Is M&A coming back into fashion after the 2016 decline?
This month’s deals are dominated by company acquisitions. Is this a sign that the M&A deal activity and value is back on an upward path after the decline in 2016? In 2016 pharma and biotech M&A according to Evaluate was 35% down on deal volumes and 48% on values. The latest report from MergerMarket reports a 15% decline in M&A deal values in the first quarter of 2017 versus first quarter 2016. This analysis includes medtech as well as pharma and biotech. It is speculated that US companies are delaying M&A deals while they wait for President Trump to implement the tax reforms he promised. The latest news is that the corporate tax rate will be reduced from 35% to 15% with fewer tax deductions, it will be a “territorial system” and there will be a “one-off pass” for profits held overseas to be repatriated. According to a report by Oxfam, in 2015 America’s 50 biggest companies held $1.6 trillion overseas including Pfizer with $193bn. More recent data reported in FiercePharma (1st May) shows Amgen has cash overseas of $34bn, Gilead $27bn and Merck & Co $22bn. Apple is said to have $250m offshore and could use this to enter the healthcare market following in the footsteps of the internet giant, Google. Although US companies may be holding back on making acquisitions, the volume and value of M&A transactions in April may be the first signs of a change in the downward trend.
Debt financing of acquisitions
The largest deal this month was in the medtech sector with Becton Dickinson’s (“BD”) acquisition of C R Bard for $24bn at a 25% share price premium. According to a Financial Times report, this deal comes only months after BD at an analyst briefing stated it was seeking to reduce its leverage to three times annual cash flow. At end 2016 BD had $10bn debt, $1.5bn cash and $2.5bn of operating cash flow. The Bard acquisition will add another $10bn of debt but only $0.5bn annual operating cash flow pre synergy benefits. The BD leverage / cash flow target seems to have gone out of the window at least for the next three years when BD expects to reduce it from 4.7 to 3. So what did investors think? Following the announcement the BD share price fell by 3%.
Cardinal Health’s share price decline was even worse, falling by 11%, after the announcement it is acquiring from Medtronic its patient care, deep vein thrombosis and nutritional insufficiency business for $6.1bn. The shareholders may have been concerned that the company plans to fund the major part of the acquisition price with $4.5bn of debt. In a situation where the Federal Reserve is signalling further increases in interest rates and there is a risk that the new Trump tax laws will restrict the amount of interest that is tax deductible, this may not be a good time to be doubling its amount of debt The acquisition will bring $2.3bn sales (70% in the US), 17 manufacturing facilities and 10,000 staff (12% of Medtronic’s total). In contrast to Cardinal Health, Medtronic’s share price went up by 3% no doubt driven by the news that $1bn of the proceeds would be used to buy back shares and the remainder to reduce the $20bn net debt at end January 2017.
Studies of acquisition transactions shows that most deals provide a better return for the seller than the buyer so it is not surprising to see the buyer’s share price decline following an announcement as seen with BD and Cardinal Health. It is encouraging, therefore, to see Fresenius’s share price increase by 2% following the announcement that its subsidiary Fresenius Kabi is making two acquisitions worth over $5.5bn. The acquisition of Akorn, a US based company that manufactures “alternate” formulations such as liquids, gels and injectables and markets a range of products with a focus on ophthalmology will cost $4.75bn representing 12 x EBITDA. Since 2013 Akorn has been on a spending spree buying US rights to timolol and other ophthalmics from Merck & Co, acquiring generics companies such as Hi-Tech for $640m and Versapharm for $440m. These acquisitions brought a number of accounting and manufacturing problems and as a result the Akorn share price today is half the level of two years ago. In addition at the end of 2016 Akorn had net debt of around $600m and operating cash flow of $168m. So investors are probably pleased at the $34 per share offer (40%+ premium) from Fresenius which will pay $4.3bn (4x sales) and assume $450m of debt. The acquisition is being financed by debt but Fresenius expects its net debt to EBITDA ratio will be three by the end of 2018. This ratio sounds familiar (see Becton Dickinson above).
