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Pharma funding and M&A in 2020

Why pharma M&A has continually bucked the trend


Now that the UK has finally officially left the European Union, and with the dust having settled on a tumultuous end to 2019, it’s an opportune moment to review the funding environment for pharma – a sector which, of course, plays such an important role in the UK and European economies.

Perhaps the most noticeable feature is that despite all the recent political uncertainty and economic sluggishness causing M&A activity to slow down in other sectors, pharma M&A has continually bucked this trend.

Indeed, pharma deal value not only increased in 2019, but the top ten transactions announced in the first six months of last year alone reached a total value of 47% higher than the top ten deals in the first half of 2018.

What’s more, this is a continuation of a long-term trend. Over the last five years, the pharma sector has seen over 400 mergers and acquisitions, especially within the sub-sectors of gene therapy, immune-oncology and orphan drugs therapeutic categories.

We should not forget that deal flow is of course affected by numerous factors. Indeed, a factor that has caused M&A levels to be sustained in the pharma sector in the face of wider difficult market conditions has been the rise of strategic acquisitions (about which I write more below).

But there are other factors too which I predict will continue to influence pharma M&A in 2020, which I believe are worth looking at in more detail.

Digital deals

Pharma has for some time been grappling with the potential impact of Big Data and Big Tech. Undeniably, innovations such as AI and machine learning of course hold out the prospect of far more efficient and personalised healthcare. But so far, the interaction between Big Tech and Big Pharma has been limited.

I would suspect that 2020 is the year when that starts to accelerate. Indeed, this has been several years in the making, with former Teva chairman Dr Yitzhak Peterburg saying back in 2017 that he was competing not only with the Novartises of the world but with the Googles and the Amazons too.

In truth, so far Big Tech has been more of a collaborator than a competitor for Big Pharma. For example, Gilead collaborated with Google’s Verily to study immunological disorders, and GlaxoSmithKline partnered with Google’s parent company Alphabet to found Galvani Bioelectronics.

But just as Big Tech has disrupted plenty of other industries, there is every reason to think that it will be interested in the opportunities to move more into drug therapy and treatment. That’s why in 2020 I would suspect we’ll see more attempts at ‘digital deals’ between tech companies and the pharma sector.

Mega mergers

However, the flip side of new disruptors entering a sector is that the established players will of course seek to defend their positions. It’s unsurprising, therefore, that in recent years we’ve seen a number of mega mergers.

Indeed, 2019 was notable for Bristol-Myers Squibb’s acquisition of Celgene (which at a stroke bolstered its immunotherapy and oncology departments), as well as AbbVie’s acquisition of Allergan for a cool $63bn (which was also notable for putting the world’s best-selling drug Humira under the same roof as Botox).

And once again, this was not a blip but rather the continuation of a trend. Indeed, in 2018 we saw GSK’s buy-out of Novartis’ stake in their consumer health joint venture for $13bn, as well as acquiring Tesaro for $5bn. All this in the same year that Japan’s Takeda acquired Shire, making the combined entity one of the top ten pharmaceutical firms by revenue (and only the second non- American or European firm in that list).

In fact, taking a longer-term view, we can see that the pharma industry has witnessed more $40bn-plus deals in the last ten years than any other sector. So I for one would certainly expect mega mergers to continue. But there’s another reason for this trend, alongside the pull of market consolidation through greater scale: innovation.

Specifically, M&A can be the path to larger pharma companies bolstering their portfolios with more innovative products, without undertaking the high cost and risk of R&D.

Indeed, a key theme of the deals I have mentioned has been oncology and immunotherapy, with M&A allowing Big Pharma to increase its offering in those fields without a lengthy R&D process that has no guarantee of success. This is why I expect to see not only more mega deals but also these types of strategic acquisitions in 2020.

Bolt-ons booming

So how might these strategic acquisitions look? Increasingly, the trend is for ‘bolt-ons’ where, for example, a larger pharma player acquires a smaller biotech firm.

The rationale for this is clear. Not least because of the challenge of patent cliffs for many traditional pharma businesses, the firms that wish to still be around in years to come need to innovate.

But of course thanks to advances in technology, the capacity to innovate is no longer only the preserve of large-scale pharma companies, but can often be exemplified by smaller biotech and biopharma firms. Indeed, McKinsey research found that between 2001 and 2016, the share of revenues coming from innovations outside Big Pharma grew from 25% to almost 50%.

This trend is unlikely to stop anytime soon, not least as R&D is of course high-cost and high-risk. So it’s not surprising therefore – set against a backdrop where there has been a clear shift away from Big Pharma focusing on internal R&D – that the way in which traditional pharmaceutical companies look to increase innovation is through bolt-on acquisitions of more innovative players in the industry.

But such bolt-on acquisitions are not just beneficial to Big Pharma – they can also benefit smaller firms. That’s because late-stage trials are not only incredibly expensive but have complex regulatory pathways. By contrast, the larger pharmaceutical companies often have both the time and resources to see these drugs over the line.


So how likely is all this to come to pass? I would argue very likely, for the simple reason that all of these trends have been building momentum for several years and show every sign of continuing.

But the one additional point I would make is to not assume the European or North American firms will be the ones making all the running. As we see with Takeda – and as we’ve seen with other industries, notably tech – companies from fast- growing emerging markets continue to rise.

So in 2020, as much as investors will be paying attention to noises from Boston, the San Francisco Bay Area, Britain, yes Britain, and even Brussels, I suspect they’ll also be looking to the likes of Beijing and Bangalore.

Michael Jewell is Partner and Head of Healthcare & Life Sciences at Cavendish Corporate Finance

1st April 2020

Michael Jewell is Partner and Head of Healthcare & Life Sciences at Cavendish Corporate Finance

1st April 2020

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