Biopharma Deal Value, Volume Tumbled Substantially During First Half
Executive Summary
A PwC analysis finds biopharma aggregate deal value declined 87% during the first half compared to the second half of 2018; deal volume dropped 17%. The pandemic was a cause, but not the only factor.
The biopharmaceutical industry has fared better than many others during the COVID-19 pandemic, but it hasn’t escaped disruption. A new PwC analysis shows that deal-making decreased precipitously during the first six months of 2020, both by aggregate value and volume.
In a survey of deals valued at $15m or higher, PwC analysts found just $3.3bn in total big pharma deal value during the second quarter of 2020, even though the total number of deals rose from 19 during the first quarter to 22 during the second. Aggregate deal value in big pharma during the quarter was the lowest since the first quarter of 2018, the firm’s mid-year 2020 Global Pharma & Life Sciences Deals Insights report notes.
“Key industry players are focusing resources internally right now and not on inorganic growth,” PwC stated. “As many companies redirect resources towards developing vaccines and treatments for COVID 19, they have also begun planning for how to respond to disruptions in supply chains and maximizing the potential of their limited capital resources.”
In addition to uncertainty caused by the pandemic, it cited a need by big pharma to digest the large volume of deals made in prior years. There has been significant consolidation in big pharma in recent years – highlighted in 2019 by the Bristol-Myers Squibb Company/Celgene Corporation and AbbVie Inc./Allergan plc mergers – and PwC anticipates that large pharma companies will seek smaller deals and divestiture opportunities as they attempt to manage their portfolios in a volatile business environment. Divestment activity also will be driven by a continued emphasis on narrower therapeutic focus and core competencies, the report asserts.
Across the four life sciences sectors – pharma, biotech, medical devices and “other,” which includes over-the-counter medicines, animal health and contract manufacturing and research – PwC recorded $35bn in aggregate deal value during the first half of 2020, down 87.2% from the second half of 2019. They counted 99 total deals during the six-month span, with volume down 16.8% from second-half 2019.
Karen Young, PwC’s US pharmaceutical and life sciences assurance leader and one of the report authors, said other factors such as general economic uncertainty and the upheaval of an election year were factors in these declines. PwC has predicted some decline in life science sector deal-making coming into 2020, she added, since 2019 saw a substantial amount of large deals valued at $5bn or more. (Also see "Two Mega-Mergers Were Just The Highlights Of A Year Of Major Deals" - Scrip, 15 Jan, 2020.)
But not all prognostications expected a deal-making downturn in 2020. EY forecast $300bn in deal-making this year, with an emphasis on five therapeutic areas: oncology; cardiovascular and metabolic disease; immunology, infectious disease; and central nervous system disorders. (Also see "2020 Could Spell The End Of Mega-Mergers, For Now" - In Vivo, 19 Feb, 2020.) KPMG anticipated a targeted deal-making environment in 2020, with heightened focus on cell and gene therapies as well as on personalized medicine.
“Certainly, the pandemic is one cause of derailing the deal activity during the period that we’re in,” she told Scrip. “I think companies are focused on trying to figure out what the timing is and what the long-term impact is from an economic perspective. We predicted as we came into the new year that we would see a decline in deals, [but] it’s pretty significant at this point.”
Only two deals with values of $5bn or greater were made during the first half of 2020, Young pointed out, and both happened during the first quarter. These included Gilead Sciences, Inc.’s buyout of Forty Seven Inc., valued at $5bn, and a non-pharma acquisition of Qiagen NV by Thermo Fisher Scientific, valued at $11.8bn. (Also see "Gilead Calls Forty Seven Buyout Complementary To Kite, Other IO Efforts" - Scrip, 2 Mar, 2020.) and (Also see "Thermo Fisher Scientific Announces $11.5Bn Buyout Of Qiagen" - Medtech Insight, 6 Mar, 2020.) There were four deals valued at $5bn or greater during the last six months of 2019, the report notes.
Full year 2019 saw seven M&A deals with valuation above $5bn, including the Bristol/Celgene and AbbVie/Allergan mergers, valued at $74bn and $63bn, respectively. (Also see "BioMarin’s Hemophilia Gene Therapy Still Works After Four Years, But Effects Tail Off" - Scrip, 18 Jun, 2020.) and (Also see "AbbVie Pounces On Chance To Buy Revenues In $63bn Mega-Deal For Allergan" - Scrip, 25 Jun, 2019.) The third most expensive deal of the year was an asset acquisition, not a merger: Amgen, Inc. paid $13.4bn to buy the autoimmune drug Otezla (apremilast) from Celgene in August, a divestiture required for the Bristol/Celgene combination. (Also see "Amgen's $13.4bn Otezla Buy Helps Bristol/Celgene Merger Close By Year-End" - Scrip, 26 Aug, 2019.)
