Shifting from megamergers to strategic collaboration: M&A predictions for biopharma

“We never say never to mega deals – there is always potential for megamergers… But when we look at the trend, we expect volume: the collaboration activities, the partnership activities, the bolt-on acquisitions will be preferred in the coming years.” – Subin Baral, EY Global Life Sciences Deals Leader.

Through the last two years of the COVID-19 pandemic, a mainstay of the drug development community’s response has been collaboration. We have seen it in a variety of forms, including between Big Pharma and smaller companies, such as the Pfizer/BioNTech collaboration which led to the Comirnaty^® messenger RNA (mRNA) vaccine for COVID-19, drug developers and regulators or government, increasing numbers of deals for outsourced development and manufacturing activities, and so on.

But will collaboration continue to be a critical paradigm for biopharmaceutical development?

A seller’s market

EY’s recent 2022 M&A Firepower report reveals that though the number of M&A deals that occurred during 2021 was greater than in previous years, the total value was the lowest since 2017.¹ Overall, there were 90 M&As in 2021, a >20 percent increase in activity from the 70 and 69 that occurred in 2019 and 2020, respectively. However, their total value was $108 billion, a 60 percent decrease from the peak of $261 billion in 2019.

This trend of increasing activity but decreasing value, which Baral expects will continue through 2022, is due to it being a seller’s market. He pointed to several factors promoting a shift in negotiation power away from Big Pharma companies towards smaller enterprises: “One is the patent cliff. All the big pharmaceutical companies are exposed to this cliff looming from 2025 onwards.” According to Baral, the internal pipelines of these large companies are not sufficient to overcome the growth gap potentially created by the fall in revenues after branded medications go off-patent, making them heavily reliant on external innovation.

However, it is often not as simple as directly acquiring companies and assets, because the valuations for these smaller companies are extremely high. Given the ample capital that is accessible for these smaller enterprises to enable their continued development, they are “not in a desperate mood to sell” explained Baral. He added: “The existence of this valuation premium puts pressure on buyers to demonstrate quick returns on any acquisitions they make, acting as a deterrent to transactions – and increasingly making partnerships and collaboration the preferred method.”

Does collaboration sound the death of the megamerger?

Baral cited one reason for the low total value of M&A deals in 2021 as the lack of megamergers. These are a subset of transformative M&A with valuations of at least $40 billion. The comparatively high value of 2019’s deals were driven by four megamergers totalling $231 billion, including Bristol Myers Squibb’s acquisition of Celgene ($74 billion) – the third largest in history, AbbVie/Allergan ($63 billion) and Takeda/Shire ($62 billion). Read our article to learn about the largest deals in 2019.

“The 60 percent fall from the 2019 peak is because people are skeptical, cautious about doing big deals and paying up front,” explained Baral, adding that, combined with the reluctance of smaller companies to sell, organisations are entering into collaborations or partnerships. These deals enable access to some assets, allow the larger companies to go in small, gain an understanding of the technology, people or market and then, if it seems promising, potentially acquire the company or asset.

An example of this is Pfizer’s investment in – and subsequent acquisition of – Trillium in 2021. Initially in 2020 Pfizer invested $25 million in Trillium, buying approximately 2.3 million of its common shares;² then in 2021, Pfizer went on to acquire the company for a further implied equity value of $2.26 billion.³

“At EY, we never say never to mega deals – there is always potential for megamergers, especially if you look at companies with so much cash because of COVID-19 vaccines and so forth. These deals could happen. But when we look at the trend, we expect the volume; the collaboration activities, the partnership activities, the bolt-on acquisitions will be preferred in the coming years,” he added.

What were the largest deals of 2021?

CSL/Vifor – $11.7 billion⁴

In December, CSL announced it would acquire all publicly held Vifor Pharma shares in an all-cash public tender offer. The total aggregate equity value for Vifor was $11.7 billion.

The acquisition gave CSL access to Vifor’s portfolio of products across nephrology, dialysis and iron deficiency therapies, adding 10 commercialised products and 37 under development, increasing the company’s development pipeline by 37 percent.

