Good times roll through 2015 as life sciences dealmaking continued torrid pace

Print 19 January 2016
Marie Powers / BioWorld

SAN FRANCISCO — For the third straight year, money flowed like honey in the life sciences sector, with 468 life sciences M&As disclosed in 2015, according to the Thomson Reuters Deals Review, presented in conjunction with the 34th Annual J.P. Morgan Healthcare Conference. That total represented a 90 percent increase over the trough in 2012 and 11 percent more than in 2014, "which was no slouch," observed Laura Vitez, principal business analyst for Thomson Reuters Life Sciences. The number also compared favorably to an average of 320 M&A deals per year during the 10-year period dating back to 2006.

To put 2015 into context, however, M&A activity increased globally across multiple sectors, Vitez pointed out, thanks to cheap capital from low interest rates and a variety of other optimistic factors.

Therapeutics represented 123 of the 2015 M&As in the health care sector. The largest group of these, at 38 percent, were represented by diversified portfolios, where the acquired target contained assets or platform technologies in two or more core therapeutic areas. Some of these deals encompassed generics companies with broad portfolios, while others focused on specialty pharma, where activity is perennially brisk, according to Vitez.

The second largest group of deals came in the cancer space, at 15 percent, followed by infectious disease at 9 percent and neurology and endocrinology/metabolic disease at 7 percent each.

"Everybody knows about the tremendously exciting work being done in the area of immuno-oncology," Vitez pointed out. "You can ask Jimmy Carter about the progress being made in that field today." The former president reported last month that his metastatic melanoma was in remission following treatment with Keytruda (pembrolizumab, Merck & Co. Inc.), approved by the FDA in 2014 as the first asset to emerge from the PD-1 inhibitor class. (See BioWorld Today, Sept. 5, 2014.)

The cancer sector saw 18 announced M&As in 2015 compared to 17 the previous year, with top dealmakers including Abbvie Inc., Astrazeneca plc, Bristol-Myers Squibb Co., Celgene Corp., Merck and Novartis AG, according to Vitez.

Deal stages also are shifting upstream, a trend that began in a big way in 2014. Last year, roughly one in three deals occurred following a drug's approval – nearly the same ratio as in the previous year – falling from a five-year average of 54 percent of dealmaking at the approval stage. Discovery and preclinical deals are taking up the slack, rising from a five-year average of just 9 percent to 22 percent over each of the past two years.

One reason for enrichment at the early stages is the growth of contingent deal structures that move some of the price tag downstream on various milestones, enabling the parties to agree on terms early, "when there's still a lot of risk left in the program," Vitez said. Of 2015 deals that disclosed financial details, approximately 40 percent were designed using contingency structures.

"In general , the power and progress of today's science, the deep experience of today's venture investors, the willingness of pharma to participate early and fairly – and, in fact, a lot of ex-pharma people working on the sell side – these factors appear to be synergizing, and the industry seems to be doing a good job with its early stage decision-making," she observed.

Across the entire health care sector, 2015 M&A deals were valued at a staggering $513 billion dollars, compared to an average of $182 billion per year across the 10-year period dating back to 2006. That growth is the result of a growing number of large deals along with "some very, VERY big deals," Vitez said, including Monday's confirmation that Baxalta Inc., of Bannockburn, Ill., will be acquired by Shire plc, of Dublin, for a $32 billion – a transaction set in motion last August. (See related story in this issue.)

But Vitez called the pending acquisition of Dublin-based Allergan plc by Pfizer Inc., of New York, "the granddaddy of them all." The all-share deal, disclosed in November, values Allergan at $160 billion and allows Pfizer to slash its tax rate from a reported 25.5 percent in 2014 to 17 percent to 18 percent for the combined company, despite the transaction's structure as a reverse merger. (See BioWorld Today, Nov. 24, 2015.)

"This is a chart-topper deal in every way," but whether the economics make sense and how Pfizer can create value from the deal remain to be seen, she said. The combined company is said to account for $63 billion in annual sales on a pro forma basis, 40 R&D sites, 75 manufacturing sites and 110,000 employees, "although I'm sure those folks are not sleeping easily," Vitez observed. "When Pfizer says they are good at cutting costs, believe them. They are very good at cutting head count, too."

