Merrill Corporation

Healthcare Insights

Big Pharma’s Big Shopping Spree

January 30, 2020

Last year set a record for mergers and acquisitions in pharma and biotech, and that pace shows no signs of slowing. According to MarketWatch, 2019 saw the biggest total deal value for pharma/biotech M&As ($342 billion) since the company started tracking deals in the 1990s. What’s spurring the large (and even medium-sized) companies in this sector to keep scouring the market landscape for new M&A targets? 

Analysts point to several factors. First, the ongoing impact of U.S. tax reform in 2017 created significant incentives for both sellers and buyers in this sector. Writing in PharmaTimes, Tom Cowap, an investment banker with Alantra focusing on mid-market healthcare and life sciences, notes that these changes “provided a predicted $160 billion of cash for industry multinationals to deploy.” Looming patent expirations in Big Pharma portfolios have also played a role. Cowap writes that $251 billion in sales are forecast to be at risk over the next four years. 

The biggest driver, however, appears to be more straightforward: large-cap pharma and biotech companies seek to bolster their development pipelines through inorganic growth. Increasingly, they’re looking outside their own R&D organizations for innovation, using M&As and in-licensing to effectively outsource early-stage development to smaller companies.

This trend creates an exciting environment for life sciences companies small and large. Multiple opportunities exist for both parties to benefit from each other’s unique attributes. As more organizations explore these inorganic growth models, however, they also face the burden of managing the complex regulatory and documentation requirements that come with them—a challenge that can be especially fraught for smaller firms. 

A Growing Trend

Analysts have tracked the uptick in the inorganic growth trend over the past decade, as large pharmaceuticals looking to expand or diversify their pipelines have increasingly turned to M&A. According to McKinsey, “[our] research has shown that the share of revenues coming from innovations sourced outside of Big Pharma has grown from about 25 percent in 2001 to about 50 percent in 2016.”

In an industry where early-stage research requires significant funding with a low probability of success, and late-stage trials require high investment plus the ability to navigate complex regulatory regimes, this model shouldn’t surprise. McKinsey notes that “These dynamics create an industry profile in which smaller, creative companies end up funding innovation. Once their research is more advanced, larger pharmaceutical companies enter the picture, looking for the next ‘new’ thing and ponying up the resources required to fund expensive late-stage trials and large commercial marketing campaigns.”

In practice, the strategy has proven quite successful, becoming a core component of the contemporary Big Pharma business strategy. According to Deloitte Insights, “biopharma assets sourced via open innovation approaches are three times more likely to be successful than those sourced via traditional approaches.” Deloitte also found that “launch rates for externally sourced drugs are consistently higher than the industry benchmark.”

 

 

Inorganic Growth in Action

You don’t have to pore over industry research to find evidence of these trends; just look at financial page headlines. A comprehensive list of deals from the past 14 months would take several pages, but highlights include:

·       Novartis acquiring The Medicines Company for $9.7 billion

·       Merck acquiring ArQule for $2.7 billion

·       Pfizer’s $11.4 billion acquisition of Array Biopharma

·       Eli Lilly’s $8 billion acquisition of Loxo Oncology

·       GlaxoSmithKline acquiring biotech Tesaro for $5.1 billion

·       Takeda Pharmaceuticals’ $62 billion acquisition of Shire—one of the largest pharma acquisitions in history

In all these cases, bringing promising new therapies into the pipeline was a prime motivator for the acquisition. The Medicines Company, for example, added a new atherosclerotic heart disease treatment to Novartis’ portfolio. For Merck, ArQule came with innovative new cancer therapies. You can find the same rationale up and down the list. Ely Lilly, Pfizer, and GSK all acquired companies developing promising oncology therapeutics. For Takeda, which was facing significant patent expirations and a thin pipeline for late-stage molecular therapies, Shire’s rare disease portfolio was highly attractive.

Sometimes, pharma deals represented acquisitions nested within acquisitions. Take Bristol-Myers Squibb’s $74 billion purchase of Celgene. Just the year before, Celgene itself had acquired Juno Therapeutics for $9 billion and Impact Biomedicines for $7 billion. 

In just the first few weeks of 2020, we’ve already seen four more $1 billion+ deals compared to this time last year, according to PharmaTimes. Many larger pharma companies are also exploring licensing agreements that allow them to tap the potential of smaller firms’ individual products at different stages of the pipeline. These in-licensing/out-licensing arrangements are also becoming more common. For example, 2019 saw multiple Korean biopharma companies enter licensing agreements for products worth more than $7 billion.

Reducing Risk in Life Sciences Licensing Agreements and Acquisitions

The inorganic growth trend holds significant potential for this sector, but it also raises new risk. Licensing and M&A deals can represent a complex network of multiparty relationships, with the need to continually update, organize, and securely share confidential information.

 

These complex, granular requirements hold the potential to disrupt deals and financing rounds. This is especially true for smaller life sciences organizations, which may not have the infrastructure in place to address the complex administrative and documentation requirements of licensing and M&A deals. Indeed, 43 percent of dealmakers in this sector cite information security—data privacy and regulatory compliance in particular—as their top concern for life sciences deals.

Companies contemplating out-licensing arrangements, or that are targeted for M&A, often consist of a small group of scientists with little experience setting up data rooms or managing the minutiae of organizing information and processes for document review. For these organizations, the most important step is, of course, to work with a top-flight legal team through this process. They can also benefit, however, from working with Merrill Corporation and taking advantage of our established M&A technology and services.

Merrill provides extensive experience in biopharma deals, including helping firms of all sizes set up and organize data rooms and secure file sharing, so their internal teams don’t have to. In 2019 Merrill facilitated 4 of the 8 largest Healthcare M&A transactions. We also provide a comprehensive toolset to securely share financial and clinical information through multiple financing rounds, at all stages of drug development.

Organizations can streamline document-sharing using Merrill DatasiteOne’s specialized permissioning and security at multiple levels (index, document, page). They can securely submit applications and share clinical trial data using eCTD documents—the format required by the U.S. Food and Drug Administration. Using tools that comply with standards like ISO 27001, they can maintain granular security and access control over all their information.

Bottom line: smaller biotech innovators should expect to see more large players in this space closely observing their progress. Look for 2020 to bring more of these symbiotic marriages, as Big Pharma continues scanning the landscape beyond its walls for the blockbuster therapies of the future. With modern digital tools, even smaller organizations can capitalize on this trend with significantly less effort—and far less risk.

To learn more about how you can reduce risk in complex biopharma deals and smooth your organization’s path to success, download the white paper The Future of Due Diligence in Healthcare M&A.