Mergers and acquisitions activity in the pharmaceutical industry got off to a slow start for 2020, but industry experts believed this was just a temporary pause before the floodgates opened - at least, they did before worries over the new coronavirus rocked the markets.
In an Industry Global News 24 article, Alan Klein, co-head of M&A at the law firm of Simpson Thacher, claimed that volatility is bad for deal making across all industries because it’s difficult for buyers and sellers to effectively gauge value.
A decline in profits could create a disconnect between buyers and sellers. The shortfall is likely to cause M&A activity to decline. Buyers typically react quickly to market changes, and they could lower their offers. William Blair and Co.’s John Ettelson says that sellers, who are usually slower to respond, would likely still want their original prices, putting a damper on transaction volume.
In the pharma industry, there was only one billion-dollar deal in the first two months of 2020. In the same period in 2018, there were four of that size. Things started off slow in 2019 until the Bristol-Myers Squibb Company’s (BMY) $74 billion purchase of Celgene. The Celgene deal seemed to kick-start others, including AbbVie’s (ABBV) $63 billion acquisition of Allergan and Takeda Pharmaceutical Company’s (TAK) nearly $59 billion buyout of Shire.
Pre-cornoavirus conditions, analysts and consultants seemed to believe the slow start to pharma M&A in 2020 didn’t mean a great deal. "We don't think a lack of deals over a couple of months is really anything notable," said Phil Nadeau of Cowen & Co.in a Feb. 27 article in Bio Pharma Dive. "It's probably just a bit of a dry period for no reason at all."
May Investment Banks thought that drug companies would pursue deals early in the year, before any disruptions that might be caused by the U.S. presidential election. That hasn’t happened, although it’s clear that many large biotech and pharms still need M&A.
Industry experts seem to agree that two big biotechs, Gilead Sciences (GILD) and Biogen (BIIB), are in sore need of additions because the drugs they’re testing might not be as commercially successful as their current marketed products that are losing momentum.
Among pharmas, Sanofi (SNY), Eli Lilly and Co. (LLY) and GlaxoSmithKline (GSK) are trying to play catch up in the industry's hottest research area, oncology, and have shown a willingness to speed up that process through buyouts. Roche (RHHBY) and Novartis (NVS) have already paid large premiums to get into the potentially lucrative field of gene therapy.
The most attractive targets seem to be small and middle size biotechs. Acquirers are waiting to see how the drugs of these companies perform in clinical testing. Buyers appear to be most comfortable with deals ranging from $2 billion to $10 billion.
Disclosure: The author holds positions in Eli Lilly, Bristol-Myers Squibb and Gilead Sciences.
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