Biotech M&A Ratchets Up to a New Level

A flood of cash is causing an industry-wide feeding frenzy

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Apr 20, 2018
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Many biotech industry-watchers expected 2018 to be a big year for mergers and acquisitions, and the big players have not disappointed. Fueled by a massive infusion of cash repatriated from overseas thanks to the Trump tax law’s one-time tax holiday, the M&A boom has only just gotten started.

The first quarter saw a real whirlwind of M&A activity, with just shy of $47 billion in deals done. And the deal flow has not stopped in the second quarter. During the second week of April alone, two big buyouts added another $10 billion or so. That represents more than all the buyout cash dished out during all of second quarter 2017. Clearly this boom has legs.

Let’s take a look at the action so far, and what we can expect next in this cash-rich sector that’s hungry for growth at any cost.

What they are buying

The main targets tend to be smaller developmental biotech companies with products approved or far along in their pipelines. There is also a clear interest in companies with very specific profiles. Namely, the big buyers are hunting companies focused on the rare disease and cancer spaces. That makes perfect sense, since orphan drugs and cancer therapies tend to have little competition, rack up huge fees and are comparatively low-cost to market thanks to a concentrated patient (and physician) population.

These are also drugs that are well-protected from both sides of the pharmaceutical vise: regulation and price controls on the one side, and low-cost generics on the other. Orphan drugs are protected from the former, since they enjoy special protections from the government, and generics are nowhere on the horizon for these new products. Additionally, the FDA’s recent light-touch approach to drugs treating rare diseases makes bets on these products look much more enticing to cash-flush pharma giants.

Giant hunting

Smaller firms are not the only ones finding themselves being hunted. Indeed, some of the biggest pharmaceutical players are circling much larger prey. The latest such giant hunt got underway last week, when Takeda announced a bid for Shire (SHPG, Financial), a major player of the biotech world. The bid sent Shire’s shares roaring upward. Then on April 19, Shire announced it had rejected the $63 billion bid, saying the price was too low. Considering that Shire had a market capitalization of less than $40 billion the day the Takeda bill went public, it is indicative of a seller’s market.

Shire may have had good reason to hold back. Allergan (AGN, Financial) also floated a rival bid, which may have gotten Shire to consider playing the two suitors off of one another. However, Allergan has since withdrawn its pursuit, so the situation is now in a degree of limbo. That said, Shire is clearly in play. Takeda may well come back with a fresh bid, and a few other big names might throw their hats in the ring.

But Shire is just the latest example of upscale biotech M&A. With so much cash floating around, there are very few pharma companies that could be called safe.

Seller’s market for the foreseeable future

Shire’s story highlights a clear fact of the current state of biotech M&A: This is very much a seller’s market. The huge amount of cash is bound to create significant bidding wars, as is the need of many of the big players to replenish their diminished pipelines. For acquisition targets big and small, the future looks bright indeed.

Investors in biotech should look forward to continued excitement throughout 2018.

Disclosure: I/We have no position in any of the stocks discussed.