The Urge to Merge: M&A in 2015

With the cost of capital remaining low, and the appetite for deals in the biopharma market continuing, 2015 looks set to be another interesting year from a consolidation and strategic opportunity perspective.

Discussions with numerous investment analysts indicate that the scarcity of attractive assets will continue to keep valuations high, particularly for biotechs with mid-stage drug candidates that represent an advance in therapy and encounter few upfront competitors in the field. To thrive in this competitive environment, acquirors need to keep focused on two essentials: (1) how they intend to monetize these assets and (2) stay disciplined in their approach to negotiations. In an era of sharply curtailed product life cycles, any residual gain from paying too much is subject to a much bigger set of risks.

Following the since-cancelled AbbVie–Shire sales transaction, the US Treasury Department made it clear last year that they're not in favor of tax inversions; accordingly, says Les Funtleyder, managing director of Poliwogg, we'll see "a lot less of that in 2015." But pharma has long been a consolidating industry, "so it wouldn't surprise me to see more large mergers taking place, despite them having a poor track record of long-term value creation." For Peter Tollman, senior partner and managing director, Boston Consulting Group, "it's tough to predict big deals, but look at the big players who have had success reshaping and strategizing their portfolios" in 2014. Tollman expects "similar smaller deals, asset swaps, and ecosystem manipulation" to continue into this year.

However, for Elys Roberts, president of Ipsos Marketing North America, one of the issues with the proposed deals involving Pfizer, AstraZeneca, Actavis, and Allergan is that the potential for R&D is being crushed. "While operational synergies are huge drivers of financial value, the industry's raison d'être is to develop and deliver much-needed therapies," says Roberts. It's arguable that, in the current cycle, where investment dollars flow freely, the investor community's involvement is diametrically opposed to the target company's original therapeutic goals at a potentially significant-but as yet unknown-long-term cost to the industry and the patient population.

The Pfizer acquisition of Wyeth provides a revealing illustration, explains Roberts. In 2008, the combination of the R&D investments of the two companies was close to $12 billion. In 2013, Pfizer spent $6.5 billion in R&D. Clearly, R&D over the years can become bloated, but $5.5 billion in R&D savings is not only the result of consolidating overlapping capabilities, but also the elimination of research sites, programs, and scientists.

"Isn't the irony here that the very patent cliffs that are stimulating these deals, and that these firms are so desperate to avoid, are actually interfering with and eroding the future innovation that our industry keenly needs?" says Roberts.

The point appears to be reinforced by the recent asset swap between GlaxoSmithKline and Novartis, in which Novartis receives GSK's oncology assets in exchange for Novartis' vaccine business, in effect, reducing GSK's oncology investment and focus. "While we do not know what the plans are for the R&D teams, wouldn't it be better in the long term for cancer vaccine research if both organizations had teams of scientists pursuing cancer and vaccine R&D?" says Roberts.

"Hopefully, as an industry we can take a moment to consider the intrinsic value of these terrific companies, while finding a balanced approach to protecting current and future innovation."