Over the last few years, Big Pharma executives were more than willing to lay out multiple billions of dollars to acquire companies that could help them pump up their pipelines. Then COVID-19 hit, and suddenly dealmaking became a much different game.
That phenomenon is reflected in eye-popping statistics that PwC released Wednesday. Between the second half of 2019 and the first half of this year, deal values dropped 56% in pharma to $7.7 billion and 74% in biotech to $12.6 billion. Year-over-year comparisons were even more striking, given that deal value in the first half of 2019 in pharma and biotech reached $100.1 billion and $137.4 billion, respectively.
The COVID-19 pandemic has had a wide-ranging impact on mergers and acquisitions in the biopharma sector. Several companies have changed course in an effort to develop drugs and vaccines to treat the virus—redirecting resources that might otherwise have been used for M&A. At the same time, the shutdowns disrupted supply chains, forcing companies to rethink methods for deploying capital.
“Whether they’re focusing on vaccine development or prioritizing a pivot in their supply chain, these companies are having to redirect resources,” Karen Young, U.S. pharmaceutical and life science leader for PwC, said. “So looking for new sources of innovation and new opportunities [for deals] has stalled a bit.”
Were it not for COVID-19, the ingredients necessary to drive biopharma deals would have been firmly in place, Young said. Private equity firms have plenty of “dry powder” to deploy toward megadeals. And Big pharma companies are looking to divest non-core assets, and to use the cash they gain to bring in assets that boost their core competencies.
In fact, several companies seemed as if they were headed in that direction at the start of the year. Eli Lilly paid $1.1 billion for Dermira in January, but then dealmaking in Big Pharma all but shut down. In fact, there were no major deals in the sector after that until March, when Takeda shed 18 over-the-counter drugs to Hypera for $825 million.
Biotech saw one mega deal in early March—Gilead’s $4.9 billion purchase of cancer drugmaker Forty Seven. Novo Nordisk picked up Corvidia for $2.1 billion and Alexion laid out $1.8 billion for Portola. Nevertheless, the total value of biotech deals was flat from the first to the second quarter—and the lowest it’s been since the second quarter of 2017.
Even though the pandemic isn’t easing up as rapidly as everyone hoped it would, PwC analysts predict M&A activity will pick up in the second half of the year, particularly in oncology and gene and cell therapy, Young said. “Biotech continues to be a hot market. And companies are looking for those smaller tuck-in acquisitions that are often more digestible at an uncertain time,” she said.
It helps that venture capitalists and public-market investors continue to invest heavily in biopharma assets in spite of the pandemic. This year is on track to set a record for investments in biopharma, according to a new report (PDF) from Silicon Valley Bank. In fact, there have already been 26 financings of $100 million or more.
PwC predicts that M&A valuations will be rich, particularly in competitive areas like oncology. Gilead may have turned heads when it paid 96% more than Forty Seven’s share price to get ahold of its anti-CD47 antibody magrolimab, which is being developed to treat some forms of blood cancer, but it won’t be the last to devote that high a premium to the right asset. “Everybody is looking to be part of the oncology market, so certainly we’re going to see high values associated with new, innovative platforms,” Young said.
There are still some obstacles that could keep dealmakers on the sidelines, at least temporarily, Young warned. Capital could be scarce depending on the course of COVID-19 and other unknowns. “Are we really getting closer to re-emerging after the pandemic? Plus we’re in an election year, which could cause a bit of a pause,” she said.
But the underlying strength of the biopharma market portends a quick return to dealmaking, Young said. “I don’t think business development organizations are sitting idle. I think everybody had deals they were looking at pre-COVID. And they’re certainly going to watch them during this intervening period.”