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Pharma deals continue to slide

But, from payers to the banks to the electorate, who's to blame. Deal Watch investigates

Medius Deal Watch September 2016

There is plenty of evidence that the number and value of biopharma M&A and licensing deals in 2016 and 2017 is declining. In 2016 pharma and biotech M&A, according to Evaluate, was 35% down on deal volumes and 8% on values. Ernst and Young in its report Beyond Borders also reports declines in volumes of M&A and strategic alliance deals in 2016. In 2017, this trend has continued.

Evaluate’s latest report (July 2017) reports that the number and value of M&A deals in the first half of 2017 was the lowest since 2013. So what are the reasons for the decline in deals? The reasons can be split into two broad groups: macroeconomic, where global and national exogenous factors affect the biopharma industry; and microeconomic at the individual company level and its particular circumstances. Companies’ decisions about deals are primarily driven by microeconomic factors such as access to new products, territory, etc. For example this month, Karo Pharma, Sweden acquired Weifa, Norway for $163m for product and territory complementarity. But, all companies are subject to the vagaries of the world economy which may delay or prevent deals. This month Deal Watch reviews the potential impact of some of the macroeconomic factors and the impact they may have on deals.

The electors in the US are to blame for creating uncertainty

Little did US electors know what would be the effect on the US biopharma industry and its deals when they elected Donald Trump. The US pharmaceutical industry has been told that Obamacare would be repealed, prices are too high and must come down and corporate tax rates will be reduced and modified to allow repatriation of cash held overseas. With the dysfunctional political system in the US it is hardly surprising that eight months following President Trump’s inauguration, the repeal of Obamacare has been dropped and the pricing and corporate tax changes are still unknown. In addition the US stock market excited by the prospect of changes in corporate tax and greater government investment driving growth has risen to new highs. NASDAQ in particular has increased by around 20%. As a result the market capitalisation of many biopharma companies has increased.

With a high level of uncertainty about changes to corporate taxes and higher valuations particularly of biotechnology companies, it is not surprising that big pharma companies are delaying M&A deals. At the beginning of the month this was confirmed by Ian Read, CEO of Pfizer. During the second quarter earnings call Read said: “We look at BD (business development) as a way of improving returns for shareholders. And right now I would reaffirm that I think there are short-term events in the marketplace such as a tax reform that may change asset values, so any focus on BD, to my point of view, is somewhat delayed by a resolution of that.” In Europe, asset values are also of concern. Emma Walmsley, CEO of GSK, said: “We will use cash for business development purposes, with M&A obviously dependent on the right kind of return profile.”

Given big pharma’s reluctance to spend on M&A it is perhaps surprising that this month Gilead has announced the $11.9bn acquisition of Kite Pharma. On the other hand, Gilead has been under pressure from investors to do something with its $36.6bn cash, especially as its sales, largely driven by hepatitis C products, fell by 12% in the first half of 2017. Gilead has been trying to diversify away from anti-viral therapies into oncology and Kite is a good fit with its CAR-T technology and a lead product in priority review by the FDA. In this case Gilead’s cash mountain and the pressing need for a deal outweighed the uncertainty about future US tax and high valuations. Gilead seems to have got its timing right because two days after the announcement of the acquisition the FDA announced “a historic action today making the first gene therapy available in the United States”. This referred to the CAR-T therapy, Kymriah, from Novartis for treating a form of acute lymphoblastic leukaemia in children and young adults. Novartis has announced a price of $475,000 per treatment following discussion with health assessment authorities. Following the FDA/Novartis announcement, Gilead’s share price leapt by 8%.

The acquisition of IFM Therapeutics by BMS for $2.3bn is also a deal where the company factors outweigh the global ones. Firstly the cash outlay upfront is only $300m. The remaining $2bn is payable as two $1bn contingent payments for the preclinical immuno-oncology projects, a stimulator of interferon genes and a NLRP3 agonist. As such the high biopharma valuation challenge is not material. Secondly, BMS is one big pharma company that has particular issues, namely, a reduction of its share price by over 20% in the past year and rumours that it is a takeover target. Boosting the pipeline by M&A may deter a potential acquirer.

