Discerning Dealmaking: Caution Flag Still Raised in Biopharma M&A Race

M&A activity is seen as a vehicle to drive growth, fill pipelines, or put working capital to use. Weakened equity markets have led acquirers to be more circumspect about the deals they target, despite many of the biggest life sciences companies having the balance sheets and cash flows to complete deals.

Developmental stage companies and smaller pharmaceutical companies are facing higher interest rates and dampened valuations, driven by a market that has become increasingly risk averse.

The Nasdaq Biotech Index (NBI) reached a high of 5,449 in August of 2021 and hit a low of 3,509 in May, a 36% drop. An exchange-traded fund (SPDR S&P Pharmaceuticals ETF [XPH]) that represents the pharmaceutical segment of the S&P total Market Index traded as high as $55.56 in February 2021 and was as low as $37.94 in May 2022.

Amit Sinha, head of life sciences investing, asset management at Goldman Sachs, told the firm’s Exchanges podcast (https://bit.ly/3BVjePn) that the value of life sciences companies has been hurt. “On the fundamental side, we’ve seen a bunch of disappointing news over the past year,” he said. “These have been things like clinical trial failures to FDA setbacks, and they’ve served as an important reminder that life sciences innovation is risky.”

Jeffrey Stoll, KPMG’s US life sciences strategy and deal advisory leader, says market uncertainty has become a factor in decision-making about deals.

“I think the last thing you want to do is announce the deal and what you thought was a fair price end up looking ridiculous in the market,” he says. “I think there’s a little bit of a game of chicken. The valuations are down because the stock in most companies has been suppressed between 15% and 30%. A lot of [selling] companies are still going to want their 2021 price and make the argument that the 2022 market conditions are temporary. Certain companies are going to want to hold out if they can for the healthier market timeframe.”

Large pharma companies have resources to make deals, however. So what’s the likelihood of a mega-cap deal, such as a merger of global top 25 companies?

“It would have to be a very unique situation. I think the market uncertainty makes that a difficult thing. It’s not in vogue in terms of strategy right now,” says Stoll. “I would never say never, but I think it’s a low likelihood that we’ll see a mega merger this year.” Next year is a possibility if the market becomes “more consistent and predictable,” he adds.

Steven Lendaris, who leads the life sciences practice at the Baker Botts LLP law firm, says he doesn’t expect the same type of consolidation from 15 years ago. Some of the companies that have spun off of or will spin off consumer health businesses, or have sold generic drug divisions, might have a new mindset about consolidation.

Selective approach

This summer has seen a few billion-dollar-plus deals. Stoll and other industry deal advisors believe big drugmakers have the “dry powder to complete deals.” Some of the billion-dollar M&As have been in cash and the targets have been in very specific disease categories, where there are unmet medical needs.

In August, Amgen agreed to buy ChemoCentryx Inc. for $3.7 billion. ChemoCentryx is the maker of Tavneos, a treatment for anti-neutrophil cytoplasmic autoantibody-associated vasculitis that can harm the function of kidneys, the liver, and other organs. The company also has three early stage drug candidates that target chemoattractant receptors in other inflammatory diseases and an oral checkpoint inhibitor for cancer.

“Our decades of leadership in immunology and nephrology will enable us to add value to the Tavneos launch, reaching many more patients and much more quickly than would otherwise have been possible,” said Amgen Chairman, CEO and President Robert A. Bradway in a statement announcing the deal.

In July, GSK closed its acquisition of Sierra Oncology, the maker of momelotinib, a late-stage potential new medicine with a dual mechanism that may help with treating myelofibrosis patients with anemia. GSK says the deal aligns with its “strategy of building a strong portfolio of specialty medicines and vaccines.”

Both Pfizer and Novo Nordisk announced acquisitions of companies with a focus on sickle cell disease and rare blood disorders. Pfizer agreed to buy Global Blood Therapeutics (GBT), maker of Oxbryta and developer of GBT601, for $5.4 billion. Novo Nordisk agreed to acquire, for $1.1 billion, Forma Therapeutics Holdings Inc., whose etavopivat is in a Phase II/III clinical trial in patients with sickle cell disease and in a Phase II study in patients with transfusion-dependent sickle cell disease and another blood condition called thalassemia.

In May, Pfizer also announced the $11.6 billion acquisition of Biohaven Pharmaceutical Co. Ltd.’s migraine therapy portfolio.

Pfizer’s growth target factors acquisitions

Pfizer’s leadership has made it clear that deals are an important part of its efforts to reach growth targets through the remainder of the decade. The company has issued guidance to target business development opportunities that could add at least $25 billion in risk-adjusted revenues to top line in 2030.

“We wanted to just be very clear with everyone, what our expectations were on how we were going to deploy our capital and what we were going to achieve as a result of that,” Aamir Malik, Pfizer’s chief business innovation officer, told investors at the Morgan Stanley Healthcare Conference in September, noting “We also see ourselves as a growth company in the back half of the decade, ’25 till ’30, and that $25 billion is a very important part of that.”

Malik said the company’s balance sheet and strong cash flows give it flexibility to place capital on internal R&D and sourcing external science, which also compliments many of those internal programs. Acquisitions of ReViral, Biohaven, and GBT that were struck this year have the potential to add more than $10 billion in peak sales to Pfizer, according to Malik.

He also explained that the company has the following set of criteria about entering transactions:

• Is the science compelling and can it potentially offer a breakthrough versus the standard of care?
• Is there something that Pfizer can do scientifically and commercially to add value to that science?
• Is the company confident that the deal is going to generate revenues between 2025–2030?

“The one thing that we have been clear on is that deals where cost synergies are the primary source of value creation are not a focus for us,” said Malik. “We are agnostic to size. So if we see a large-scale transaction that meets that criteria where we can advance breakthrough science and add value and create growth, we’re certainly very open to it.”

Developmental-stage struggles

Smaller-cap, developmental companies, however, have their own struggles in this market because of the valuations.

KPMG’s Stoll says founders of these smaller-cap organizations are not looking for dilutive transactions, and any deals need to ensure that the strategy fits both companies.

“It becomes a confusing story to tell if it’s not a natural fit or a synergistic play around either the scientific platform or the commercialization efforts,” he says.

In cases where there is more cash at a smaller biotech than market value, Lendaris at Baker Botts says that can drive some consolidation if there is an opportunity to bring on products that can quickly add more market value.

Stoll notes that special purpose acquisition companies (SPACs) that were the rage two years ago are “still circling” and we may start to see some companies going public that route later in 2022 and the first quarter of 2023, especially if the IPO market is suppressed.

Sinha believes life science investors have become more finicky than a few years ago. In 2014, 90% or more of the companies going public were in clinical stages of testing, but that figure fell to 40% in the last surge for biotech funding.

“If you think about that simplistically, because most of the companies were going public earlier and the probability of success in earlier studies is much lower, you should see that a large number of the outcomes are negative,” said Sinha on the podcast. “And that’s what we’re seeing in the space today.”

Meanwhile, venture capital flooded into the sector. “When you see the total amount of capital going into a space rise that far, that fast, you inevitably see things that get funded that probably shouldn’t be funded,” said Sinha.

“We think in the near term there is going to be some challenges, particularly for companies who have recently gone public, just given the correction,” he added. Funds will continue to be raised and the markets will continue to reward the best companies, Sinha noted, asserting, “A little bit of the correction we’re seeing is, frankly, good and healthy for the space because it drives more rational allocation of capital.”

William Borden is senior vice president at Tiberend Strategic Advisors, and a freelance journalist based in New Jersey. He does not have any business or financial interests in the companies or organizations mentioned in this article.