Midsize Pharmaceutical Firms Are the Industry’s Big Deal Makers This Year
Larger peers pull back, as they pay down debt from previous sprees and resist high premiums
Midsize pharmaceutical companies are the industry’s big deal makers this year, replacing larger brethren as new sources of capital emerge.
Typically the biggest drugmakers do the most deals by value. Yet large-cap pharmaceutical companies have pulled back on acquisitions this year, as they pay down debt from previous sprees and resist high premiums.
Instead, medium-size pharmaceutical companies, which had been targets of their larger peers, have spent the most on acquisitions fueled by the new sources of capital and the need to find growth for the long haul.
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Midcap drug companies have struck nine deals valued at $13.1 billion so far this year, about twice what larger pharmaceutical companies spent on eight acquisitions during the period, according to pharmaceutical data provider Evaluate Group Ltd.
Among the biggest deals across the industry this year was an agreement by midsize Jazz Pharmaceuticals JAZZ 0.18% PLC in May to buy cannabinoid drugmaker GW Pharmaceuticals PLC for $6.7 billion.
Also doing multibillion-dollar deals were midcaps Horizon Therapeutics HZNP -0.75% PLC and MorphoSys AG .
“That’s a sign of their maturity, and the expanded scope of the capital markets for these companies that were previously largely shut out,” said Geoffrey Porges, a SVB Leerink pharmaceuticals analyst.
Licensing and acquisitions can help drugmakers of any size plug holes in their pipelines and portfolios and find new products to increase sales. Wall Street investors often drive up company shares on deal news.
Yet experimental drugs often fail, and a large acquisition can load up a company with debt.
“One transaction can sink a company, particularly if it’s a very large acquisition relative to the size of the company,” said David Steinberg, a Jefferies Financial Group pharmaceuticals analyst.
Jazz, which paid a 50% premium for GW Pharmaceuticals shares, financed its cash-and-stock deal partly with $5.4 billion in debt, including $1.5 billion in senior secured notes and a $3.9 billion term loan. The company said it has plans to rapidly pay down debt.
The deal would help Jazz replace sales lost when its top-selling product, Xyrem, faces generic competition soon, as well as generate future sales growth, Mr. Steinberg said. Xyrem, a narcolepsy drug, accounted for some 70% of Jazz’s $2.4 billion in revenue last year.
GW Pharmaceuticals’s lead product, called Epidiolex, treats a rare form of epilepsy and had $510 million in sales last year.
Large drugmakers have done the majority of the deal making in the last 10 years, as companies from AstraZeneca PLC to AbbVie Inc. and Pfizer Inc. sought to bolster offerings and offset sales losses as patents expired.
From 2016 to 2020, large-cap pharmas struck 178 deals valued at more than $452.3 billion, according to Evaluate. Midsize drugmakers, meanwhile, did 155 deals worth around $55.8 billion.
One factor behind big pharmaceutical companies’ limited deal making this year, analysts said, was a lack of targets the large companies think could meaningfully boost their businesses.
Also contributing, the analysts said, were concerns the government could fight some deals on antitrust grounds and premiums that have exceeded 65% or higher in recent years.
Midsize pharmas, valued between $2.5 billion and $30 billion, have long pursued licensing deals and acquisitions of their own. New ways to fund deals, Mr. Porges said, are helping fuel recent activity.
MorphoSys, despite a $2.9 billion market cap at the time, was able to strike a $1.7 billion deal for cancer drug developer Constellation Pharmaceuticals Inc. by selling the royalty rights for some compounds and drugs from both companies.
For the rights, MorphoSys, of Planegg, Germany, got a $1.4 billion upfront payment from Royalty Pharma PLC, which also agreed to make future milestone payments and is expected to provide $100 million cash for MorphoSys stock.
Constellation brings to MorphoSys two promising but experimental cancer drugs developed using an emerging area of molecular research known as epigenetics.
“There are financial partners to help companies of this size acquire or engineer innovation with M&A,” MorphoSys Chief Executive Jean-Paul Kress said in an interview.
Dublin-based Horizon paid cash for its $2.7 billion acquisition of Viela Bio Inc. earlier this year. It financed the deal partly with $1.6 billion in debt financing. It also used cash on hand, including from a $963.5 million public offering last summer.
Viela brought Horizon a recently approved drug for a rare immune condition and two other immune-disease compounds in development that Horizon said could be big sellers.
Horizon had about $812 million in cash and equivalents left as of the end of March. The company plans to pursue more deals, said Chief Strategy Officer Andy Pasternak.
“We have a better hunting ground in terms of transactions of size that will make a difference,” he said.