If the US corporate tax regime is changed making it attractive for US companies to repatriate overseas cash, it is not by any means certain that US companies will indulge in a flurry of M&A activity. According to a report by Reuters, an analyst at SunTrust reviewed the last repatriation tax holiday in 2004 when pharma companies repatriated more than $90bn “but there was no massive wave of M&A. Only three US companies consummated deals in excess of $1 billion the following year”. One thing is certain, if the cash is repatriated by companies who have a healthy cash balance, their investors will be looking for some share of that either via share buy backs or increased dividends.

The payers are to blame for creating uncertainty about future pricing

A third factor that may be at play reducing some types of deals, is pricing and the ongoing pressure on prices of prescription products from payers especially for new high price products. While this may not have been the reason behind GSK’s termination of its rare disease projects, it has not deterred Mallinckrodt from acquiring Infacare, a US company with a rare disease product for treating severe jaundice in neonates. Mallinckrodt estimates that there are around 100,000 patients per year in the US and, at a treatment price of $5,000, sales will be $0.5bn, assuming of course all the patients are treated and Mallinckrodt obtains 100% market share. The payers may be less impressed with the $0.5bn sales than the investors and there may be some push back. No doubt Mallinckrodt is aware of this and so the acquisition price is structured as an upfront of $80m and the remaining $345m is linked to regulatory and sales milestones (hopefully for Mallinckrodt most linked to high sales milestones).

The central banks are to blame for flooding the market with cash

A fourth macro-economic factor that may be having an effect on the number of deals is the availability of cash and IPOs for biotechnology companies who, as a result, are under less pressure to sell or to make partnership deals. According to Evaluate, the amount of Venture Capital (VC) funding is likely to match the 2016 levels but more significantly, the number and value of IPOs of development stage companies in the second quarter 2017 has surged.  The volume of 20 companies raising $1bn is roughly double the volume and value of the previous five quarters. Similarly with quantitative easing, debt finance is available at low interest rates. For example, Fresenius’s acquisition of NxStage Medical (US), a home dialysis competitor, for $2bn is being financed with cash and debt. Fresenius at end June 2017 had over $23bn debt representing 3 x EBITDA (2.3 x at end 2016) which is moving towards the top end of what is desirable. Even so the Fresenius shareholders do not seem worried as the share price remained much the same after the announcement.

The electors in the UK are to blame for creating uncertainty

The UK electors created a tsunami of uncertainty by voting to leave the EU.  As with the Trump supporters it is doubtful that the Brexit supporters had any inkling of what might be the outcome. This is hardly surprising given the complexity of the economic and legal issues after 40 years membership of the world’s biggest trade association. The immediate outcome was a steep decline in sterling. Since the Brexit vote the pound is now 10% lower against the dollar and nearly 20% lower against the Euro. Similarly, the Euro is now around 10% stronger against the dollar since President Trump was inaugurated. The consequence of these exchange rate changes is that acquisitions of UK and US companies and assets by companies based in euro countries are much less expensive. While this would not be the key reason for an acquisition, it helps at the margin. For example, Evotec, the German small molecule development company, is acquiring for $300m the US preclinical development company, Aptuit. The company is a good fit for Evotec in complementing its drug discovery and development capability and adding a pre IND service. This is the key reason for the acquisition but it is unlikely that the company did not consider the benefit of the strong Euro exchange rate. Perhaps it is only a matter of time before European big pharma companies seek to acquire companies and assets in the UK but at the moment the uncertainty about the final terms of Brexit make that a risky proposition.

Companies in trouble have to find deals irrespective of the winds blowing from the world economy

There are some biopharma companies that have had a torrid time over the past 12 months reflected in significant reductions in share prices eg Teva.