The second deal Fresenius announced this month is the acquisition of the biosimilar business of Merck KGaA, set up in 2012, for $729m (€670m). This includes the products in development and 70 staff in Switzerland. The first biosimilar product is expected to be launched in 2019. Fresenius will pay Merck a single digit royalty on sales. According to Fresenius, the deal will “strengthen Kabi’s already strong position in injectables”. This sounds more like the words of a CMO rather than a developer of biosimilars, which is proving to be a highly competitive field and is probably part of the reason Merck wanted to sell. There are said to be more than 10 companies developing biosimilar versions of Humira, the lead biosimilar at Merck. The Merck CEO explained that the biosimilar programme was a Plan B when it was started in 2012 in collaboration with Dr Reddys. At the time Merck had a less strong R&D pipeline and spare capacity at a biomanufacturing plant. Merck has spent €130m on the biosimilar programme which will be covered by the €170m upfront from Fresenius. The remaining €500m of the purchase price is linked to achievement of development milestones. Fresenius estimate the business will break even at EBITDA level in 2022 so there is still a long way to go.
Barbarians at the Gate
“Barbarians at the Gate” is the title of a book describing the battle for control of RJR Nabisco in 1988 between KKR, a leveraged buyout firm (“LBO”), and the CEO who wished to buyout the other shareholders. KKR won the battle and were accused of being Barbarians for loading RJR Nabisco with a massive debt burden that seriously damaged the company as it struggled to pay off the debt and interest. A study of the buy-outs in 1987-88 revealed that one third went bust or had to be restructured. Realising that debt financing followed by severe cost cutting was not popular, the LBOs rebranded themselves as private equity companies who, in theory, would preserve the company and its employees. The problem is that cheap credit can be an enormous temptation for some financial companies to re-emerge as Barbarians. The 2008 financial crash is a salutary reminder.
Given this background what do we make of the deal where two private equity companies, Bain and Cinven, joined forces to acquire Stada for $5.63bn? This price was much bigger than the reported bid of $3.7bn from another private equity company, Advent. The price paid represents a share price premium of 49% which doesn’t sound too much compared to some of the 80%+ premiums paid for some biotech companies. But, looked at as a multiple, the price represents over 15 x EBITDA which is much higher than the private equity companies’ target of 5-10x (Advent’s offer was 10x). To make life even more difficult for Bain/Cinven, the usual route to improving profitability by cutting costs has been closed by agreeing to “extensive protection provisions for the employees, production sites and the corporate strategy”.
So why did Bain/Cinven acquire Stada at a high price? Almost certainly it was because they were in competition with other potential buyers and as there is a relative shortage of companies available for sale. In 2016 private equity’s share of all deals at 4% was the lowest level since 2009 but investor funds continue to flow in and at the end of 2016 the amount un-invested reached nearly $1.5 trillion. Another reason for the high price maybe Cinven’s optimism at repeating the success it had with the acquisitions of the generic companies Goldshield (renamed Mercury) in 2009 and Amdipharm in 2012 which were merged to create Amdipharm Mercury and then, with other smaller acquisitions bolted on, was sold in 2015 for $3.5bn. The price was said to be 5 x Cinven’s original investment. Not a bad return over six years!
What happens next? Assuming the deal is completed, DW predicts the new Stada will start to hunt for product and company acquisitions to expand the company and improve its financial results ready for Bain/Cinven’s exit in about 5+ years’ time.
One other noteworthy private equity deal this month is the acquisition of Innocoll by Gurnet Point for $209m. The acquisition provides Innocoll with the financial resources to continue the development of its bupivacaine collagen implant for treatment of post-operative pain. In December the FDA notified Innocoll that the product should be characterised as a drug-device combination and additional data would be required. This caused a collapse in the share price to $0.60 compared to around $6 for most of the second half of 2016. So when Gurnet offered a price of $1.75 in cash and contingent value right (“CVR”) of $4.90 the company investors including venture capital funds have used the opportunity to exit. The CVR payments are linked to FDA approval for various indications and if annual sales exceed $60m.
