Bio­phar­ma­ceu­ti­cal Deal­mak­ers’ In­ten­tions in 2018: Bull­ish Run to Con­tin­ue Amidst Signs of Greater Risk Aver­sion

By Neel Pa­tel and Sachin Pur­war

Ret­ro­spec­tive da­ta on deal­mak­ing in the bio­phar­ma­ceu­ti­cal in­dus­try is fair­ly easy to ac­cess from a num­ber of sources. Crys­tal balls are hard­er to come by, but the Deal­mak­ers’ In­ten­tions Study, con­duct­ed by Sy­neos Health Con­sult­ing each year for the last 10 years, comes close. As the on­ly for­ward-look­ing mea­sure of deal­mak­ing in the in­dus­try, the study pro­vides a re­view of bio­phar­ma­ceu­ti­cal deal­mak­ers’ in­ten­tions around li­cens­ing and ac­qui­si­tions for the next twelve months and iden­ti­fies ar­eas of great­est op­por­tu­ni­ty – and po­ten­tial pit­falls – for buy­ers and sell­ers.

Based on this year’s study, we pre­dict that deal­mak­ing val­ue (M&A and part­ner­ing) could reach $200-$300 bil­lion in 2018 – the sec­ond high­est lev­el in a decade, al­though still on­ly about 60 per­cent of the record lev­el seen in 2015 (Fig. 3). This ac­cel­er­a­tion in deal­mak­ing is an in­di­ca­tion not just of the mon­ey flood­ing the sys­tem—thanks to a ro­bust fi­nanc­ing en­vi­ron­ment, tax re­form in the U.S. and the ex­pect­ed repa­tri­a­tion of sig­nif­i­cant funds from over­seas, which is an episod­ic bump like­ly to have rip­ple ef­fects in­to 2019 as well—but al­so re­flects a thirst for in­no­va­tion as com­pa­nies seek to re­plen­ish de­plet­ed pipelines, strength­en their po­si­tions in tar­get­ed ther­a­peu­tic ar­eas, and race to stay ahead of the tech­nol­o­gy curve.

Read the full study find­ings.

To gain more in­sight in­to what the rest of 2018 holds, Sy­neos Health^TM sur­veyed deal­mak­ers across the in­dus­try to as­sess their in­ten­tions for the next 12 months and put these find­ings in­to con­text for the year ahead. This year, we sur­veyed 66 mem­bers of the bio­phar­ma­ceu­ti­cal com­mu­ni­ty who par­tic­i­pate on ei­ther or both sides of deals and who are pre­dom­i­nant­ly ex­ec­u­tive-lev­el in­flu­encers on de­ci­sion-mak­ing. The 2018 Deal­mak­ers’ In­ten­tions Study, the 10th in our se­ries, cap­tures their ex­pec­ta­tions for deal ac­tiv­i­ty, sup­ply and de­mand for spe­cif­ic as­sets at dif­fer­ent de­vel­op­ment stages, and var­i­ous fac­tors af­fect­ing deal­mak­ing. In this ar­ti­cle, we dis­cuss high-lev­el deal­mak­ing trends for 2018, ex­pec­ta­tions by deal type, and fac­tors in­di­cat­ing buy­ers are be­com­ing a bit more se­lec­tive about the as­sets they are pur­su­ing and more risk averse.

IPOs vs. Ven­ture Fi­nanc­ing in 2018

The ini­tial pub­lic of­fer­ing (IPO) land­scape is pro­ject­ed to be around the av­er­age of the five-year trend, with ex­pect­ed vol­ume of just over $2.5 bil­lion. Al­though IPO vol­ume is not ex­pect­ed to reach the lev­el we saw in 2017, this year is shap­ing up to be a rel­a­tive­ly strong en­vi­ron­ment com­pared to his­tor­i­cal stan­dards.

In con­trast, ven­ture fi­nanc­ing in the life sci­ences has wit­nessed a bull mar­ket run that start­ed in 2014 and re­sult­ed more than dou­bling in an­nu­al ven­ture fi­nanc­ings in 2015-2017 ver­sus the his­tor­i­cal av­er­age in 2009-2014 (Fig. 5). Ad­di­tion­al­ly, we are see­ing a greater amount of fund­ing per in­di­vid­ual ven­ture fi­nanc­ing deal, which has more than dou­bled across all ven­ture in­vest­ments in life sci­ences when you com­pare the av­er­age of 2009-2013 ver­sus 2014-2017. Based on Q1 2018 num­bers, 2018 ven­ture fi­nanc­ing is on pace to reach $10-11 bil­lion, which will put it just be­hind the un­prece­dent­ed ~$12 bil­lion that we saw in the peak in 2017. In par­tic­u­lar, Se­ries A fi­nanc­ing stands out as it is ex­pect­ed to see more than 80 per­cent growth in 2018 (sim­i­lar to the jump from 2014-2016). The in­crease in Se­ries A fi­nanc­ing in­di­cates a ro­bust in­vestor ap­petite to fu­el new com­pa­ny for­ma­tion that is like­ly the re­sult of the ex­it op­por­tu­ni­ties in life sci­ences cre­at­ed through M&A and part­ners in the last few years. A large in­crease in Se­ries D+ in­di­cates that many com­pa­nies are opt­ing to stay pri­vate longer to avoid an IPO and de­vel­op their pipeline to more mean­ing­ful val­ue in­flec­tion points or com­mer­cial­ize them­selves.

