Header-solution the way we do it Pharmaceutical Mergers and Acquisitions in the U.S. Analyzing the correlation between new drug approvals and M&A activity 2015
Key Findings 2014 surpassed the combined total for deals from 20112013 and saw over $200bn in pharma mergers and acquisitions, a 300% increase from the previous year’’ • Since 2014, the pharmaceutical industry has seen a wave of larger M&A deals driven by opportunities for revenue growth, cost synergies, tax inversion, and cash utilization • While megadeals (deals greater than $5bn) have inflated deal value, the deal volume has been driven by smaller, product-focused acquisitions • Over the past decade, there has been an increase in the valuation multiples that pharmaceutical and biotechnology companies have received • New drug approval is an acquisition trigger; approximately one third of small and midsized pharmaceutical firms (companies with less than $15bn in 2014 revenues) that received approval from Food and Drug Administration for a new product were acquired; 90% of these product-driven acquisitions happened within six months of FDA approval U.S. Pharma M&A Activity Overview Since 2010, approximately 200 pharmaceutical and biotech deals have taken place per year in the United States. In 2014, only 182 major deals took place, lower than average (~190). However, 2014 surpassed the combined value of deals from 2011-2013 ($178bn) and saw over $200bn in mergers and acquisitions, a 300% increase from the previous year. 2014 saw several of the largest deals in the pharmaceutical industry to date, including the $66bn purchase of Allergan by Actavis, Merck unloading its consumer health unit to Bayer, GSK and Novartis’ multibillion-dollar asset swap, as well as Novartis’s animal health unit sale to Eli Lilly. 2015 will likely be an even bigger year for pharmaceutical deals. Companies are constantly looking for opportunities to bolster portfolios and increase shareholder value. Over $150bn of merger and acquisition activity was recorded by U.S. pharmaceutical industry through August 2015, and this figure will likely exceed $220bn by year-end. There has also been a shift in deal value from 2013 to 2014. The average deal size in 2013 was approximately $40m, while the average deal size in 2014 was over $1bn, underscoring industry’s appetite for larger deals. Figure 1: Size and number of deals by U.S. pharmaceutical and biotech companies since 2007 M&A Activity in Pharma and Biotech Deal Value ($Bn) 200 150 194 188 192 193 182 170 $212 $109 $109 $56 2008 2009 2010 Deal Value Source: FiercePharma, EvaluatePharma, Capgemini Analysis Pharmaceutical Mergers and Acquisitions in the U.S. 150 $151 $70 2007 200 175 $152 0 $73 171 100 50 2 197 225 2011 Year 125 $79 $43 2012 Projected 2013 2014 Deal Count 2015 100 Deal Count 250
Factors Driving Acquisitions The size of recent deals disguises the true characteristics of pharmaceutical mergers and acquisitions activity. Although major acquisitions outweigh other deals by value, over 90% of deals were relatively small in size (less than $5bn) (see Figure 2). The difference in deal value appears to be driven by different motives. For megadeals, motivations from large pharmaceutical companies, such as top-line increases, cost synergies, tax inversion or cash utilization, frequently came into play. In contrast, the smaller deals tended to be much more focused, with target companies offering different sources of value to the acquirer, such as research or portfolio expertise, a breakthrough pipeline drug, or a recent drug approval. A closer look at recent drug approvals reveals an interesting correlation with acquisitions of small and mid-sized companies. Of the 105 drugs approved in the U.S. since January 2014, 58% were filed by companies with less that $15bn in 2014 revenues (see Figure 3). Of the 16 large companies (with 2014 revenues greater than $15bn) that had one or more new drug approvals in the past 20 months, none were acquired within the same period. In comparison, 26% of small to mid-sized pharmaceutical companies with new drug approvals were acquired within that time period. The fact that the small and mid-sized companies acquired since January 2014 typically had no more than a few approved products supports the observation that the motivations behind large deals are very different than those behind smaller deals. So what makes a particular small to midsized pharmaceutical company attractive to potential acquirers? Following factors have been resonant themes across recent acquisitions: 26% of small to midsized pharmaceutical companies with new drug approvals were acquired in past 20 months’’ • New drug approval with promising estimated peak sales • Special FDA status for existing or pipeline products (breakthrough therapy, fast track review, orphan drug designation, priority review) • Proven R&D leadership in a specific technology or therapeutic area • Relatively small market capitalization Figure 2: U.S. pharmaceutical and biotech deals by value and count since January 2014 Deal Value 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 89% 11% Megadeals ($5 bn+) Other Deals (< $5 bn) # of Deals 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 94% 6% Megadeals ($5 bn+) Other Deals (< $5 bn) Source: FiercePharma, CrunchBase, EvaluatePharma, Capgemini Analysis 3
