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Deal Watch October 2016

Allergan, Astellas, AstraZeneca, Boehringer Ingelheim and Eli Lilly feature in this month's pharma deals round-up

Medius Deal Watch September 2016Last month Deal Watch described the slow-down in the number of M&A and licensing deals reported by Evaluate at the European Pharma Licensing Meeting in Brussels in September 2016. The report concluded that if the number of licensing and M&A deals continues the trend in the first 9 months, the number of deals this year will be at the lowest since 2010.

A similar story, specifically relating to M&A deals, comes from the analysts at Merger Market who have identified a reduction in the third quarter compared to the second quarter European and US life science M&A deals.

M&A deals in 3Q16 versus 2Q16EuropeUS
Number-25%-27%
Value-51%-40%

The implication is that M&A deals in Europe have been adversely affected by Brexit and US cross border deals have been in decline over the past two years because of the taxman's changes in tax inversion rules. In contrast, in Asia the value of life science M&A deals tripled in the third quarter compared to the second. The report concludes that in future there are likely to be fewer mega M&A deals and more small transactions.

In October the Deal Watch top 20 valued deals showed a reduction in the number of company acquisitions to two but an increase in asset acquisitions to eight as companies continued to rationalise their portfolios. AstraZeneca has won the prize for the most deals reported in the DW top 20 in any one month. Two months ago Pfizer claimed a hat trick but this month AstraZeneca has got two deals.

AstraZeneca's Portfolio Transformation
It is no wonder that AstraZeneca has a very high deal count. It has been single minded in pursuing the rationalisation of its portfolio into three main areas: respiratory, inflammation and autoimmunity; cardiovascular and metabolic; and oncology. As a consequence non-core marketed products and developments have been divested over the past four years since Pascal Soirot took over as CEO and there has been a dramatic increase in deal numbers (77 in 2015 versus 29 in 2011).

Whilst the CEO sets direction it is the BD&L team at AstraZeneca that has had to deliver the results. They must have been working eight days a week!

Core therapy area acquisitions and non-core divestments are changing the shape of AstraZeneca. In 2011 the non-core products represented 44% of total product sales. In the first half of 2016 it was 23%. The table below shows some of the deals that have led to this transformation. In the table the total buying spend is $7.6bn and the income is $7.5bn. It is interesting to see the spread of the price/sales ratios probably reflecting the differences in gross margins. Also of interest is the number of deals that have royalties as part of the consideration. It suggests the parties may have used the royalty as a way of bridging the gap between the buyer's and seller's valuation.

Core areasSELLERProductsPriceSalesPrice/sales
Diabetes 2013BMSProducts + pipeline$4,300 + royalty
Buyout of collaboration
Respiratory 2015Actavis US and CanadaBranded products$600m +royalties$230m US2.6
Respiratory 2015TakedaDaxas Non US$575m$198m2.9
Respiratory 2014AlmirallProducts + pipeline$2,100 + milestones

Non-core areasBUYERProductPriceSalesPrice/sales
Cardiovascular 2016AralezToprol XL + generic US$223m + royalties$142m1.6
Cardiovascular 2016
China Medical SystemPlendil China$310m$189m1.6
Infection 2016Pfizer3 antibiotics + 2 pipeline$1,500m

Gout 2016IronwoodLesinurad US$265m + royalties

Rhinitis 2016JanssenRhinocort outside US$330m

Neurology 2016Aspen5 anesthetics$770m + royalties$592m1.3
Neurology 2014LillyAZD3293$500 + profit share

Neurology 2012Impax USZomig US$163 + royalty$130m0.8
GI 2016AllerganIL-23 MAb$1,520m + royaltyPhase 2b
GI 2015Zeria / TillottsEntocort non US$215m$53m4.1
GI 2015Daiichi SankyoMovantik US co-pro$825m

GI 2014IGI USInjectable generics$506 + $3m royaltis

But AstraZeneca is not only divesting of marketed non-core products, it is also prepared to license out a development project in a core area such as respiratory. In the deal with Insmed the molecule is in phase I and has been licensed for development and commercialisation in an orphan indication to Insmed and AstraZeneca has retained the option to commercialise the product in COPD and asthma.

According to Reuters not all the financial analysts believe in the revolution. Apparently a Deutsche Bank analyst said that the strategy of divesting non-core assets to invest in new assets is of “questionable sustainability”.

