For more than a year, biopharma's M&A scouts have largely been holding fire on dealmaking, partly because they've been waiting for tax breaks. Now that Republicans in Congress have passed their tax plan, the sector could be due for a long-anticipated M&A rebound.
As analysts with Credit Suisse noted in a November report, any tax deal that allows U.S. drugmakers to repatriate foreign cash at a lower rate will give the industry significant buying power. And on Wednesday, Congress passed a bill that will allow those companies access to their foreign cash at a 15.5% tax rate.
That cash could fuel large-cap M&A that in turn benefits smaller companies. But with biotech deal prices still high—and multiple drugmakers chasing the same deals—a surge of transactions could be some time coming. At least some of that money is likely to flow directly to investors as dividends and buybacks.
And big deals aren't necessarily good for everyone in pharma: They've been implicated in low R&D productivity at some companies, and most lead to layoffs and cost-cutting as buyout targets are integrated.
Where's that cash likely to go? For the most part, downstream to smaller companies, and there's where the trickle-down benefits arrive, the analysts figure.
"Whereas investors thought M&A would tick up in 2017, it has ticked down relative to prior years," the report says. "If large cap companies have more cash to spend, we believe that this directly benefits small [and] mid cap companies which are sources of future growth."
Indeed, tax reform is one of the "most important catalysts" for biopharma over the next year and a half, the analysts said, and they're far from alone. Deal activity may be picking up already; even before Congress passed the final legislation Wednesday, The Telegraph reported on rumors that Big Pharma companies were eyeing Shire for a takeout.
Even in recent weeks, Celgene said it is "actively reviewing M&A opportunities," according to analysts with Mizuho Securities. A number of top pharma companies are shopping business units for sales or spinoffs as they look to focus on core areas, including Novartis with generics, Eli Lilly with animal health, Pfizer and Merck KGaA with OTC products, and now Teva as it looks to recover from a devastating year that it capped with 14,000 layoffs.
The tax changes aren't likely to boost all types and sizes of deals, authors with EP Vantage cautioned in a recent industry outlook. It's likely to help only the companies looking at major purchases, at $15 billion and above, for instance. One factor that could entice pharma management teams into dealmaking is investor pressure to grow sales after a slow M&A period, the analysts noted, especially for drugmakers that are nearing key patent losses or those deriving sales from increasingly competitive fields.
Of course, there are always reasons to be skeptical that M&A will improve until it actually does. Many experts thought President Donald Trump's election would boost dealmaking in 2017, and that didn't happen, not least because of gridlock in Washington, D.C.
Another factor that could hurt the deal pace, pharma execs have said, is that prices for biotechs are high. Sanofi CEO Olivier Brandicourt reiterated that point during a conversation with investors in mid-December, calling potential cancer acquisitions "very expensive," according to Reuters.
In a recent report, EP Vantage tallied deal values so far this year, disclosing that pharma did just $9 billion worth of M&A in the second quarter and $18.4 billion in the third quarter, down from $27 billion and $62 billion during the same periods the year before. In the first quarter of 2017, biopharma's deals were worth $40.3 billion, with Johnson & Johnson's $30 billion Actelion buyout making up the lion's share.
More recently, Gilead Sciences bought Kite Pharmaceuticals for $12 billion in August, a "big-ticket M&A approach that many were hoping to see more of in 2017," according to the EP Vantage authors. As the tax bill makes its way into law, top drugmakers and their consultants will surely be digging into the details, perhaps more eager to pull the trigger on M&A they had previously resisted.