Figure 3: New drug approvals by FDA since January 2014 across companies Recent Drug Approvals (since January 2014) 42% 45% Large Pharma (2014 Revenue > = $15bn) Mid-Sized Pharma Small Pharma companies (2014 Revenue < = $5bn) 13% Source: FDA, Capgemini Analysis Most small to midsized pharmaceutical companies that received new drug approval from FDA were acquired within six months.’’ New Drug Approval as an Acquisition Trigger Any acquisition is a result of various interrelated factors. Failure of bigger pharmaceutical companies to consistently develop new drugs and pressure from shareholders to deliver returns have forced large pharmaceutical companies to look outside for innovative drugs. This has resulted in new drug approvals emerging as a major trigger for acquisitions. Capgemini Consulting collected the data for all the new drug approvals from January 2014 through August 2015 to analyze the correlation between new drug approvals and acquisitions. Companies that received the approvals were segmented into large, mid-size and small based upon their 2014 revenues (large >=$15bn, $15bn < mid <$5bn, small <=$5bn). Since there were no acquisitions in the large segment over last 20 months, the analysis focuses on the small to mid-sized pharmaceutical companies. Figure 4 shows the correlation between small to mid-sized pharmaceutical companies, that were acquired in last 20 months with the new drug approvals. 4 Pharmaceutical Mergers and Acquisitions in the U.S. As seen in Figure 4, all companies, with the exception of Chelsea Therapeutics, were acquired within six-months of obtaining FDA approval. Excluding Forest Laboratories, in cases where a company was acquired prior to drug approval [denoted by (-)], the period between approval and acquisition was less than six months, meaning that the drug was under FDA review when the deal was finalized. Not surprisingly, in the two cases (Zerbaxa and Natpara) where the drug was expected to be a blockbuster, the company was acquired within days of receiving FDA approval. Of the small and mid-sized companies with new drug approvals that have not yet been acquired, four have already been predicted by Wall Street as the next probable targets. Furthermore, some of the companies with new drug approval possess certain characteristics that make them unattractive acquisition targets. Some companies, such as Mannkind and Pharming Group, have strategically established relationships with Big Pharmaceutical companies that deter other companies from attempting an acquisition. Others, such as Knight Therapeutics and The Medicines Company, have opted to increase their market capitalization through
Figure 4: Relationship between new drug approval and acquisition for small- and mid-sized pharmaceuticals since January 2014 Time Elapsed Between New Drug Approvals and Acquisitions 2014 Jan 2015 Feb March April May June July Aug Sept Oct Nov Dec Jan Feb March April May June July Aug Zerbaxa (Cubist / Merck) Natpara (NPS / Shire) (+) 6 mths Imbruvica (Pharmacyclics / Abbvie) (-)2 mths Xifaxan (Salix Pharmaceutical / Valeant) (-) 2 mths Esbriet (InterMune / Roche) Namzaric (Forest Laboratories / Actavis) (-)10 mths (+) 5 mths Dalvance (Durata Therpeutics / Actavis) (-) 3 mths Kybella (Kythera Biopharma / Allergan) (+) 15 mths Northera (Chelsea Thpts / Lundbeck) (+) 6 mths Sivextro (Cubist / Merck) (-) 5 mths Soolantra (Galderma / Nestle) Cholmbam (Asklepion / Retrophin) (-)3 mths Addyi (Sprout / Valeant) Legend FDA Approval Date Acquisition Date Product (Acquired / Buyer) $100200M $200300M $300400M $400500M $500M1B >$1B Estimated Peak Product Sales Source: Capgemini Analysis acquisitions of their own. The remaining few are too small to be attractive acquisitions (i.e. single product companies with less than $100mm projected peak sales). Hence, any small to mid-sized pharmaceutical company nearing a product approval from FDA should consider potential acquisition as a risk and take necessary steps to prepare for it. 5
Valuation Pharmaceutical multiples have steadily increased over past 20 years’’ One of the first steps that a pharmaceutical company can take to be better prepared for a potential acquisition is to have an estimate of their own valuation. Over the past decade, there has been an increase in acquisition prices for pharmaceutical and biotechnology companies. Acquisition prices in 2015 are highest relative to EBITA and revenue in last 20 years. Also market is eager to invest and pay rich multiples for potential high payout that exists. quickly, become significantly more valuable. Examples of these errors in valuation span across disease areas, and include such products as Zytiga, a drug that treats prostrate cancer in men which became a $2bn drug (sold by BTG for ~$6mm a year royalty), and Cubicin, used to treat bacterial infection with annual sales of over $1bn (sold by Eli Lilly for less than $50mm). These challenges are more pronounced in valuing orphan drugs. Orphan drugs have Figure 5: Median EBITDA multiple paid to acquire pharmaceutical and biotechnology companies, 2007-2015 Pharmaceutical and Biotechnology Median Acquisition Multiples Median EBITDA Multiple (x) 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg, Capgemini Analysis It is important for pharmaceutical companies to select their valuation partners carefully’’ 6 The valuation process for pharmaceutical and biotechnology companies presents a challenge, as products in the early stages of development have no product revenue on which to base a valuation. Nevertheless, valuations are continuously being performed and adjusted, using available data, while also being influenced by investor speculations regarding the value of a particular company or pipeline product. Due to lack of transparency in the process, it is not rare to find instances where pharmaceutical and biotechnology companies sell promising products, based on very low valuations, and these products later, and sometimes very Pharmaceutical Mergers and Acquisitions in the U.S. small patient population coupled with the attractive pricing structure of the market. This magnifies the errors in valuation process leading to variance that can completely skew the numbers. Given the high degree of uncertainty and reliance on assumptions that exist in valuations for pharmaceutical and biotechnology companies, as well as the increase in deal value, it is becoming increasingly important for these companies to select their partners carefully, so as to ensure that these valuations incorporate all relevant information.