  Share prices  August 2016
($)
Share prices  August 2017
($)
$% change Debt 2Q2017 2016 EBITDA / (Net loss)
Teva 50 16 -68% $35bn $7.3bn
Valeant 40 17.5 -56% $28bn ($2.4bn)
Perrigo 90 78 -14% $3.7bn ($4.0bn)
Cerecor 4.0 0.7 -82% $0.6m ($16m)
Xoma 11.7 7.7 -34% $13.5m ($54m)
Aptevo 2.4 1.2 -50% $18.7m ($112m)

These companies are selling assets to try and reduce their debt and improve the balance sheet of the company. Teva’s debt problem was caused by the $40bn acquisition of Allergan’s generic business. This deal was rated one of the worst M&A pharma deals of the last 10 years by FiercePharma readers. At the time (July 2015) DealWatch commented “This is an expensive acquisition with a sales multiple of over 6 and an EBITDA multiple of 15 before synergies”. The business has not performed because of generic price pressures so Teva has reduced its dividend, is laying off 7,000 staff and is selling its women’s health and other businesses to reduce debt. It should be remembered that Teva is Israel’s biggest company with many local employees and Israeli pension funds investing in the company. So when Teva sneezes, Israel catches a cold. Teva said it would lay off 700 workers in Israel but after political and trade union pressure it has decided to reduce the number of local redundancies. Business in Israel could also be affected by Perrigo’s sale of its API business to the private equity company, SK Capital, for $110m. The main manufacturing operation is in Israel with supporting operations in India and the US. Perrigo, like Teva and Valeant, is seeking to reduce debt.

Biotech companies are also selling (or licensing) assets to stay alive

It is not only pharma companies that have seen their share prices dive over the past year. Biotech companies like Cerecor developing drugs for neurological diseases, Xoma and Aptevo developing antibodies have suffered an 82%, 34% and 50% decline respectively in their share prices. These companies have been running out of cash and have had to do deals to stay alive.  Cerecor has sold its kappa opioid receptor antagonist in phase 2 to Janssen (J&J) and Xoma has licensed its interleukin 1 beta intellectual property for cardiovascular disease to Novartis plus a developed product where development had stopped. The Xoma licensing deal is interesting because it required Novartis to settle the $14m debt owed to Xoma’s previous licensee Servier. In so doing Novartis has rescheduled the debt with Xoma. Aptevo has sold three marketed products to settle a debt obligation and advance its other projects.

Licensing  

The most common licensing deal is big pharma licensing in from biotech. This month, both AstraZeneca and Lilly have entered into technology platform discovery deals with an option to license. The trend for big pharma to collaborate in areas of unmet clinical need where there is a high risk of development failure continues with AstraZeneca and Takeda collaborating on development of an antibody for treatment of Parkinson’s disease. It is also good to see big pharma continuing to license out projects that are no longer of interest. Roche has licensed a monoclonal antibody in phase II to Dermira, a dermatology company. The headline value at $1,410m is high but the upfront at $80m is only 6% of the headline value. This is probably as much as Dermira can afford. It estimates that the development cost will be $200m to get the top line phase IIb study results and has cash after paying this to survive until mid-2019 following its $278m fund raising in May this year. One thing is certain - Dermira will be seeking more money in 2018.

Arcus, a privately owned US immuno-oncology company, may have to do the same following its deal to license a monoclonal antibody from the Chinese companies WuXi Biologics and Gloria Pharmaceuticals. While the upfront at $18.5m (2% of the headline value) is low, Arcus has raised $120m since inception in 2015 and is planning to move four projects into phase I in 2017 and 2018. Finally it is always encouraging to see medium size companies like Mundipharma and Jazz finding and licensing new product opportunities. Mundipharma built its oncology franchise following the acquisition of an old anti-cancer drug and the deal to license a phase 3 product for biliary tract cancer will provide a new impetus for its business.

Are deals being delayed or prevented by macroeconomic factors?

