Taxes, tech and China to fuel pharma M&A in 2018, says EY
- The market is looking "ripe for a surge in life sciences M&A" in 2018 due to a reworked U.S. tax code and growing competitive threats from large tech firms and Asian drugmakers, according to a new report from EY.
- EY predicts life science M&A to exceed $200 billion this year, though divestitures from big pharma players could lift that total even higher. Eli Lilly & Co., Novartis AG and Pfizer Inc., for example, are mulling a sale or spin-off of their respective animal health, eye care and consumer health businesses. Collectively, those units earned more than $10 billion during 2016.
- Repatriated cash should also facilitate dealmaking. EY estimates the top 10 U.S. life science companies have around $160 billion overseas, some of which they're sure to bring home under recently approved Republican tax legislation that levies a 15.5% tax on such funds versus 35% previously.
Life sciences M&A didn't hit the fever pitch some expected in 2017. Deal volume fell 20%, due in good part to lackluster activity among biopharmas. Whereas drug manufacturers accounted for almost 80% of the value of all life sciences M&A in 2016, last year they represented a much more modest 25%, according to EY.
Key to that weaker performance was uncertainty surrounding the U.S. tax code. Pharmas held out on big ticket deals in the hopes that Congress would enact more favorable corporate and foreign income tax rates, but President Donald Trump signed the bill just in mid-December.
"We heard time and time again during 2017 from the players — both from the middle market and the large players in biopharma and medtech — that it wasn't so much that uncertainty was holding up smaller deals, but it was certainly a potential barrier to really large deals," said Jeff Greene, EY's global transactions leader for life sciences and an author of the 2018 M&A Firepower Report: Life Sciences Deals and Data report, in an interview with BioPharma Dive.
With the new tax code in place, drugmakers are likely more willing to pull the M&A trigger. EY noted an extensive list of biotechs with promising pipelines, and therefore may come onto the radar of potential buyers. They include interference RNA specialist Alnylam Pharmaceuticals Inc. (market cap $12.6 billion), gene therapy developer bluebird bio inc. (market cap $8.6 billion), and neuroscience and endocrine disease-focused Neurocrine BioSciences Inc. (market cap $7.2 billion).
A survey from EY published in October found that 60% of life science executives plan on pursuing M&A in the approximate 12 months.
But biopharmas will have competition on that front, and not just from the usual suspects. Tech giants like Alphabet Inc. are diving deeper into the life science sector, while Asian countries — China, in particular — are putting billions of dollars toward improving their spot in global life sciences sector.
"As incursions from technology behemoths threaten the health care status quo, traditional biopharma and medtech leaders may find mega-mergers more tempting as a means to protect profitability, maintain competitiveness in key therapeutic areas and build scale to confront new challenges in the supply chain. The transformative CVS/Aetna merger may exacerbate these challenges, as payers move to drive value through lower costs," EY said in the report.
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