The considerable influence of private equity in the medtech and biopharma business is demonstrated by the fact that private equity companies were involved in 10 acquisition, investment and financing deals for this month alone. The top value deals are shown below.
| Private Equity | Deal | Target | Value $m |
| Blain / Cinven | Company acquisition | Stada (pharma) | 4,350 |
| Apax | Company acquisition | Syneron (aesthetic devices) | 397 |
| Gurnet Point | Company acquisition | Innocoll (pharma) | 209 |
| Capital International | Minority share | Intas (pharma) | 106 |
| Bain and others | Investment | Dicerna (biotech) | 70 |
M&A without debt
Private equity companies are in the minority compared to acquisitions made by pharmaceutical companies for strategic reasons such as new markets or technologies. An example of geographic expansion is Sawai Pharmaceuticals, the leading generic supplier in Japan, which has acquired the generics business of the US company Upsher-Smith Laboratories for $1.05bn. For Sawai this acquisition represents an entry into the US market and as such the current facilities and management will be retained. Upsher–Smith is owned by the Evensted family and as a private company there is very little data to assess the transaction. DW suspects that Upsher-Smith with only 30 products on the market found it difficult to compete with the big generic competitors so the family decided to sell to focus on its other companies Proximagen, an early-stage drug discovery and development company, and Pairnomix, a genetics research company.
An example of a big pharma buying a company with a new technology/ product is Astellas which acquired the venture capital owned Belgian company Ogeda for up to $872m. Ogeda is developing drugs targeting G-protein coupled receptors. The lead product is a NK3 receptor antagonist (fezolinetant) for treatment of menopause-related vasomotor symptoms (hot flashes). Fezolinetant successfully completed a phase 2a study in January in 80 menopausal women. As has become usual these days for buyouts of development companies, the purchase price consists of an upfront plus contingent value rights. In this case $319m is dependent on clinical and regulatory outcomes of fezolinetant. Even if the product fails in the next month, the venture capital companies will have a made a substantial financial gain. The two A and B round investments over the last five years had been $28m compared to the buyout price of $533m. No wonder the venture capital investors decided to exit rather than undertake phase 2b studies. If the product reaches the market, it will be interesting to see how it performs. It could be the first non-hormonal treatment for hot flashes, but given the large number of women who experience hot flashes the payers, in Europe at least, may be reluctant to grant high prices or full market access.
The alternative to competing in large markets with competitive prices is to focus on niche markets such as rare diseases. This is what Sucampo is doing with the acquisition of Vtesse that has a late stage product for treatment of Niemann-Pick Disease. Sucampo has funded the acquisition with equity and cash i.e. no debt.
M&A deals that don’t complete
Of course not all M&A deals complete following signature. It is becoming more frequent these days that if a company pulls out of the deal there is a termination fee to be paid by the other side. For example AbbVie paid Shire $1.64bn (3% of the price). But what happens when the signed deal does not have adequate pre- completion termination provisions? A good example is Abbott’s acquisition of the diagnostics company Alere signed in February 2016. Two months later Abbott asked Alere to cancel the transaction because of a SEC inquiry into accounting issues at Alere and offered $30m to $50m compensation. Alere rejected the offer. Abbott had been aware of the SEC inquiry before the deal was signed. So although the due diligence had identified the issues Abbott had chosen to sign the deal. In August 2016 Alere sued Abbott for failure to get anti-trust clearance in a timely manner. The legal case went on for another eight months until this month when Abbott and Alere announced a settlement where Abbott will pay $5bn for Alere, $0.5bn (9%) less than the original price of $5.5bn. Whilst this may be a reasonable compromise, it does demonstrate both the importance of taking note of due diligence findings or ensuring that the deal has clearly defined termination provisions and compensation. The new deal is expected to close by the end of September subject to the “satisfaction of customary closing conditions”. Fingers crossed.
Licensing by big pharma
The most common licensing deal is big pharma licensing in from biotech. An example is the deal between Janssen and the Japanese company Peptidream that has a peptide discovery platform. The published maximum deal value is $1.15bn if everything goes according to plan with every development. Needless to say the upfront payment has not been published. However Peptidream has something going for it apart from speculative numbers. It has signed deals with 10 companies in the last two years including Novartis, Genentech, Sanofi, Merck & Co and Lilly. The most advanced is an immuno-oncology peptide in phase 1 partnered with BMS.
A less common licensing deal is big pharma licensing out to big pharma although this type of deal seems to be more frequent as big pharma consolidates and focuses on core areas. This month BMS has announced two licensing out deals worth nearly $1.1bn. Two pre phase 2 molecules to treat neuro-degenerative disease have been licensed to Biogen and Roche for a combined $1.085bn. The value of the Biogen deal is nearly twice the value of the Roche deal suggesting a bigger commercial opportunity or different risk profiles or perhaps, Roche were better at negotiating the deal! In both cases the upfront is around 44% of the total deal value.