Pfizer and some other big pharma companies are using uncertainty about US tax reform and Brexit and high company valuations as reasons to justify their lack of investment in M&A and other deals. However many other companies with specific issues such as poor performance or debt or the need to expand are not being distracted by macroeconomic factors. The business pressures at the individual company level are driving deals not the general trends of the world economy. As such there is the suspicion that the lack of deals by some big pharma companies is because these companies are suffering from management uncertainty about strategic direction  not because of the uncertainty created by President Trump, Brexit and the world economy.

Licensor / Acquisition target Licensee / Acquirer Deal type* Product /technology Headline
$m
Kite (US) Gilead (US) Company acquisition CAR-T technology with lead product ‘axi-cel’ under priority review at the FDA for treatment of refractory aggressive NHL 11,900
IFM Therapeutics (US) BMS (US) Company acquisition Small molecule immunological drug development including 2 preclinical programmes 2,320 (upfront 300)
NxStage Medical (US) Fresenius Medical Care (DE) Company acquisition Acquiring competitor at-home dialysis devices and care centres making 2,000
Roche (CH) Dermira (US) Licence to develop and commercialise Phase II MAb to block IL-13 for treatment of atopic dermatitis 1,410 (upfront 80)
WuXi Biologics and Gloria Pharma (CN) Arcus Biosciences (US) Licence to develop and commercialise** GLS-010, anti-PD-1 antibody in phase I for treatment of cancer 816 (upfront 18.5)
Xoma (US) Novartis (CH) 2 licences: gevokizumab and IP Gevokizumab plus IP for use of IL-1 beta targeting antibodies for cardiovascular disease 469 (upfront 31)
Infacare (US) Mallinckrodt (US/GB) Company acquisition Phase IIb fast track stannsoporfin, a heme oxygenase inhibitor for treatment of severe jaundice in neonates 425 (upfront 80)
Calimmune (US) CSL (AU) Company acquisition Preclinical haematopoietic stem cell therapy for sickle cell disease 416 (upfront 91)
AstraZeneca (GB) Takeda (JP) Joint development and commercialisation MEDI1341, an alpha-synuclein antibody entering phase I for treatment of Parkinson’s disease 400
Aptuit (US) Evotec (DE) Company acquisition Drug discovery and development to IND submission including 3 R&D sites 300
CellAct (DE) Mundipharma (GB) Licence to develop, commercialise and manufacture CAP7.1 prodrug of etoposide at start phase 3 for second line treatment of biliary tract cancer 250+
Immunogen (US) Jazz (IE, US) Collaboration and option Phase I haematology-related antibody-drug conjugate plus 2 other projects 175+ (upfront 75)
Weifa (NO) Karo Pharma (SE) Company acquisition Karo acquires Norwegian OTC company to expand product range and territory 163
Mologen (DE) iPharma (CN) Binding term sheet for licensing and co-development*** Phase III toll-like receptor 9 agonist for metastatic colorectal cancer 124
Perrigo API (US) SK Capital (US) Asset acquisition API manufacturing operations primarily in Israel with supporting units in US and India 110
Confluence Life Sciences (US) Aclaris (US) Company acquisition Discovery and development of kinase inhibitors for treatment of cancer and inflammation 100 (upfront 20)
Aptevo (US) Saol (US) Asset acquisition Three marketed hyperimmune products: WinRho SDF, HepaGam B, and VARIZIG 74.5 (upfront 65)
Cerecor (US) J&J/Janssen (US) Asset acquisition CERC-501 phase II oral kappa opioid receptor antagonist for adjunctive treatment of major depressive disorder 45 (upfront 25)
Dr Reddys (IN) Encore (US) Licence to develop, manufacture and commercialise**** Pre-registration (US) topical high potency steroid for moderate to severe plaque psoriasis 32.5
Ethris (DE) AstraZeneca (GB) R&D collaboration + option to license Stabilised non-immunogenic modified RNA technology for respiratory diseases 29 (upfront)
Topas (DE) Lilly (US) R&D collaboration + option to license Antigen-specific tolerance induction technology ND

* Global rights unless stated

** North America, Europe, Japan and certain other territories

*** China

**** United States

29th September 2017

29th September 2017

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