The Pulse of Biopharma M&A

M&A-driven dealmaking in 2018 across the biopharmaceutical industry is on track to becoming the second highest of the decade.

“There’s been a significant increase in private financing, principally driven by Series A financing, which tells us that new company formation has accelerated in the last four to five years,” says Neel Patel, managing director, commercial strategy and planning, at Syneos Health Consulting, and co-author of the

Neel Patel

2018 Dealmakers’ Intention Study. Released in June at the BIO International Convention in Boston, the study, now in its 10th year, showed a mostly healthy landscape for prospective buyers and sellers, with Patel noting, “dealmaking in the life sciences is continuing an unprecedented run.”

“Licensing and M&A will likely experience a significant increase in activity as US tax reform will increase the amount of capital buyers have available for assets/partnerships,” he says. “Private financing’s bull-run will continue as life science investors have recently closed new funds for investments and many are out actively fundraising now.”

Hot spots

Oncology remains the top therapeutic area of interest for buyers and sellers, and the supply surplus in this segment stood out in this year’s report. “Compared to 2017, oncology has become a much more attractive, opportunistic market for buyers, suggesting that premiums could start seeing a potential decline in the coming year for products that are not highly differentiated,” says Patel. 

He explains that larger companies have narrowed their focus, and fewer are fully focused on oncology. “For sellers, this means they have to be very mindful about differentiating their asset and making sure the core mechanics of commercial success are being considered-things like patient population targeting, making sure you can demonstrate that stakeholders’ most important unmet needs are being addressed with the data you are generating and that you’re not just another “me too” in the marketplace,” says Patel.

According to the report, other areas of high demand include hematology, respiratory/pulmonary, and renal assets. The top-five areas for licensing include immuno-oncology, CAR-T cell therapy, CRISPR/Cas9, microbiome, and cancer vaccines.

Red flags

There are some trends that Patel says leaders do need to be cautious about. “In addition to the greater surplus in oncology assets, we also saw that it is becoming much harder to close deals,” he says. “The overall deal conversion rate fell to 1.9% in 2017 from the more typical 5% range. This was especially the case at later stages of the deal, after progression to CDA, with lower conversions to term sheet-a warning to sellers to be vigilant and responsive until the deal is actually signed.” The report also showed a greater parity in the discount rate between buyer and seller-both at 17% compared to the 4% that was seen in 2017. “This could suggest an increase in partnerships as opposed to outright acquisitions-again, an indication that buyers are looking to structure deals where the sellers participate in some of the risk, and that sellers are assigning high valuations to their assets compared to 2017,” explains Patel. 

The IPO question

The IPO outlook appears mixed. “The year-to-date pace of IPOs indicate that 2018 financing raised in the IPO market to be around the average of the five-year trend, with expected volume of just over $2.5 billion-a relatively strong environment compared to historical standards,” says Patel. However, he did add, “we are also seeing a large increase in Series D+ financing, indicating that many companies are opting to stay private longer to avoid an IPO and develop their pipeline to meaningful value inflection points or commercialize themselves.”

Retrospective

With 10 years of data to look back on, Patel is able to take an extensive look at the dealmaking landscape and draw some solid conclusions. “One of the most interesting changes we’ve seen in the study over time has been the increased fragmentation in the industry, with more and more smaller companies holding onto assets longer or even ‘going it alone’ to commercialize assets themselves,” he says. “In large part, this is thanks to the robust financing environment and the exponential increase in financing options available to emerging companies. This is expected to increase significantly as many life science investors have recently closed new funds and will continue to invest in new company formation and growth of privately funded companies. In addition, companies are developing molecules in more specialized fields, which require smaller commercial footprints.”

Further, Patel notes that over the last decade, there has been the “rise of the SMID.”

“In 2009, only 6% of all M&A activity was attributed to small- and mid-cap biopharmaceutical companies,” he says. “That number grew to a high of 66% of all M&A activity in 2014. Meanwhile, the share of large-cap (>$50 billion) companies represented in M&A deals has continued to decline from a high of 82% in 2009 to 57% in 2017.”

Michelle Maskaly is Pharm Exec’s Senior Editor. She can be reached at michelle.maskaly@ubm.com and on Twitter at @mmaskaly