The torrid pace of consolidation among drugmakers is bound to slow at some point. But that doesn’t mean deal bankers and lawyers will be idle in 2016.
There have been more than 2,000 announced deals over the past two years within the pharmaceuticals and biotechnology sectors world-wide, according to Dealogic, for a total consideration north of $750 billion. This wave has arisen as big pharmaceutical companies hunted for promising biotechs as a way to conjure growth.
The pace isn’t likely sustainable. Consider that the second-most prolific two-year period of biopharma deals, in 2008 and 2009, yielded less than half the recent deal volume.
But even if volume falters, prices for targets might continue to rise. And that holds risk for shareholders in big pharma companies on the prowl, of which there are many.
For instance, Shire continues its pursuit of Baxalta, which sports a market value of $27 billion. Amgen has said it is on the hunt for a purchase of up to $10 billion. Gilead Sciences, meanwhile, sports a pile of cash and equivalents above $25 billion as it grapples with the maturation of its juggernaut hepatitis C franchise, which accounts for more than half of revenue in the 12 months ended Sept. 30.
And hunters need deals that are big enough to move the needle on growth. There are fewer of those around. For example, there are now just seven companies within the Nasdaq Biotechnology Index that sport a market value between $5 billion and $10 billion, according to FactSet. Over the past two years, 14 deals have been struck for a total transaction value in that range, winnowing the number of such candidates.
As the number of big targets dwindles, along with a multiyear biotech bull market, prices are rising. Earlier in December, AstraZeneca announced a $4 billion deal to acquire a 55% stake in closely held Acerta Pharma, a clinical stage biotech.
Meanwhile, the macroeconomic environment is still supportive of consolidation. Corporate borrowing costs remain low, despite the Federal Reserve’s move to raise interest rates for the first time in a decade. Economic growth is tepid, and the biggest pharma companies still face a future of slow growth.
So buyers will probably have to be prepared to pay more or be willing to take chances on products in earlier stages of development. That is good news for investors in potential prey.
But there is a clear danger for big-pharma shareholders: As deals get pricier, it will be tougher to add value.
By Charley Grant
Source: Wall Street Journal
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