The Gilead takeout of Forty Seven would only be the eighth largest biopharma M&A deal if it occurred during 2019.
Tracking quarterly deal-making data, PwC observed 49 life sciences deals during the first quarter of 2020, with an aggregate value of $24.4bn. But that value dropped significantly during the second quarter, when 50 deals equated to a total value of $10.6bn.
The pandemic itself drove hectic deal-making in its early weeks, as companies partnered to develop vaccine and therapeutic candidates and set up supply and distribution channels for whatever COVID-19 products eventually emerged. (Also see "Deal Watch: Coronavirus Collaborations Reflect Industry’s Full Press Pandemic Response" - Scrip, 27 Mar, 2020.) Informa’s Biomedtracker lists 104 partnerships driven fully or partially by the pandemic between 24 February and 27 July.
During the virtual BIO 2020 meeting, biopharma deal-making executives said that while the COVID-19 pandemic had changed some of the ways deals were negotiated, deals were still getting done, both ones driven by the pandemic and by other rationales. (Also see "Biopharmas Manage To Deal During Pandemic" - Scrip, 9 Jun, 2020.) Some of the changes that proved to be time- and resource-efficient, such as fewer in-person meetings, may be here to stay, the speakers suggested.
PwC anticipates an increased appetite for M&A activity during the second half of 2020, however, as companies address challenges ranging from changing supply chain realities and needs, questions about availability of capital, and regulatory and political uncertainty. Companies may be gradually getting back to thinking about the strategies they were planning before the pandemic hit, Young said.
“We think that there’s still a lot of activity going on behind the scenes, companies are evaluating and prioritizing programs as well as prioritizing resources in order to decide to either take a little longer and see how they come through this or take action when the value gets to the right level,” she explained. “Organizations are continuing to watch the market, and we think activity will start to pick up as people get more comfortable with the timeline, what the economy is going to look like, and whether a vaccine will start to open up the market as well.”
One driver of deal-making, according to PwC, will be a continuing need for biopharma companies to make divestitures both to narrow their therapeutic focus and also to obtain cash flow. The COVID-19 pandemic may only have increased the need for some companies to prioritize their operations and focus on a more limited R&D effort, the report asserts.
“It’s a need to prioritize resources,” Young pointed out. “We’d say divestitures allow that opportunity to get more capital to an organization to spend elsewhere and to be more comfortable in the current marketplace about how to manage through this. There are other costs and expenditures that are putting pressure on development as well as pressure on being innovative and proactive in the market.”
Private equity firms have a vital role to play in the divestiture arena, and these largely stayed on the sidelines during the first six months of this year. Young attributed that somewhat to private equity waiting for more favorable valuation, with the pandemic possibly making some companies more eager to sell off assets.
Looking at pharma and biotech separately, PwC reports that biotech saw a steep drop-off in deal volume (about 57%) during the first half of 2020, while deal volume remained level for pharma. Both sectors saw aggregate deal valuation plummet, however. Deal values declined by 56% in the pharma sector and by 74% in biotech.
Big pharma, including specialty and generic drug firms, likely will seek out smaller deals during the second half of 2020, the report predicts, with companies actively managing their portfolios in a fluctuating business environment. Specialty and generic firms will continue to feel pressure to increase their product portfolios via deal-making, PwC noted, but larger deals including major M&A may be difficult as companies want to preserve capital in an uncertain environment.
High valuations have been a perennial compliant and remain a limiting factor in biotech M&A, Young said. The sector saw valuations decrease early during the pandemic but then recover quickly. (Also see "Mid-Sized Pharmas Mostly Seeing Valuations Rise During Pandemic" - Scrip, 22 Apr, 2020.) Capital has also been easy to come by, and initial public offerings have been robust. (Also see "Interview: Why Biotech Companies Should Be Confident About Deals Despite Coronavirus" - Scrip, 14 Jul, 2020.) Differences on valuation between would-be buyers and sellers remain a problem going forward, she added.
“Underlying assets within those biotechs have been strong, driving high valuations,” she explained. “There’s been strength in the capital markets, so we continue to see these high values. It probably will be harder to get [biotech M&A] transactions done if people are trying to be disciplined, so we expect more of the same.”
“Maybe, we’ll see some growth and maturity at some of these biotechs before they get acquired,” Young asserted.