Companies Deepen Therapeutic Focus: The EY Firepower Report
M&A Opportunities Likely In 2020 In Cell And Gene Therapy And In Immune-Oncology.
Executive Summary
Growth gaps and a desire to concentrate on a small number of therapeutic areas are expected to continue to drive M&A in 2020, but thought needs to be given to investing in data-driven and digital technologies, a new EY report says.
Portfolio optimization in a small range of therapy areas, the continuing need to access innovation, and a focus on specific business models, are expected to drive M&A and deal-making activity in 2020, says the 2020 EY M&A Firepower report, launched at the start of this week at the J.P. Morgan meeting in San Francisco.
“Portfolio optimization could generate nearly $300bn in deals in just five therapy areas,” the report claims. A majority of companies have acute growth gaps driving near-term need for deals, and around a half of biopharma companies still need to increase their therapeutic focus, the report adds.
“In 2019, almost every major biopharma acquisition increased both the buyer’s overall therapeutic focus and its projected five-year compound annual growth rate,” the EY report notes. 20 of 25 deals analyzed by EY involved a high degree of overlap between the purchaser’s existing portfolio and the therapy area or indication of the lead product of the target company.
Such overlapping-portfolio deals accounted for nearly 45% of the year’s M&A total. Two exceptions were AbbVie Inc.’s purchase of Allergan PLC, designed to reduce the big pharma’s dependence on Humira (adalimumab), and Vertex Pharmaceuticals Inc.’s acquisition of Semma Therapeutics Inc.. Vertex was not previously active in type 1 diabetes, but Semma’s emphasis on curative therapies was consistent with Vertex’s business model of focusing on differentiated products.
And based on further analysis, EY highlights 12 companies that are not therapeutically focused and are lower growing, including firms such as Takeda Pharmaceutical Co. Ltd., Amgen Inc., Boehringer Ingelheim International GmbH and Bayer AG.
The report believes significant “firepower” is still available for deal-making among life sciences (ie, pharma, biotech and medtech) companies to deepen therapeutic foci, snap up discarded opportunities, and transform businesses.
“Although life sciences companies deployed $200bn in firepower in 2019, as an industry, more than $1tn remains available for deals,” the report says. A company’s firepower is defined as its capacity to fund transactions based on balance sheet viz-a-viz its available cash, debt and market capitalization.
And on the target side, market volatility and investor concerns are creating numerous opportunities, the report continues. “An analysis of more than 100 small- and mid-cap biotechs shows that as of 30 November 2019, 60% are trading at a discount relative to their trailing 52-week averages; within this cohort, the share prices of 52% have fallen 20% or more. Even some of the biggest biotechs are trading as much as 20% below their yearly highs.”
“As was the case in the Bristol-Myers Squibb Co./Celgene Corp. deal, such discounts create buying opportunities for big pharma companies hungry for new modalities or additional therapeutic depth,” the report says.
Finally, the EY analysis suggested there was a high level of interest in M&A activity in the cell and gene therapy space, which is expected to continue into 2020. On the flip side, life sciences companies are not investing enough in data-driven and digital technologies to drive future growth, the report says.
“In 2020, we expect to see more activity in medtech and big biotech, with mega-mergers coming from companies with acute growth gaps,” commented EY global health sciences and wellness transactions Leader, Peter Behner. “Opportunities will also arise in the cell and gene therapy and immune-oncology areas as valuations for start-ups continue to moderate, and as small- and mid-cap biotechs keep trading below averages, becoming interesting targets for big pharma companies.”
All-Time High
In 2019, deal-making among life sciences companies reached an all-time high by value, estimated at $357bn, driven by the pharmaceutical sector and mega-deals such as Bristol-Myers Squibb/Celgene, AbbVie/Allergan, Danaher Corp./GE Healthcare, and Pfizer Inc.-Upjohn/Mylan NV.
However, biotech and medtech companies remained on the sidelines, discouraged by high valuations, according to the EY report.
In terms of the number of deals, the trend was less noteworthy; deal volume declined by 14% compared with 2018, and was 29% below the average for the previous five years, the EY report says.