Dealmaking 2014 boom was fueled by a strong market and a renewed pharma focus

Print 16 January 2015
Staff Writer / BioWorld

SAN FRANCISCO – Dealmaking in "really robust" 2014 easily outstripped the previous year, with 3,141 agreements nailed down that year, valued at about $382.7 billion, as compared to 2013's total of just over 2,100, worth about $158 billion, said Vinay Singh, senior deals analyst with Thomson Reuters Recap – "a third as many total deals, [with] well over twice as much" money involved.

"This is everything in life sciences, not just VC-backed biotechs or just therapeutic companies. It's contract research organizations and manufacturers [too]," Singh noted of the Recap database, which also includes license, distribution and supply deals along with mergers and acquisitions (M&As). The year proved inspiring, as M&As comprised $277 billion of the total number, or 58 percent, and asset purchases $61 million, or 34 percent. Licenses and joint ventures (JVs) accounted for $36 billion, or 5 percent, with various other types of deals making up the remainder. Within M&As, 25 percent more took place in 2014 (412 deals) than in 2013 (308).

Singh said it's twice as much as the average seen during the past 10 years. "In terms of money exchanging hands, we've blown that out of the water," he said. "We haven't seen that kind of number in over a decade." Last year "was finally the arrival of the mega-mergers," he said. "We had entered 2013 anticipating that big pharma would open up their wallets again and make a splash. It wasn't so much the case in 2013, but we certainly saw that in 2014."

Recap's figures rolled out during the J.P. Morgan Healthcare Conference, where attendees of the traditional annual meeting hustled to make connections that might lead to their pieces of 2015's pie, while making sense of 2014.

Of the $277 billion, $170 billion, or 61 percent, related to therapeutic products, while devices made up $63 billion, or 23 percent, similar to previous years. "Interestingly, last year, lab agents and supplies was number three on the list," Singh said, but that was due largely to the September deal in which Merck KGaA, of Darmstadt, Germany, bought St. Louis-based Sigma-Aldrich Corp. for $140 per share, valuing the company at about $17 billion. "Somewhat sobering news" came in the field of diagnostics, where deals totaled only about $2 billion, he said. Several years ago, "a lot of optimism" prevailed about diagnostics helping to design clinical trials and heal patients, Singh said, but "we're really just not seeing a lot of activity in diagnostics for the second year in a row."

Broken out by indication group, infectious disease came up the winner, with $16.5 billion in aggregate worth in 10 total deals, six of which disclosed their financial terms. The average deal size amounted to $2.8 billion, with Whitehouse Station, N.J.-based Merck & Co. Inc. taking the lead by far, thanks to a pair of buyouts. The firm paid $9.5 million for Cubist Pharmaceuticals Inc., of Lexington, Mass., and $3.85 million for Cambridge, Mass.-based Idenix Pharmaceuticals Inc. (See BioWorld Today, June 10, 2014, and Dec. 9, 2014.)

For the takeouts of private firms Singh credited strong capital markets. "From a private company perspective, you've got multiple avenues and options, so the buy side has likely moved faster and sooner on these companies that can go public," Singh said.

The year's top 10 acquirers signed $214 billion in deal dollars by way of 32 acquisitions. Actavis plc, of Dublin, turned out the biggest money shopper, remembered for its $66 billion buyout of Irvine, Calif.-based Allergan Inc., in the form of a combination of $129.22 in cash and 0.3683 Actavis shares for each of Allergan's common shares. Allergan dodged a hostile takeover by Valeant Pharmaceuticals International Inc. (See BioWorld Today, Nov. 18, 2014.)

Actavis did more M&A deals, a total of $25.8 billion worth of disclosed transactions, putting the firm at the top of the heap with $91.8 billion. Another big payout came for Forest Laboratories Inc., of New York, for which Actavis paid $28 billion. (See BioWorld Today, July 3, 2014.)

PHARMA'S FOCUS IS BACK

Singh cited a pair of "really good examples of strategies we're seeing." The Actavis moves are "a great representation of what we're seeing from specialty pharmas, the growth-by-acquisition strategy," he said. "On the opposite end, we saw Novartis divest its animal-health unit to Eli Lilly. We saw a lot of that from big pharma last year – focusing on your core competencies and shedding some of your peripheral vision" projects. Indianapolis-based Eli Lilly and Co. paid Basel, Switzerland-based Novartis AG $5.4 billion for the unit, in an effort to bolster the position of Lilly's Elanco division. Lilly funded the all-cash deal with about $3.4 billion of cash on hand and $2 billion in debt.

Another 2014 trend involved assets swaps and divestitures, $61 billion worth. "If you were really to jump into who's behind those deals, for the most part it was big pharma," Singh said. Included were triple-asset swaps between Novartis (strengthening its position in oncology), London-based Glaxosmithkline plc (vaccines) and Lilly (animal health).

As for stage of development at which M&As took place, though it's still true that phase II and approval are the hot zones, 2014 saw a shift toward earlier-stage deals. On average between 2008 and 2013, considering 443 deals, 44 percent and 26 percent happened at the market-approval and phase II stages, respectively, with only a total of 10 percent at the lead-molecule/preclinical stage. In 2014, 29 percent and 23 percent of M&As took place at the market-approval and phase II stages, respectively, whereas 19 percent of deals were struck at the preclinical stage and 6 percent when the target had only a lead molecule. With more private-company deals done further upstream, earn-out structures stayed popular – almost 20 percent of private companies were acquired via contingency structures.

Laura Vitez, principal business analyst for Thomson Reuters Recap, provided a rundown of licensing and JVs from the firm's database for 2014, which she called "amazing." In all, 739 deals were done, valued at $36.1 billion. "The fourth quarter came in particularly strong," she said. The average number of licenses per quarter over the past five years was 155, and all four quarters last year were above that.

"This is momentum," Vitez said. "We're in an 'up' part of our cycle." She pointed to the principle in physics that objects in motion stay in motion until acted upon by an opposing force. "Everyone in the room is aware of what some of the forces might be that could impact us in the future," she said, "but for now we have momentum, it's very strong momentum, and we expect it's going to continue at least for the near term, because it's got some very strong contributors to it."

Mainly, cash is flowing again. "The capital markets fiasco is in our rear-view mirror," Vitez said. Venture firms are raising funds again, "and they're already putting that money to work," she said. "Large pharma is beyond the steepest part of the patent curve. Remember those site closures, layoffs, reorganizations and reprioritizations and restructuring and pain and confusion and chaos?" Such distractions made negotiating for new drug development hard, but pharma players have begun to regain their calm, Vitez said. "They're back, their focus is back and their dealmaking is back."

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