Pharma M&A is starting strong this year, with Baxalta ($BXLT) and Shire ($SHPG) reportedly close to inking a $32 billion-plus deal. But don't expect 2016 to best 2015 in terms of dealmaking, according to some industry watchers who say the rapid-fire pace is likely to slow in the year ahead.
For reference's sake, look back at this time last year. The beginning of 2015 was "almost a perfect M&A environment: a generally stable economy, lack of volatility in the equity markets, low interest rates," not to mention "tons of cash on companies' balance sheets," Jeff Stute, head of healthcare investment banking at JPMorgan Chase & Co., told Bloomberg. Those conditions prompted more than a few deals over the year, including Pfizer's ($PFE) $160 billion tax inversion deal with Allergan ($AGN), AbbVie's ($ABBV) $21 billion Pharmacyclics buy and Teva's ($TEVA) $40.5 billion deal for Allergan's generics business.
Now that pharma has fed its dealmaking appetite, it could shift its attention to digesting its bigger purchases rather than shelling out more for new companies. Pfizer, for one, could stay quiet on the dealmaking front as it moves ahead with its Allergan merger, especially in light of the Treasury Department's stricter policies on tax inversion deals.
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| John Fraunces |
Plus, the ongoing drug price debate could take its toll on M&A. Mounting backlash over skyrocketing drug prices could prompt some companies to shoot less expensive deals to avoid public scrutiny. "You see more people talking about cost-containment--that's another theme that only seems to be growing," co-portfolio manager of the Turner Medical Sciences fund John Fraunces said, as quoted by Bloomberg. "I generally think as we see a more sober environment, we'll see the valuations of the deals come down."
But that doesn't mean that the M&A train will stop altogether. Companies such as Gilead Sciences ($GILD), Johnson & Johnson ($JNJ), Bayer and Shire could all be in the market for a deal this year. Gilead at the end of Q3 had $14 billion in cash, funds that could come in handy if and when the company decides to dabble in some dealmaking. J&J could also afford a big deal, Bloomberg points out, even though it announced a $10 billion share buyback program last year. "I wouldn't interpret the $10 billion share buyback as impacting our appetite for scale of any size in M&A at all," J&J CFO Dominic Caruso said at the time.
In the meantime, all eyes are on Baxalta and Shire's potential deal. The pair are reportedly discussing a price between $46.50 and $48 per share. If all goes to plan, the combined company would have about $20 billion in sales by 2020, creating one of the world's top drugmakers in rare diseases.
- read the Bloomberg story
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