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A cautiously optimistic healthcare M&A outlook for 2017

Monday, February 13, 2017

Although 2016 was a lackluster year for megadeals in healthcare, a recent flurry of big deals has Wall Street investors cautiously optimistic that 2017 will bring new mergers and big-ticket acquisitions. An increasingly competitive landscape in healthcare, coupled with signs that the new U.S. presidential administration may usher in more business-friendly policies, could spur major deals in the upcoming year.

“Because capital remains relatively cheap, companies are looking to use lower cost of capital to fuel growth,” said David K. Blume, managing director, Edgemont Capital.

Across all sectors, innovation and disruption will drive the need for larger players to “fill the gaps rather than be left behind,” said Michael Jewell, partner, head of Healthcare, Cavendish Corporate Finance. Other drivers of M&A market-wide will be U.S. tax reforms and repatriating of cash, as well as cash-rich corporates and strong financing markets, Jewell added. 

If the first few weeks of 2017 are any indication, the price tags for acquisitions in life sciences might reach new peaks after last year’s lull. On January 9, Takeda Pharmaceuticals announced the purchase of Massachusetts-based Ariad Pharmaceuticals for $5.2 billion, and on January 26, Johnson & Johnson said it would buy the Swiss company Actelion for $30—the healthcare giant’s biggest purchase yet.

On February 4, Reuters reported that the medical testing company LabCorp is in talks to buy the CRO PPD for $8 billion, and in a recent earnings call, Amgen signaled it is open to big deals moving forward by eliminating a $10 billion cap on acquisitions. During the call, CEO Bob Bradway said, “We’ve got a balance sheet that supports our ability to look at transactions large and small,” pointing to the company’s $40 billion treasure chest.

Considering these events, it is possible that the industry may see bigger deals than ever before, according to Jewell. “The do-nothing option may be less palatable than potentially overpaying for the new best thing in the market that will drive valuation and the next five-year strategy.”

Although 2016 saw more than 4,000 deals across the life sciences industry, the dollar value of those deals paled in comparison to value seen in 2015, according to Cortellis Deals Intelligence (CDI). None of the deals in 2016 topped $40 billion, a trend that may have been influenced by the actions of U.S. regulators. In April 2016, the Treasury Department introduced new rules designed to thwart Pfizer’s proposed $160 billion acquisition of the Ireland-based Allergan, a tax inversion deal that could have saved Pfizer an estimated $1 billion annually. After the rules were introduced, Pfizer walked away from the bid—which would have been the biggest ever in pharma history.

In July 2016, the U.S. Justice Department filed a lawsuit to block two major acquisitions in the insurance industry—Anthem’s bid for Cigna and Aetna’s bid for Humana. During the subsequent trials, a judge blocked the proposed Aetna/Humana merger, and a decision is expected on the Anthem/Cigna case soon. The Treasury Department’s tax inversion rules and Justice Department’s lawsuits—coupled with market uncertainty surrounding Brexit and the outcome of the U.S. presidential election—cast a dark cloud over would-be megadeals in 2016.

However, 2017 is off to a great start. In fact, during the first month of 2017, M&A deal making across markets reached $258.2 billion worldwide, a figure bolstered by Johnson & Johnson’s $30 billion bid for Actelion, according to Thomson Reuters. Total deals in January 2017 represented a 38% bump over the same month last year, and the highest January figure since 2011, according to Thomson Reuters. The January 2017 bump coincides with a changing of the guard at the White House, as well as the annual JP Morgan conference in San Francisco, a popular venue for companies to announce major deals.

M&A catalysts in the pharmaceutical industry include the “well-trodden issues of patent cliffs,” which will encourage companies to acquire potential blockbuster drugs and technology to improve market position, said Jewell. In the absence of innovation, mid-cap companies will become a target for the biggest players. Pharmaceutical companies will be “looking for relatively de-risked propositions,” such as approved or late-stage products, Jewell said.

The CRO sector, meanwhile, has seen a number of large consolidation transactions that have turned “large CROs into giants,” said Edgemont Capital’s Blume. As a result, 2017 will likely bring “a whole host of M&A activity” in the mid-sized and specialty CRO marketplace.

“We’ll see mid-size players try to increase global reach, and we’ll see dramatic consolidation in the clinical research site sector,” Blume said.

Jewell added that CROs will be hunting for capacity, therapeutic skills, further scale or global reach to service biopharma and pharma clients.

Big pharma companies are “increasingly acquiring innovative drug companies rather than developing drugs in-house,” said Jewell, which “may mean that CROs will be expected to provide more innovation” moving forward.  

 

This article was reprinted from Volume 21, Issue 06, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »

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