Implications What are the implications for small to mid-sized companies that are in the process of developing and launching new drugs? There are a few steps that the potential target company can take to be better prepared for such a scenario. These are: • Remain informed of current market focus and incentives for mergers and acquisitions, specifically related to types of products and portfolios • Estimate their global valuation, including value of both the lead product as well as the pipeline • While performing valuations, select partners carefully so as to ensure that all relevant information is appropriately captured • Get a better understanding of the corporate law of their home country as well as that of the U.S. • Review their ownership structure and have a plan ready to respond to any unsolicited third-party interest • Develop relationships with key investors to ensure their ongoing commitment and understand relevant motivations • In the case that the company is open to a merger or acquisition, they should proactively identify potential companies that might be a good strategic fit • Identify acquisition targets of their own to increase market capitalization and deter acquisition References 1. “2014 FDA Approved Drugs” CenterWatch. Accessed September 2, 2015 2. Acquisition details from BioSpace. Accessed September 2, 2015 3. Company profiles from CrunchBase. Accessed September 2, 2015 4. Gardner, J. & Urquhart, L. (2015) “Pharma and Biotech Half-Year Review”. Evaluate Ltd., Accessed September 2, 2015 5. Helfand, C. & Palmer, E. (2015) “Pharma’s top 10 M&A deals of 2014”. FiercePharma. Accessed September 2, 2015 6. Helfand, C. & Palmer, E. (2014) “Pharma’s top 10 M&A deals of 2014’s first half”. FiercePharma. Accessed September 2, 2015 7. Lachapelle, Tara (2015) “Drug Takeover Valuations Soar as Par Pharma Gains 300%”. Bloomberg data. Accessed September 20, 2015 8. Jarvis, L.M. (2015) “The Year in New Drugs”. Chemical & Engineering News, 93(5): 11-16 9. “Orphan Drug Report” EvaluatePharma, 2014 7
Header-solution the way we do it About the Authors Sheetal Chawla is Principal Consultant at Capgemini Consulting and leads Digital and Commercial Strategy in the North America Life Sciences practice (New York). She has more than 12 years of experience in business strategy, market analytics, marketing and business development / valuation. In her role, she advises clients on commercial, launch and patient strategies, digital transformation, and portfolio / profit optimization, among other topics. She can be reached at [email protected] Rohit Bansal is Managing Consultant at Capgemini Consulting within North America Life Sciences practice (New York). He has over 10 years of experience of working with pharmaceutical clients in the area of commercial strategy, process optimization, business analytics and planning. His areas of expertise are market potential assessments and transformative business strategy development. He can be reached at [email protected] Contributors Alexandra Alpaugh, Capgemini Consulting – New York Betsy Dolan, Capgemini Consulting – New York Rohit Mahajan, Capgemini Consulting – New York About Capgemini Consulting Capgemini Consulting is the global strategy and transformation consulting organization of the Capgemini Group, specializing in advising and supporting enterprises in signiﬁcant transformation, from innovative strategy to execution and with an unstinting focus on results. With the new digital economy creating signiﬁcant disruptions and opportunities, our global team of over 3,600 talented individuals work with leading companies and governments to master Digital Transformation, drawing on our understanding of the digital economy and our leadership in business transformation and organizational change. For more information: www.capgemini-consulting.com About Capgemini With 180,000 people in over 40 countries, Capgemini is one of the world’s foremost providers of consulting, technology and outsourcing services. The Group reported 2014 global revenues of EUR 10.573 billion (about $14 billion USD at 2014 average rate). Together with its clients, Capgemini creates and delivers business, technology and digital solutions that ﬁt their needs, enabling them to achieve innovation and competitiveness. A deeply multicultural organization, Capgemini has developed its own way of working, the Collaborative Business ExperienceTM, and draws on Rightshore®, its worldwide delivery model. Learn more about us at www.capgemini.com Rightshore® is a trademark belonging to Capgemini The information contained in this document is proprietary. ©2015 Capgemini. All rights reserved. Rightshore® is a trademark belonging to Capgemini.