When Bristol-Myers Squibb kicked off 2019 by making a $74 billion bid for Celgene, biopharma watchers everywhere declared it to be the end of the mergers-and-acquisitions drought in the sector. Then, six months later, AbbVie slapped an exclamation point on that declaration by announcing its intention to pay $63 billion for Allergan.
But the big bucks actually masked the real story: The volume of M&A deals in pharma during the first half of the year dropped dramatically over the same period last year, from 83 to 62. In fact, in the second quarter there were only 22 takeovers in the sector—the smallest quarterly M&A showing in at least a decade, according to a new report from Evaluate Vantage.
The M&A volume decline in the first half may not have seemed like a troubling trend were it not for the fact that licensing deals plummeted, too, from 80 in the first half of 2018 to 41 so far this year. This year’s transactions were worth $3.5 billion upfront, but a lot of that came from AstraZeneca’s monster $1.4 billion payment to Daiichi Sankyo for access to its cancer drug trastuzumab deruxtecan. So once again, the dollar amounts ended up “masking a pretty low number of deals,” Evaluate wrote.
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The slowdown in deals during the first half of this year has been blamed on a stock market run-up that’s resulted in unrealistic valuations, Evaluate said. “At the same time, however, the takeouts of companies like Array Biopharma and Loxo Oncology show that when big players want an asset, they are willing to swallow huge price tags,” the report stated.
Indeed, Pfizer agreed to pay $11.7 billion for Array in June, a 62% premium, to access the target company’s strong oncology portfolio. That deal came six months after Lilly said it would pay a 68% premium to grab Loxo in a deal worth $8 billion.
Venture capitalists could be to blame for the falloff in dealmaking, Evaluate suggested, because they’re shelling out so much cash there’s little need for early-stage biopharma companies to strike deals. VC investing in biopharma in the first half of this year totaled $6.6 billion—down significantly from the $9.5 billion raised in the first half of last year, but still a healthy sum, the analysts said.
“Barring a dramatic decline on the financial markets, it’s hard to see this trend shifting,” the report’s lead author, Amy Brown, special reports and projects editor for Evaluate, said in a statement (PDF).
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If there’s anything that could dampen VCs' enthusiasm for the sector, it would be a crackdown on drug pricing in Washington, D.C., Brown added. That issue continues to dominate the political agenda, both among elected officials and Democratic candidates for the 2020 presidential election. Last week, the Senate Finance Committee advanced legislation that proposes sweeping changes, including capping Medicare drug prices based on the inflation rate.
So how is the rest of the year shaping up for M&A? Evaluate pointed out that Gilead Sciences' recent announcement of its $5 billion, 10-year collaboration with Galapagos is notable because the upfront payment was greater than the total amount paid out in licensing deals across the sector during the first half of the year. That will give the second half a huge boost, the report said, after a first half in which pharma companies pledged “an eye-watering” total of $173 billion on M&A—a sum that’s already higher than the amount spent on deals last three years combined, Evaluate said.
But the M&A volume decline should still raise eyebrows, the analysts concluded. Bankers may not be concerned by the slowdown, the analysts said, “but no one will want to see this level of activity over the remainder of the year.”