The consultants at Novasecta have been crunching the numbers on biopharma M&A for the past few years and concluded that a lot more of these deals are weighing in so heavily inflated now that many buyers would be better off looking for other ways to grow their businesses and their pipelines.
Looking at each deal as a multiple of revenue for the acquired company, the London-based consultancy says that the median value of a buyout last year was 39 times revenue. Compare that to a median 19 times revenue in 2015 and 8 times revenue in 2014, and you get a pointed picture of the fresh peak that’s been created in valuations.
Zeroing in on the amount paid relative to sales revenue was a good proxy for representing the increasing amount that companies are paying for all their new assets, both on the market or still in the clinic. In an email exchange, Novasecta Managing Partner John Rountree tells me:
•The multiple combine the two things going on in M&A, one is the amount you have to pay to acquire a certain amount of revenue, which is clearly up, and the second is that when revenue is lower (i.e. mostly pipeline value) you are taking more risk and betting on the hope that your acquisition will pay off.
•To get a good-sized sample and long-term trend we also looked at two cohorts of deal-making – 2009–2011 and 2014-2016 (five years later). This part of our analysis clearly shows that the multiples are up across the board, so even when the company is not taking on the risk of early-stage hope, they are also paying much more for on-market revenue.
•So we don’t explicitly value the early-stage programs, this is in the eye of the beholder, the issue is that acquirers are paying more than they used to for early-stage generally across the board.
That assessment may also help explain why 2016 fell far short of overall M&A expectations, as some companies you’d expect to be in the buyer column — hello, Gilead — have steered clear of acquisitions.
Anyone looking for specific examples of how this trend is playing out in particular deals need only look at Allergan’s buyout of Tobira or Pfizer’s $14 billion Medivation acquisition, which included a big share of a marketed drug as well as a prominent experimental med. J&J’s prospective acquisition of Actelion will do nothing to pop this particular bubble.
“The bottom line is that the era of cheap capital since 2008 has led to a significant inflation in deal values across the board,” Rountree adds, “which can be great for the acquired company shareholders but questionable for the acquirer’s shareholders.
“Our conclusion is that though some deals will end up being great for both parties, many are at over-inflated prices, and the acquiring companies would do better to focus on fixing their own shops and entering into partnerships where they need extra capability rather than expensive M&A.”
Don’t look for the end of this trend in 2017 as Big Pharma waits for President-elect Donald Trump to follow through with a highly anticipated move to allow the multinationals to repatriate billions in overseas cash.
“Our sense is that 2017 is unlikely to see a decrease in the prices paid, perhaps they will go higher yet: there is a lot of money in the ecosystem seeking the high returns that successful innovation can create,” notes Rountree. “The price of revenue-generating deals will become prohibitive due to lack of supply, except for those with extremely strong balance sheets or very patient shareholders or both.”
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