Biopharma M&A set for a strong H2 despite political noise—and Biogen and Gilead look like buyers: analysts

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In addition to pursuing hot assets in oncology and gene and cell therapy, biopharma dealmakers are embracing alternative financing strategies, such as merging with SPACs. (Getty/Natee Meepian)

In March, the Federal Trade Commission (FTC) under newly elected President Joe Biden announced a major review of how it has handled mergers and acquisitions in pharma and biotech. Not surprisingly, the news prompted some Wall Street analysts and legal experts to fret that the increased political scrutiny—fueled by ongoing concerns about drug pricing—could put the kibosh on M&A in the industry.

Those worries seem to have been unfounded.

Biopharma and medical devices chalked up 201 deals in the first half of 2021, double the M&A transactions seen in life sciences during the same period a year ago, PwC found. The value of those deals jumped 410% over the same period in 2020 to $123.3 billion, leading PwC to predict that M&A would continue growing in the second half.

Indeed, all signs points to biopharma dealmaking this year. Of 100 industry executives surveyed recently by law firm Mintz and Mergermarket, 60% said they felt the Biden administration would be favorable to life sciences deal-making. The execs made it clear they would continue to search for innovations that can boost their R&D capabilities—and that they would pay top dollar if necessary, William Whelan, co-chair of Mintz’s life sciences practices, said in an interview.

“I think they feel the Biden administration is pro-science and in favor of global collaboration, and this industry is as global as it gets,” Whelan said. It helps that the government promoted a rapid COVID-19 vaccine rollout, including shots using brand-new mRNA technology, he added. “Success breeds optimism.”

One big change in life sciences M&A is that patent expirations are no longer the main motivation for companies looking to acquire new assets. Rather, it’s a hunger for innovation that’s the main attraction. “There is a lot of capital and strong balance sheets in the industry, so companies are going to continue to use those to support their overall strategic initiatives,” Sky Milch, PwC's U.S. pharmaceutical and life sciences deals leader, said in an interview.

Cancer drugs and gene and cell therapies continue to be major draws. Last year ushered in a couple of huge deals in those areas, including Eli Lilly’s $1 billion purchase of Prevail Therapeutics, which is developing two gene therapies for rare diseases. The momentum continued into 2021. In March, Amgen scooped up Five Prime, which is working on a promising drug for gastrointestinal cancers, for $1.9 billion, and last week, uniQure said it would pay about $55 million to pick up French gene therapy developer Corlieve Therapeutics.

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Some deals in the second half could center on the need for buyers to quickly address operational challenges, Milch said, like shoring up distribution channels or boosting their ability to source active pharmaceutical ingredients. Buyers are also looking for “digital innovations that will increase the speed of R&D,” he said.

Meanwhile, biopharma companies continue to embrace alternative deal structures, including merging with special purpose acquisition companies (SPACs), which are publicly traded entities that raise money through initial public offerings and then use that capital to make acquisitions. In May, Ginkgo Bioworks pulled off a $2.5 billion merger with a SPAC co-sponsored by former Kite Pharma CEO Arie Belldegrun.

Half the execs surveyed by Mintz and Mergermarket said they had considered SPAC deals in the last 18 months. Such mergers can offer advantages over IPOs, including faster time to a public listing and greater visibility into valuations, analysts at RBC explained in a podcast earlier this year.

RBC Capital Markets issued a report a few weeks ago predicting an uptick in biopharma M&A activity for the rest of the year. Low valuations could drive some of that: Biotech stocks have dropped 9% so far, RBC noted, likely because of sales slowdowns during pandemic shutdowns and renewed pricing debates, the analysts said.

History suggests the downturn in biotech stocks could be setting up a big second half for deals, RBC said. The firm zeroed in on deals exceeding $1 billion and determined that the only other time in the past five years that bio shares “had an overall downtick over half a year, deal size and flow was down that half as it has been in 1H21, but then picked up sharply the next half.”

Two of the most often cited acquisition targets are gene therapy pioneers bluebird bio and BioMarin. In oncology, Deciphera is high on analysts’ target lists, as is Iovance.

So who are the most likely buyers? Moody’s recently pegged Merck, Johnson & Johnson and Bristol Myers Squibb as top contenders, all driven by the need to boost their pipelines. Vertex, Biogen and Gilead could also turn to M&A to fill pipeline gaps, RBC said.

RELATED: FTC's crackdown on pharma mergers reflects 'tougher' M&A environment under Biden administration: lawyer

As for that ongoing FTC review, it’s lurking in the background, but remains a minor concern for biopharma M&A going forward, said Barry Burgdorf, a partner in the life sciences division of law firm Hogan Lovells, in an interview.

“Traditional wisdom is that Republican administrations are less interested in antitrust enforcement and Democratic administrations are more interested,” Burgdorf said. “But other than both sides talking about high drug prices, we haven’t seen anything out of the Biden administration” that would indicate where they’re leaning on M&A in the sector, he added.

Some members of Congress hope to change that, however. On June 22, Representative Katie Porter, D-California, penned a seven-page letter (PDF) to the FTC’s pharma M&A task force and U.S. attorney general Merrick Garland, alleging that many deals in the industry are aimed at shutting down potential competitors and therefore should be considered a threat to innovation.

But there’s no sign yet that the FTC is considering major changes to how it reviews biopharma deals. In April, shortly after it announced its sweeping review, it cleared AstraZeneca’s $39 billion acquisition of Alexion Pharma, with neither company having to jump through hoops to seal the deal.

Meanwhile, another trend is setting up biopharma for a string of deals: a huge runup in venture capital fundraising. Biotech backer Flagship Pioneering, for one, just poured $2.2 billion into a fund that it launched in the spring of 2020. That brings its total to $3.37 billion.

“They’ve got to deploy that money,” Whelan said. “The investment community has a pipeline, just as drug companies have pipelines. VCs have a lot of companies that they intend to grow over time. That’s going to fuel M&A activity way into the future.”