Signs of Greater Risk Aver­sion

Over­all, there is a strong con­sen­sus among buy­ers and sell­ers that deal­mak­ing will ei­ther in­crease or stay the same. Both groups ex­pect about the same lev­el of out­right ac­qui­si­tions. How­ev­er, buy­ers are more op­ti­mistic than sell­ers that there will be an in­crease in tra­di­tion­al li­cens­ing/part­ner­ship deals in 2018. This is in spite of an ex­pect­ed in­crease in deal flow and a po­ten­tial in­crease in cap­i­tal thanks to repa­tri­a­tion and fa­vor­able tax law changes, which may sug­gest that an off­set of risk is com­ing back in­to play.

In ad­di­tion, for 2018 we are see­ing a greater par­i­ty in the dis­count rate be­tween buy­er and sell­er (both 17 per­cent) com­pared to the 4 per­cent spread we saw in 2017. This shrink­ing gap in dis­count rates may be the re­sult of the bull mar­ket in pri­vate fi­nanc­ings. It could sug­gest an in­crease in part­ner­ships as op­posed to out­right ac­qui­si­tions as sell­ers as­sign high­er val­u­a­tions to their as­sets com­pared to 2017, and buy­ers will look to struc­ture deals where the sell­er par­tic­i­pates in some of the risk. It may al­so sug­gest that not enough val­ue is be­ing cre­at­ed for buy­ers through the trans­ac­tion from a straight rev­enue per­spec­tive and they will have to be more re­liant on syn­er­gies with ex­ist­ing ca­pa­bil­i­ties. With dis­count rates at par­i­ty, in-li­censers and out-li­censers will need to have sim­i­lar com­mer­cial ex­pec­ta­tions for an as­set in or­der to align on over­all val­ue as there may be less flex­i­bil­i­ty around ne­go­ti­a­tion. Giv­en our hy­poth­e­sis last year that a wider spread leads to in­creased ac­tiv­i­ty in the fol­low­ing year (which ear­ly ex­pec­ta­tions for 2018 are show­ing to be the case), this year’s par­i­ty may al­so be an in­di­ca­tor of a slow­down in ac­tiv­i­ty in 2019.

Deals Get­ting Hard­er to Close

An­oth­er fac­tor sig­nal­ing that buy­ers are be­com­ing a bit more se­lec­tive about the as­sets they are pur­su­ing and a bit more risk averse is the over­all deal con­ver­sion rate for 2017 which, at 1.9 per­cent, was much low­er than in pre­vi­ous years (Fig. 6). This could par­tial­ly be due to the in­creased num­ber of screened prod­ucts per com­pa­ny (60/com­pa­ny in 2017 vs. 50/com­pa­ny in 2016), as well as few­er deals pro­gress­ing to term sheet. Ad­di­tion­al­ly, there are like­ly more com­pa­nies in the mix for trans­ac­tions due to the fa­vor­able fi­nanc­ing en­vi­ron­ment. Pro­gres­sion to CDA rates dur­ing 2017 were sim­i­lar to what we saw in 2016 but the pro­gres­sion to term sheets and com­plet­ed trans­ac­tions dropped sig­nif­i­cant­ly (from 38 per­cent to 26 per­cent and 37 per­cent to 25 per­cent, re­spec­tive­ly). So, while there is ap­par­ent­ly a lot of talk­ing go­ing on, is­sues re­lat­ed to strate­gic align­ment, risk and/or due dili­gence are mak­ing deals hard­er to close. With deals fail­ing at a lat­er stage of the process, even af­ter pro­gres­sion to term sheet, it should be a re­minder for sell­ers not to take their eye off the ball but to be vig­i­lant and re­spon­sive to their part­ner’s re­quests and need­ed un­til the trans­ac­tion is com­plet­ed, even in this very ro­bust deal­mak­ing en­vi­ron­ment.

Fig­ure 6

For more on the Deal­mak­ers’ In­ten­tions 2018 Study, watch for the sec­ond ar­ti­cle in this se­ries, which will re­port on ex­pec­ta­tions for as­set sup­ply and de­mand by ther­a­peu­tic area and stage of de­vel­op­ment, along with per­spec­tives from lead­ing deal­mak­ers on the study’s find­ings and what they mean for bio­phar­ma­ceu­ti­cal deal­mak­ing go­ing for­ward. Fol­low my LinkedIn page and check back on End­points to find ad­di­tion­al in­sights on fac­tors im­pact­ing bio­phar­ma­ceu­ti­cal deal­mak­ing.

Au­thors: Neel Pa­tel is Man­ag­ing Di­rec­tor, Com­mer­cial Strat­e­gy and Plan­ning for Sy­neos Health Con­sult­ing, and Sachin Pur­war is Di­rec­tor, Com­mer­cial Strat­e­gy and Plan­ning for Sy­neos Health Con­sult­ing. Sy­neos Health Con­sult­ing is an in­dus­try-lead­ing con­sult­ing firm spe­cial­iz­ing in the bio­phar­ma­ceu­ti­cal in­dus­try and part of Sy­neos Health, the on­ly ful­ly in­te­grat­ed bio­phar­ma­ceu­ti­cal so­lu­tions or­ga­ni­za­tion. We pro­vide ser­vices across a com­pre­hen­sive range of key ar­eas, in­clud­ing com­mer­cial strat­e­gy and plan­ning, med­ical af­fairs, risk and pro­gram man­age­ment and pric­ing and mar­ket ac­cess. Rec­og­nized by Forbes mag­a­zine as one of Amer­i­ca’s Best Man­age­ment Con­sult­ing Firms for three years run­ning, our in­dus­try fo­cus and depth of func­tion­al ex­per­tise, com­bined with strong sci­en­tif­ic and mar­ket knowl­edge, unique­ly po­si­tion us to tack­le high­ly com­plex busi­ness and mar­ket chal­lenges to de­vel­op ac­tion­able strate­gies for our clients. For more in­for­ma­tion, please vis­it sy­neoshealth.com/so­lu­tions/con­sult­ing.