Pharma groups are expected to hold off on blockbuster mergers in the second half of 2020 due to uncertainty over the US presidential election, the COVID-19 pandemic, and the valuation of potential targets, said sector advisors and industry experts. Instead, pharma companies will continue to pursue bolt-on acquisitions and partnership opportunities.
Merger speculation is rife in the sector as highlighted by last month’s media report that two of the world’s leading drug makers, USD 155bn market cap AstraZeneca [LSE:AZN] and USD 98bn market cap Gilead Sciences [NASDAQ:GILD], were in preliminary deal talks.
The chance for this tie-up, or any other pharma deals of this scale, coming to fruition seems low “in this time and age,” the industry sources said. Along with strategic and antitrust complications, mega deals in pharma often cross borders and are subject to geopolitical risk, some of the sources said.
Deal activity this year in the pharma and healthcare sectors globally is running at one-third of 2019 levels by deal value, according to Mergermarket data, with 666 deals worth USD 77bn announced in 1H20 compared to 875 deals worth USD 334bn in 1H19. This suggests the deals that are being struck are much smaller.
The last big pharma deal was the USD 63bn merger of Allergan and AbbVie [NYSE: ABBV], which was announced in June 2019 and closed nearly a year later. The Federal Trade Commission and European Commission required the drug makers to divest assets to secure clearance after extended antitrust reviews.
The FTC, which typically reviews pharmaceutical mergers in the US, is likely to keep up enforcement activity and scrutiny of the sector headed into the fall, said two antitrust attorneys.
Antitrust enforcers have continued to issue second requests and require merging companies to divest assets even as many officials are working remotely and reviews are taking longer to complete, agency officials and attorneys have said.
In the Allergan case, the two Democratic FTC commissioners split with their Republican majority counterparts and voted against the divestiture remedy.
The Democrats have argued that the FTC’s approach to reviewing pharma deals is too narrow and fails to address the full scope of potential competitive harms, while the Republican commissioners have argued for in-depth antitrust investigations based on the specific facts of individual mergers.
Last year in the review of Bristol-Myers Squibb’s [NYSE:BMY] USD 74bn blockbuster acquisition of Celgene, the Republican commissioners voted to require Celgene to divest a lucrative drug to resolve concerns with an overlap between an on-the-market drug and a drug still in development. The divestiture decision surprised some followers of the agency and signaled a tougher approach to enforcement.
Foreshadowing their stance on Allergan, the Democratic commissioners dissented against the Celgene remedy, saying that the pharmaceutical industry is highly concentrated and that consolidation is leading to higher drug prices.
For companies looking at the possibility of making a major strategic move, “I would say probably not now, mostly because of the virus but also because of the uncertainty around the [upcoming presidential] elections,” said the first attorney, who has government experience.
The possibility that presumptive Democratic presidential nominee Joe Biden may win the White House has some companies worried because Democrats have historically been more aggressive than Republicans on antitrust enforcement, the two attorneys added. Antitrust emerged as an issue in the Democratic presidential primary this past winter.
Regardless of who wins in November, the political environment will likely remain tough for major pharmaceutical deals as lawmakers on both sides of the aisle continue to call for curbs on big mergers in both the pharmaceutical and tech sectors.
Last September, nine senators led by Amy Klobuchar (D-MN) wrote to FTC Chairman Joseph Simons asking that the agency closely scrutinize pharmaceutical mergers that raise competition issues. These included the then pending Allergan/AbbVie and Celgene/Bristol-Myers deals.
Along with antitrust, national interest concerns can emerge in large cross-border deals. UK-based AstraZeneca and US-based Gilead would face risk because both companies are developing promising COVID-19 treatments and vaccines to combat the global health emergency, an industry consultant said.
Gilead’s main HIV franchise is also “politically sensitive” since the US government claims patents in some of the HIV prevention medications, the consultant said, noting the years-long dispute between the company and the government are still not resolved.
“It’s difficult to imagine the government would allow this type of asset to be acquired by a foreign buyer in this time and age,” the consultant said.
Overall, he said, biopharma companies, especially those developing critical technologies and products, need to be wary of the risk of increased national security scrutiny under the new rules put into effect earlier this year.
During the Obama administration, the US Treasury Department issued tax regulation to prevent so-called inversion deals that saw US pharma companies merging with foreign firms in order to move to domiciles with lower taxes. The rules crushed Pfizer’s [NYSE:PFE] USD 160bn merger with Allergan.
The increased political uncertainty has led many companies to take a more conservative approach and move on deals that they can close quickly and without antitrust concerns, the attorneys said.
This, counterintuitively, may be good news for shareholders.
Several pharma investment bankers said the new approach comes at a time when the industry is debating if there had been an overvaluation for both big-ticket pharma mergers and takeovers of single asset biotech startups.
“There are a few mega pharma deals in recent years that did not look like they have necessarily worked, given how much the buyers paid and the effort of closing”, the first banker said.
Over the past three years, shareholders have mounted initial opposition to mega deals that ultimately closed following lengthy reviews. The combined firms’ post-deal valuations “arguably have been squeezed more or less” compared to peers, the first banker added.
Still, big pharma groups continue to want to use acquisitions to expand their drug pipelines and fuel innovation. Deal structures like minority stake investments with buyout options, partnership deals with equity component and licensing agreement and structured milestone payments have become popular alternatives to traditional acquisitions, two of the bankers said.
These types of deals allow the buyer to secure a relationship with the target without rushing to make a full investment before seeing if an experimental drug is approved, they said. The pandemic has further impacted the potential for deals since some clinical trials that would provide data on experimental drugs have been delayed, one of the bankers said.
On the other hand, in the current turbulent market potential biotech targets, especially early-stage ones, are more open to taking funding, partnership, or other types of resources to carry on their clinical programs, the bankers said.
Gilead, for example, has deployed such deal strategy in its recent business development efforts to move into the oncology space.
In a June deal, Gilead acquired a 49.9% stake in the cancer immunotherapy developer Pionyr Immunotherapeutics for USD 275m, with an exclusive option to purchase the remainder of the company. The company in May forged another 10-year Immuno-oncology partnership with Arcus Biosciences [NYSE:RCUS] and earlier in the year acquired oncology drug developer Forty Seven for USD 4.9bn.
“I can easily see Gilead do five or six more deals like this.… So now the hunt for Gilead is to try to find the next [blockbuster drug] from all these different deals. They are betting the strategy will work five years from now,” the first banker said.
Elsewhere in the market, Roche [SIX:ROG] announced a licensing deal this month, offering an upfront payment to license and market a targeted cancer treatment from Blueprint Medicines [NASDAQ:BPMC]. Sanofi [NYSE:SNY], according to a recent media report, is evaluating potential acquisitions and is interested in Principia Biopharma [NASDAQ:PRNB], USD 2.8bn market cap company that has a partnership with Sanofi.