The Month of Divestments – We Can Work It Out
At least AstraZeneca are making a proactive approach to divestment. So are some of the other big pharma companies that have been rationalising their portfolio by divesting non-core businesses such as OTC or veterinary medicines. In June, Boehringer Ingelheim agreed to takeover Sanofi's veterinary business, Merial, in return for handing over its OTC business. So at first sight it is surprising that Boehringer has sold to Lilly its pet vaccines business in the US including a factory and R&D site for $885m. For Lilly this is a good deal as it acquired the Novartis Animal Health business for $4.5bn last year and Elanco, its animal health business, is now said to be one of the top three animal health companies. So why did Boehringer sell part of one of its core businesses? Although not mentioned in the Boehringer press release, Lilly stated ”The sale of BIVI's U.S. pet vaccines business and Fort Dodge manufacturing site is a required step toward the acquisition of Merial by Boehringer Ingelheim”. In other words it was a forced sale to meet anti-trust requirements required for the Boehringer – Sanofi swap.

The forced sale of part of an acquired business demanded by Competition Authorities is very common these days and can result in a low price for the vendor desperate to sell. This month there were two more deals of this type. The disposal by Abbott to Terumo of some vascular closure products for $1.1bn triggered by Abbott's intended takeover of St Jude for $25bn. Similarly the acquisition of Actavis (Allergan) Generics by Teva for $40.5bn has resulted in the divestment of Actavis's former factory and some products in the UK and Ireland to Intas for $767m. Unfortunately there is not enough information in the public domain to determine if the sale prices were low.

Apart from forced sale and proactive divestments by big pharma companies like AZ, most big pharma companies do not make much effort to divest non-core products. Until that is, the manufacturing and or regulatory departments start squealing about the cost of maintaining and producing the old products often for small markets. Big pharma often fail to properly assess the resource drag and cost of keeping old products alive. So when Janssen announced this month it had divested five injectable pain products to Piramal for $175m, it is assumed this was a consequence of low margins and manufacturing issues. The deal has a typical transition arrangement where packed product is supplied by Janssen for three years and API for five years. There is no transfer of manufacturing facilities or employees to Piramal. Typically big pharma companies have high manufacturing costs, driven by high overhead costs, compared to generic companies who can utilise their low cost base to make a low margin product profitable. It is surprising there are not more deals like this but as one former AZ Board member commented many years ago, “No one gets any credit for divesting mature products because it does not improve the share price”.

Biosimilars - Here There and Everywhere
The traditional small molecule generics business is generally characterised by low margins as price competition amongst multiple suppliers creates a downward price spiral. The question is will biosimilars be subject to the same type of price competition? The biosimilar market is heating up. This month Teva has entered into a US and Canada commercialisation arrangement with South Korea's Celltrion. Teva has paid $160m upfront with $60m refundable or creditable (presumably if registration fails) for rituximab (Rituxan) and trastuzumab (Herceptin), both in late phase III development. The market in North America for these two products is $6.5bn. These two biosimilars were originally licensed by Hospira but when Pfizer acquired Hospira it terminated the agreement. So what will be Teva's price strategy? Pfizer has announced that it will sell its biosimilar infliximab, also from Celltrion, in the US at a wholesale purchase price 15% below J&J's Remicade. This is typical of the discount level offered by the first generic entering the market. In practice the price is likely to be much lower as J&J is said to offer discounts of around 30%. Even so, based on this information and the experience in Europe there is unlikely to be the cut throat price reductions of over 90% seen with small molecule generics. One reason is the manufacturing cost per pack of biological products is high but more importantly the number of competitors is likely to be one or two, at least in the medium term, not several. For example in Europe both Pfizer (Hospira) in 2009 and Mundipharma in 2014 have rights to Celltrion's infliximab. Hopefully the biosimilar companies will not engage in non-exclusive deals with multiple distributors that creates the environment for a downward price spiral.

Even without non-exclusive deals from one supplier, there is the additional competitive risk of new biosimilar entrants, such as Sandoz, etcetera. For example Samsung Bioepis also based in South Korea, signed a deal with Merck & Co in 2013 for a range of biosimilars including infliximab, trastuzumab and etanercept (Amgen's Enbrel with $5.4bn sales). The FDA accepted the Biologics Licence Application for infliximab in May and etanercept has been approved in Canada. Another example is DM Bio, a joint venture between Dong A of South Korea and Meiji Seika of Japan who this month signed a deal with Gedeon Richter for a biosimilar of trastuzumab.

With biosimilars price is not everything, marketing is just as important. Many doctors remain sceptical that the biosimilar has the same clinical effect as the original product and so uptake has been patchy and varies significantly country by country. The Amgen Annual 2015 report says “We expect the adverse impact of biosimilars to be more like branded biologics than generic small molecules. We expect patients, providers and payers to place a high value on the reputation, reliability and safety of biosimilars”.

