&A in this area is "partly because the [return on investment] remains theoretical," EY said. "But it's also because the valuation mechanisms used to assess traditional products don't necessarily apply," citing the hard-to-model nature of these deals.
One notable exception is Roche's 2018 acquisition of Flatiron Health for $1.9 billion.
Much of what drove the biggest deals of 2019 will continue in 2020, EY expects, particularly as larger drugmakers narrow their research focus or seek to build a leading position in select areas.
Others, though, followed a different logic. AbbVie's takeout of Allergan was driven by the need to diversify away from an over-reliance on Humira, for instance, while Vertex jumped into a new research area of diabetes in buying Semma Therapeutics.
Investors and Wall Street analysts are watching the JPM conference to gauge whether 2020 may unfold in a similarly acquisitive fashion. So far, only one deal, the buyout of Dermira by Eli Lilly, has been announced in the opening weeks of 2020.
EY's report tracked deals through November, which does not account for multi-billion dollar acquisitions announced in December, including Astellas, Sanofi and Merck buying, respectively, Audentes Therapeutics, Synthorx and ArQule. Taken together, those would boost the EY estimate by more than $8 billion.