Big Pharma makes strongest start to M&A for a decade
US tax overhaul spurs near-$30bn spree but some warn of bubble amid high valuations
Healthcare companies have announced almost $30bn of acquisitions since the beginning of the year in the sector’s strongest start for dealmaking in more than a decade, as Big Pharma scrambles to replace ageing blockbusters by paying top dollar for new medicines.
Executives, lawyers and bankers said the January deals frenzy could be a sign of things to come in 2018, as large US drugmakers snap up innovative rivals by spending billions of dollars of cash freed up by Donald Trump’s tax overhaul.
Sanofi, the French pharma company, and Celgene, the US biotech group, unveiled two acquisitions on Monday worth more than $20bn, taking the total value of global healthcare deals announced so far this year to $27bn, according to figures from Thomson Reuters.
That represented the best start to a year for healthcare dealmaking since at least 2007, Thomson Reuters said.
Both drugmakers offered hefty premiums to seal the deals, with Sanofi paying $11.6bn for US haemophilia specialist Bioverativ — 63 per cent more than its undisturbed share price.
Celgene agreed to pay $9bn for Juno, a biotech group developing experimental cell therapies for cancer. The price was almost twice what the Seattle-based company was worth before rumours of a deal prompted a spike in the value of its stock last week.
So far this year, buyers of healthcare companies have agreed to pay an average premium of 81 per cent, according to data provider Dealogic — well above the 42 per cent typically paid in 2017.
Their willingness to agree to such lofty prices underscores a perennial problem for Big Pharma: what to do when successful medicines lose patent protection and revenues evaporate.
Sanofi is trying to offset declining sales of its top-selling insulin, Lantus, which has lost market share following the introduction of cheaper “biosimilar” versions. Celgene is preparing for the loss of patent protection on its top cancer medicine, Revlimid, which will face generic competition from 2022 at the latest.
“As Big Pharma is confronted with drugs going off patent and weak research and development pipelines, they have no choice but to do significant acquisitions despite pushing valuation metrics,” said Frank Aquila, a senior corporate lawyer at Sullivan & Cromwell.
Large drugmakers have often turned to buying smaller biotech groups to replenish flagging pipelines, but a steady increase in the value of such companies has prompted some in the industry to warn of a bubble.
Some executives say the sector could continue to overheat as an indirect consequence of President Trump’s tax reforms, which have enabled large pharmaceutical groups to access billions of dollars of cash that was trapped overseas.
“Given the access to cash that this pool of companies now has, will we see the value of potential targets run up? I do think that’s a risk,” said Rob Davis, chief financial officer of Merck, in a recent interview with the Financial Times.
Mr Aquila added: “The new US tax law puts more cash in buyers’ hands and lower rates make more deals accretive. It’s a powerful combination.”
Baker McKenzie, an international corporate law firm, predicts the tax overhaul will help push the value of global healthcare deals to $418bn this year, up 50 per cent compared with last year.