Dealmaking: Competitive, and under Scrutiny
M&A has finally picked up but will it last?
After a subdued 2022, M&A has picked up in 2023 with over $80 billion transactions so far. Several big pharma CEOs have said they’re shunning mega-deals – now billed as a value-destroying distraction. But hunger for commercial or late-stage assets to alleviate the patent cliff and fill revenue gaps nevertheless drove 12 deals worth more than $1 billion by mid-2023. Pfizer’s $43 billion Seagen deal comes with four marketed cancer drugs and dozens of clinical stage follow-up programs; Merck gets a Phase III-ready antibody for ulcerative colitis and Crohn’s, plus a second clinical-stage antibody from Prometheus, and Iveric Bio brings Astellas an FDA-filed complement C5 inhibitor for the rare retinal disease geographic atrophy.
Competition is hot for the biggest prizes: Merck was the protagonist in several years of sale talks for Seagen; its eventual prize, Prometheus, also attracted other suitors, according to SEC filings. So did Horizon, snared by Amgen in late 2022 for $84 billion. “It’s a harder market out there. IRA is another risk factor, meaning there are fewer good products around, yet growth and revenue needs remain unchanged,” said Novartis’ chief strategy and growth officer Ronny Gal during a panel at BIO in June. Days later, Novartis forked out $3.2 billion for Chinook Therapeutics, with two late-stage clinical candidates for rare chronic kidney diseases. The $40 a share deal represented a 66% premium to Friday’s closing price.
For now, IRA hasn’t hampered M&A activity, according to Gil Bar-Nahum, managing director, global healthcare investment banking at Jefferies. He expects dealmaking (and valuations) will continue to accelerate. “I haven’t heard anyone point to IRA as a reason not to do a deal. It’s in the back of everyone’s mind, but not the dominating thesis around whether to transact,” he says.
But if it gets over the line, IRA introduces new criteria for evaluating potential targets. Small molecules (and other drugs filed as New Drug Applications (NDAs) rather than Biologic License Applications (BLAs)) become relatively less attractive – a possibility that may have helped draw out Pfizer’s winning offer for Seagen and its portfolio of antibody-drug conjugates. Prometheus’ suite of antibodies also falls the right side of the line. Biotech products’ share of overall pharma and OTC sales was already rising steadily: by 2028, they will account for 43%, up from 24% in 2014 (See Figure 3). IRA could further accelerate this trend. Morgan Stanley’s global head of healthcare investment banking Joseph Modisett thinks it already is. “IRA has changed the game for small molecules with large Medicare/Medicaid populations, which are now more difficult to price in a transaction. We have seen deals fall apart as a result of this uncertainty,” he says. Modisett expects further dealmaking action around BLA/biologic assets.
Economics for multi-indication drugs – including orphans – will also shift. Since negotiation eligibility is determined by total sales across all indications, acquirers may be more likely to seek a suite of back-up molecules to enable one-molecule-per-indication, extending effective exclusivity – though not doing much for R&D or manufacturing efficiency.
I haven’t heard anyone point to IRA as a reason not to do a deal. It’s in the back of everyone’s mind, but not the dominating thesis around whether to transact
Dealmakers must also to contend with a more aggressive Federal Trade Commission (FTC). The anti-trust body is now scrutinising deals not only for potential product or therapy area overlap, but also for future pricing tactics that may harm competitors. An FTC lawsuit claims that Amgen’s $27.8 billion Horizon deal may presage the big biotech blocking competitors to Horizon’s monopoly drugs Tepezza (thyroid eye disease) and Krystexxa (refractory gout) by offering them to payers as part of “bundle” deals with well-established products like Enbrel. Amgen and Horizon have counter-sued, and most analysts expect the companies will prevail. But FTC’s move – supported by half a dozen US states – has already delayed the deal’s closing to later this year.
Regardless of the suit’s outcome, it signals that FTC is throwing its net wider and trying to adapt its approach to competitive dynamics in drug pricing and positioning. The risk is that it dampens all M&A. “FTC may say they’re trying to encourage innovation, but their efforts may have the opposite effect. Emerging biotechs’ ability to participate in M&A with pharma is key to attracting funding. A deal slow-down could reduce the number of well-funded companies, thereby hurting innovation and ultimately impacting patients,” warns Morgan Stanley’s Modisett.
Transactions will continue: Large drug firms need more than $150 billion of additional revenue to maintain the expected 5-6% CAGR between now and 2030, according to Bain partner Adam Koppel, talking at BIO’s industry conference in June. Internally grown assets account for less than 40% of big pharma’s overall prescription drug sales in 2023, according to Evaluate data, although company-specific figures vary: Bristol Myers Squibb’s 2019 Celgene acquisition shrinks its share of 2023 sales from internal assets to just 7%. while Eli Lilly’s Mounjaro (tirzepatide) has helped push its share of prescription drug revenue from internal assets to over 80%. (Internal assets are defined as programs discovered by big pharma or acquired at pre-clinical stage or earlier.)
Interview with Joe Modisett, Global Head of Healthcare Investment Banking at Morgan Stanley
Smaller, bolt-on deals set the tone at the start of 2023 and remain popular, not least as they may avoid FTC attention. GlaxoSmithKline’s $2 billion Bellus Health deal, for Phase 3 chronic cough molecule camlipixant and Chiesi’s $1.25 billion purchase of rare disease player Amyrt Pharma at the start of 2023 fit that mould.
In terms of therapy area, “companies are more agnostic than they used to be,” says Modisett. Inflammation and immunology have featured strongly so far this year, but “many groups are now more willing to follow the science and see where it takes them, rather than being focused on just one or two disease areas.” That flexibility may suit the current regulatory and legislative uncertainty, and fast-changing underlying technologies. “Companies that are too concentrated may be caught off guard,” he says.
Product-focused licensing deals can also help plug revenue gaps and offer cash-strapped biotechs a financial lifeline as public markets remain locked. Licensing deals worth over $6 billion in combined up-front money have been signed so far this year, tracking at 80% of 2022’s rate. In 2023’s biggest deal so far, Hong Kong-based HutchMed, struggling after an FDA rebuff and with its share price languishing, in January accepted $400 million up-front from Takeda in exchange for global development and commercialisation rights, ex-China, to its colorectal cancer treatment fruquintinib (approved in China since 2018 and filed this year with US and European regulators).
In July, Roche paid $310 million up front for a share of Alnylam’s RNA-targeting hypertension candidate zilebesiran, which is in Phase 2. The partners will co-commercialise in the US, with Roche gaining ex-US rights.