M&A and Licensing – One and One is Two
There were two acquisitions in the month, Astellas's acquisition of Ganymed and Allergan's acquisition of Motus. One interesting aspect about these deals is the different approach adopted by the acquirers. Astellas has structured its deal almost like a licence with one third of the consideration ($462m) upfront and the remainder in “further contingent milestones” (milestones and possibly royalties) as the product is in phase IIb. The approach by Actavis for a product in phase II that was about to enter phase IIb in October 2014 was not to acquire the company but instead take an exclusive option, costing $40m, to acquire the company for $200m plus an undisclosed launch payment following the completion of Phase 2b. In this scenario Actavis (Allergan) put at risk less than 17% of the total consideration rather than the 33% Astellas has paid. The licence deal obtained by Summit from Sarepta for a phase II product had an even lower upfront, 7% of the total consideration. Of course the decision whether to acquire, take an option or license is usually the prerogative of the seller not the buyer. 

Licensor / Deal dateLicenseeProduct / IndicationDeal value (Upfront)
Hanmi (SK) / Jul 15Boehringer Ing. (DE)Olmuntinib / Lung cancer$730m ($50m)
Apitope (UK) / Jan 09Merck KGaA (DE)ATX-MS-1467 / multiple sclerosis$203m
Mitsubishi Tanabe (JP) / Sept 15Biogen (US)amiselimod / multiple sclerosis$544m ($60m)

Conclusion - Tomorrow Never Knows
The majority of month's deals are based on restructuring of product portfolios either for strategic or regulatory reasons. Out of the 20 deals this month, there are only two early stage deals, by Amgen and Takeda. This is unusual. Evaluate's presentation, mentioned at the start of this report, estimates that 61% of big pharma revenue in 2022 will come from externally derived assets without including future deals. In which case there will be plenty of work for the AstraZeneca and other BD&L teams in the years ahead.

How many Beatles song titles did you spot in this month's Deal Watch report?

0 - 3 You are too young / you prefer Coldplay
4 - 6 You are not a Beatlemaniac
7 -10 Seek treatment for obsessive compulsive disorder

Finally it should not be forgotten that there are often failures in phase II to meet clinical end points. This month there have been three licensing deals where the licensee has terminated. In these cases the licensor will get back the rights.

Licensor / Acquisition target
Licensee / Acquirer
Deal type*
Product /technology
Headline $m
Medimmune / AstraZeneca (UK)
Allergan (US)
Licence
Anti-interleukin 23 MAb in phase IIb for Crohn's Disease
1,520
Ganymed (DE)
Astellas (JP)
Company acquisition
Immuno oncology MAb in phase IIb for gastroesophageal cancer
1,404
Abbott & St Jude (US)
Terumo (JP)
Asset Acquisition
Vascular closure products
1,120
Hospira / Pfizer (US)
ICU Medical (US)
Asset Acquisition
Hospital infusion business
1,000
Boehringer Ing vet (DE)
Eli Lilly (US)
Asset Acquisition*
Pet vaccines in US
885
Crescendo (UK)
Takeda (JP)
License collaboration
Transgenic platform Humabody to discover treatments for cancer
790
Teva (IS)
Intas (IN)
Asset Acquisition*
Former Actavis generics business and factory in UK and Ireland
767
Sarepta (US)
Summit (UK)
Licence collaboration*
Europe Utrophin modulator pipeline, lead molecule phase II for muscular dystrophy
562
NuEvolution (SE)
Amgen (US)
Collaboration, option to license
DNA encoded screening platform to identify targets for oncology
410
AstraZeneca (UK)
Cilag J&J (US)
Asset acquisition*
Rhinocort (budesonide) nasal spray for rhinitis, global rights excluding US
330
Ocular Therapeutics (US)
Regeneron (US)
Licence collaboration
Hydrogel sustained release aflibercept (Eylea) for wet macular degeneration
315
Cerulean (US)
Novartis (CH)
Licence collaboration
Nano particle drug conjugates - 5 targets for oncology at $226.5m per target
232 - 1,138
AstraZeneca (UK)
Aralez (CA)
Asset acquisition*
Toprol XL (metoprolol) for hypertension for US
223
Motus / Rhythm (US)
Allergan (US)
Company acquisition
Exercise of option to acquire Motus with ghrelin agonist for diabetic gastroparesis in phase IIb
200+
Janssen / J&J (US)
Piramal (IN)
Asset acquisition
5 injectable pain / anaesthetic products
175
Celltrion (SK)
Teva (IS)
Co-commercialisation*
Biosimilar rituximab and trastuzumab in phase III in North America
160
AstraZeneca (UK)
Insmed
Licence
Dipeptidyl peptidase one in phase I for non-CF bronchiectasis
150
AstraZeneca (UK)
3SBio
Distribution*
Byetta, Bydureon (exanatide) for Type 2 diabetes in China
100
Active Biotech (SE)
NeoTx (IS)
Licence
Tumour Targeting Superantigen ANYARA in phase I for oncology
71
Amgen factory (US)
AstraZeneca (UK)
Asset acquisition*
Factory in Colorado
65

*Global rights unless stated

9th November 2016

From: Sales

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