But an analysis conducted by Vitez suggested Pfizer has not boosted revenues from its acquisitions, and its market cap has generally fallen over 15 years.

"At a minimum, one thing you can conclude from the numbers is that it's tough to create and maintain value in our industry, even when you were the proud owner of the world's best-selling-ever drug, Lipitor, which Pfizer got from Warner Lambert," she maintained. "As Pfizer gets bigger and bigger, it needs to find bigger and bigger targets in order to sustain itself. Where will they go from here?"

Smaller, milestone-driven life science option deals are working well and closing in an average of two years, according to Vitez, who cited as strong examples the arrangements between Shire and Meritage Pharma Inc., of San Diego, Celgene and Quanticel Pharmaceuticals Inc., of San Francisco, and the Medicines Co., of Parsippany, N.J., and Annovation Biopharma Inc., of Cambridge, Mass. (See BioWorld Today, Feb. 25, 2015, and April 28, 2015.)

"These deals are an interesting blend of licensing, investing and M&A," she said. "They comprise only about 5 percent of the M&A activity in five of the last six years so they are not dominant, but they fill a critical need and are an important component and allow us to continue to move forward."

CELGENE, SANOFI LED 'DEALMAKING EXTRAVAGANZA'

On the IPO side, 2015 deal flow achieved the "cautiously optimistic" outlook for the year, said Vinay Singh, senior deals analyst at Thomson Reuters, reporting that therapeutic-focused IPOs amassed approximately $4.8 billion in 2015 compared to $6.1 billion the previous year. Although 61 percent of biotech IPOs closed in 2015 finished at or below their issue price and nearly 20 percent of the year's IPO class lost 50 percent or more of their value, the good news was that 12 biotech IPOs got out the door with favorable valuations following the market's downturn in mid-September. More than half of those are performing well, Singh said, citing Aclaris Therapeutics Inc., of Malvern, Pa., which finished the year up 134 percent.

What Singh characterized as "a massive increase" in licenses and joint ventures took up much of the slack, rising to 954 such deals in 2015 – including a peak of 274 in the fourth quarter – compared to 729 in 2014, for an increase of 24 percent.

Each of the top 10 licensing transactions in therapeutics in 2015 exceeded $1.5 billion, led by a potential €3.9 billion (US$4.3 billion) diabetes deal between Paris-based Sanofi SA and Hanmi Pharmaceutical Co. Ltd., of Seoul, that included $445 million up front. (See BioWorld Today, Nov. 6, 2015.)

Noting that "we're at a peak stage in our industry in terms of innovation," Singh also singled out the potential $2.625B deal between Vertex Pharmaceuticals Inc., of Boston, and Crispr Therapeutics AG, of Basel, Switzerland, to discover and develop treatments for genetic diseases, including cystic fibrosis and sickle cell disease. (See BioWorld Today, Oct. 27, 2015.)

In sheer numbers, Celgene and Sanofi were at the forefront of the 2015 "dealmaking extravaganza," he added, with four 2015 licensing deals apiece that contained up-fronts exceeding $50 million. In general, up-front dollars are growing – reaching an average of nearly $50 million across 136 licensing deals in 2015 compared to a five-year average of $33 million.

Mirroring the activity in M&A, licensing deals were dominated by diversified pipelines. But "no matter how we slice the data, cancer always remains king" by individual therapeutic area, Singh said, though he voiced optimism that licenses for central nervous system agents picked up in 2015.

Also similar to M&A trends, licensing deals favored early stage assets in 2015, with discovery or preclinical transactions accounting for 54 percent of in-licensing by top dealmakers.

Whether the good times will continue to roll in 2016 remains to be seen, as "some pieces of the marketplace are in motion," Vitez conceded. Nevertheless, collaborations and acquisitions are likely to remain a mainstay this year, she said, noting that M&As tend to operate in a synergistic manner with the public markets.

"That said, if the public markets shrink, we should see more M&A interest," she predicted. "Over time, valuations would be expected to come down, but I think we've learned some things from the very dark days, and I don't think the bottom is going to drop out."

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