Free-flowing cash for startups, sky-high valuations, and uncertainty about tax reform led to unexpected stagnation in M&A this year. But big deals could be on the horizon as large pharmaceutical companies get squeezed to deliver top line growth.
After a lackluster 2016 (thanks to uncertainty in an election year), many experts in the industry predicted — with President Trump firmly seated in the White House — that we would see an uptick in mergers and acquisitions in 2017. They were wrong. Besides Gilead’s nearly $12 billion move on Kite, 2017 was rather quiet on the M&A front, according to a new report by EvaluatePharma’s EP Vantage.
Experts are now wondering if acquirers are on standby, waiting to see what will happen with tax reform before moving forward on big purchases. And it makes sense. It’s estimated that big pharma and biotech has roughly $171 billion held in other territories to avoid the 35% corporate tax rate here in the US. If that money can come back over thanks to repatriation, then these companies will have a lot more play money to take shopping.
Other reasons for the slowdown in M&A this year could be climbing valuations of small and mid-sized biopharmas — especially in hot areas of development. Sometimes those big buyouts came back to bite the buyers (looking at you, Medivation).
One of the perhaps most interesting reasons for the slow M&A could be the industry’s relatively easy access to capital. As you can see in the chart below, venture capitalists have been giving out bigger chunks of cash to companies — reminiscent of the boom times of 2014. When companies can raise their own money for more expensive, later-stage development, then they’re less likely to look for buyers. On top of big venture deals, the IPO market has been hot this year, with even preclinical companies going public with relative success.
But this deal hiatus, both in 2016 and 2017, is likely putting pressure on big pharmas, the Vantage report says. Companies relying on older drug franchises are particularly implicated.
“Companies that rely on legacy products in areas like diabetes or heart diseases are in huge trouble,” Loncar Investments CEO Brad Loncar told EP Vantage. “In these areas, payers have the power. This might mean we see M&A, and that would be the top ingredient for having a good 2018.”
These large pharmaceutical companies are the ones that saw some less-than-stellar financial performance earlier this year. Missed expectations for the growth prospects of Celgene and Biogen, for example, caused a significant selloff.
The EP Vantage report speculates that poor financial performance of some big players could mean bargain prices for some M&As down the road.
“So if valuations of big cap biotechs remain depressed, and progress on tax reform emerges, then perhaps 2018 will see more, larger deals. Pfizer is still most frequently named as an enthusiastic big buyer – favorite targets for the rumor mill currently include Bristol-Myers Squibb and Biogen. And executives from other large players – Merck & Co and Gilead for example – have recently made it clear that they are looking around.”
In short, this report indicates that small and mid-stage companies will continue to see high valuations, easy access to cash, and a friendly IPO market — as long as unforeseeable macroeconomic factors don’t tank the market. Large-cap companies, however, may see shrinking valuations, affordable price tags, and more significant consolidation (should tax reform go their way).
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