Are multiple regional deals better than a global deal?
It is usual for big pharma to license global rights but in some cases regional deals are preferred either by the licensor or licensee. It is not known why in December 2015 the territorial rights granted to Mitsubishi for vadadustat for treatment of anaemia, were limited to Japan, SE Asia and India. From a licensor’s perspective managing regional deals amongst different partners can be difficult because of the need to share data and manage differences in licensees’ objectives. So when Akebia in December 2016 licensed vadadustat to Otsuka only for the US, there was every prospect of challenges in alliance management. However risk has now been reduced as Akebia has licensed most of the remaining countries to the same partner as the US, Otsuka. The three deals have been extremely lucrative for Akebia with aggregate headline values of $2.2bn and upfront and committed R&D spending of $573m.
Conclusion
An interesting month of deals has been dominated by M&A but the jury is still out as to whether the downward trend in M&A deals has stopped. It is likely that in the next few months companies such as Teva and Valeant that are having a difficult time at the moment will divest parts of their business. It is expected that licensing deals with headline values over $100m will continue to be few and far between.
| Licensor / Acquisition target | Licensee / Acquirer | Deal type* | Product / technology | Headline $m |
| C R Bard (US) | Becton Dickinson (US) | Company acquisition | Medical devices and diagnostics with sales of $3.7bn | 24,000 |
| Medtronic (US/IE) | Cardinal Health (US/IE) | Asset acquisition | Patient care, deep vein thrombosis and nutrition business with sales of $2.3bn | 6,100 |
| Akorn (US) | Fresenius (DE) | Company acquisition | Manufacturing facilities and generic ophthalmic products with $1.1bn sales | 4,750 (incl. debt) |
| Stada (DE) | Bain Capital and Cinven | Company acquisition | Generic and OTC product company with sales of $2.3bn | 4,350 (€4,109) |
| Peptidream (CN) | Janssen (US) | Licence | Peptide discovery platform | Up to 1,150 |
| Upsher-Smith Generics (US) | Sawai (JP) | Company/asset acquisition | US generics business with 30 marketed products and 30 in development | 1,050 |
| Akebia (US) | Otsuka (JP) | Licence expansion selected countries | Vadadustat in phase 3 for treatment of anaemia. Europe, Canada, China, Russia, Middle east, Australia | 865 (73 upfront) |
| Ogeda (BE) | Astellas (JP) | Company acquisition | Company with NK3 receptor antagonist for hot flashes due to start phase 2b | 852 (€800m) (533 upfront) |
| Merck KGaA (DE) biosimilars | Fresenius (DE) | Asset acquisition | Around 4 oncology and autoimmune biosimilars. First launch 2020 | 718 (€670m) (182 upfront) |
| BMS | Biogen (US) | Licence | Anti-tau antibody pre phase 2 for progressive supranuclear palsy | 710 (upfront 310) |
| Alere (US) | Abbott (US) | Acquisition settlement | Reduction in acquisition price from $5.5bn to $5bn | 500 |
| Syneron Medical (IS) | Apax | Company acquisition | Aesthetic device company with sales of $298m | 397 |
| BMS (US) | Roche (CH) | Licence | Anti-myostatin adnectin pre phase 2 for Duchenne Muscular Dystrophy | 375 (upfront 170) |
| Takeda (JP) products | Teva Takeda (JP) | Asset acquisition Japan | 7 mature hypertension and diabetes products with sales of $218m | 257 |
| Innocoll (US/IE) | Gurnet Point (US) | Company acquisition | Company with US pre-registration bupivacaine collagen implant for post-operative pain | 209 |
| Vtesse (US) | Sucampo (US) | Company acquisition | Rare disease company with lead orphan compound in phase 2b/3 | 200 |
*Global rights unless stated
Roger Davies works with Medius as a consultant specialising in valuations, deal structuring and negotiating late stage licensing, commercialisation and M&A deals.
He is the former Chairman of the UK Pharmaceutical Licensing Group, the professional association of licensing and business development executives, and is the Finance module leader for the healthcare Business Development and Licensing MSc at the University of Manchester.