Global M&A deals in the healthcare/life sciences sector hit an unprecedented $317.4bn in the first half of 2014, despite predictions that mega-mergers may be less likely this year, and the figures were swelled by a number of high-end deals (the biggest being AbbVie’s acquisition of Shire for £32bn).
So what is happening? In particular, are pharma deals (particularly large ones) back in fashion, or, as some critics would say, is big pharma in retreat and needing to reshape or risk being left behind by its more nimble footed competitors?
One of the drivers for deal-making has been tax inversion, whereby companies usually domiciled in Ireland or the UK are acquired by companies (previously) domiciled in other jurisdictions to take advantage of lower corporate tax rates. By moving the domicile of the (new) parent company of the group, the tax that would otherwise be payable on overseas profits under ‘controlled foreign company’ rules can be reduced. The acquisition of Shire, together with Pfizer’s attempted acquisition of AstraZeneca, are each a case in point and no sector has embraced this strategy more enthusiastically than big pharma. This may be driven in part by the fact that big pharma typically has substantial overseas profits which could benefit from a reduced CFC charge.
Despite the publicity generated by such transactions, tax is rarely the only motivating factor. Instead, the now familiar background of shrinking product pipelines and patent cliffs still exerts a bigger influence on deal making generally. However, whereas companies were previously seeking to exploit M&A to diversify their product portfolios, there is now a trend for companies (particularly big pharma) to use M&A to become more specialised (and to resize and restructure accordingly). This has manifested itself in a flurry of divestments of non-core products, for example Novartis’ sale of its animal health business to Lilly for $5.4bn. It is also driving acquisitions that complement the buyer’s existing core products, as evidenced by AstraZeneca’s $1.2bn acquisition of Almirall’s respiratory division and the deal between GSK and Novartis where GSK effectively swapped its cancer drugs business for Novartis’ vaccine unit.
A specialist approach
Companies are also increasingly seeking to specialise (including through M&A) in: (i) devices, diagnostics and speciality pharma (on the basis that they are perceived as representing high-growth areas); and (ii) biotech (on the basis that it continues to potentially offer a rich source of innovative products, especially in the much-heralded area of personalised medicine). The growing pull of biotech (particularly to big pharma) is typified by Merck’s $3.9bn acquisition of Idenix Pharma and Sanofi’s $600m stake in Alnylam Pharma. However, it is interesting to note that the biotech sector’s star has also risen among investors, with biotechs accounting for the majority of IPOs by life sciences companies so far in 2014; no mean feat when it is considered that more IPOs by life sciences companies occurred globally in the first half of 2014 than occurred during the whole of 2013. Pet allergy (and biotech) company Circassia’s £200m IPO has so far represented the largest of these deals in the life sciences sector this year.
The lion’s share of deal-making in 2014 continued to revolve around Western markets. However, significant anecdotal evidence suggests the M&A strategies of international life sciences companies are increasingly influenced by emerging markets in the Far East, especially China. The principal reason for this is that the fundamentals for continued growth in the Chinese life sciences sector (which already constitutes the third largest pharmaceutical market in the world) remain strong despite reports of a general cooling of the Chinese economy. In particular, a rapidly ageing population, larger disposable incomes due to a burgeoning middle class, the greater prevalence of ‘Western’ diseases (such as type 2 diabetes, cardiovascular diseases and neurological disorders) and the Chinese government’s rising investment in healthcare (including a major healthcare reform to extend insurance provision to rural areas) will all drive increased demand for certain products (especially when compared to Western markets).
In addition, China’s status as a place where international life sciences companies can ‘do business’ continues to grow. For example, China’s pool of R&D expertise is continuing to increase, its hitherto poor IP protection is set to be improved by imminent changes to its patent laws and China’s regulatory authorities have started to simplify their processes. 2014 has also seen increased M&A activity between local Chinese companies due to fragmentation of the industry within China.
More of the same?
M&A activity shows no sign of significantly abating in the second half of 2014. In addition, it is likely that the key drivers and trends seen so far will continue to dominate, albeit the life sciences sector is unlikely to be wholly immune when it comes to possible investor fatigue with IPOs (even when it comes to biotech).
Following the Carlyle Group’s $4bn acquisition of Johnson and Johnson’s blood testing business, there are also signs of growing private equity interest in the life sciences sector. This is likely to be particularly pronounced in respect of those companies whose pipelines and products are well positioned to capitalise on the trend of ageing populations in developed countries.
Increased activity is also a real possibility in the generics sector due to patent cliffs and as governments (especially in developed countries) continue to seek to better control healthcare costs as part of ongoing deficit reduction programmes. In this regard, 2014 has already seen the announcement of the $5.3bn acquisition of Abbott’s generics business by Mylan.