Merck/Acceleron Pharma – $11.5 billion⁵

In September, Merck (MSD outside the US and Canada) and Acceleron Pharma announced their definitive agreement, whereby Merck, through a subsidiary, would acquire Acceleron for an approximate total equity value of $11.5 billion.

The acquisition complemented and strengthened Marck’s growing cardiovascular portfolio and pipeline, adding Acceleron’s lead therapeutic candidate, sotatercept for pulmonary arterial hypertension (PAH), as well as Reblozyl^® (luspatercept-aamt), a first-in-class erythroid maturation recombinant fusion protein for the treatment of anaemia in certain rare blood disorders, to Merck’s portfolio.

Jazz Pharma/GW Pharma – $7.2 billion⁶

In February, Jazz Pharmaceuticals announced it would acquire GW Pharmaceuticals for $6.7 billion to cement its leadership in neuroscience and further diversify its portfolio.

The acquisition included GW’s lead product Epidiolex^® (cannabidiol) oral solution, approved in patients one-year and older for the treatment of seizures associated with Lennox-Gastaut Syndrome (LGS), Dravet Syndrome and Tuberous Sclerosis Complex (TSC), as well as pipeline candidates such as nabiximols in Phase III development for spasticity associated with multiple sclerosis and spinal cord injury.

Pfizer/Arena Pharmaceuticals – $6.7 billion⁷

Pfizer revealed it would acquire all the outstanding shares of Arena Pharmaceuticals in an all-cash transaction of approximately $6.7 billion in December 2021.

This acquisition gave Pfizer access to Arena’s broad development pipeline of therapeutic candidates in gastroenterology, dermatology and cardiology; complementing the company’s inflammation and immunology pipeline with the addition of etrasimod, an oral, selective sphingosine 1-phosphate (S1P) receptor modulator currently in development for a range of immuno-inflammatory diseases including gastrointestinal and dermatological diseases.

Sparking innovation in more than therapeutics

As demonstrated above, the main impetus for M&A activity is the diversification and expansion of portfolios, according to Baral. He noted that these deals are occurring across a wide range of indications from oncology to immunology, neurology and more, but the key emerging areas are cell and gene therapy, mRNA, antibodies and protein degradation therapies. The first two are particularly key, according to Baral, who noted there has already been an uptick in interest and valuations for cell and gene therapies and mRNA. “These are platform based and people are really focused on how you can use that platform for not just one therapeutic area, but across many therapeutic areas and diseases,” he added.

However, Baral explained that 2021 not only saw innovation in therapeutics, but also in M&A deal structures. For instance, MorphoSys’ acquisition of Constellation, a $1.7 billion deal financed by a long-term strategic funding partnership with Royalty Pharma plc.⁸ MorphoSys is a mid-sized biotech company that, through its partnership with Royalty, was able to finance a billion-plus dollar deal, which previously, according to Baral, seemed unlikely. Under the agreement, Royalty paid $1.425 billion upfront to MorphoSys to support the acquisition and will provide up to $350 million in Development Funding Bonds as well as $150 million in milestone payments in return for royalties on certain products.

M&A looking forward

Baral concluded that he anticipates 2022 will see very similar deals to 2021, with a lot of bolt-on acquisitions and a focus on collaborations and partnerships. “What is changing is there is ample capital in the market, so the power is shifting a little bit from Big Pharma to the mid-sized biopharma companies. They have a little more bargaining power now, with the innovation deficit and access to capital. Pharma companies are in desperate need to fill their pipelines for the looming patent cliff, so we expect a lot of deal making in 2022 and 2023. Now, they are not all going to be megamergers, but the valuations are high,” commented Baral.

References

1. Spence P, Baral S, Ural A, et al. 2022 EY M&A Firepower report [Internet]. EYGM Limited; 2022. Available from: https://www.ey.com/en_gl/life-sciences/partnerships-in-life-sciences-dealmaking-strategies
2. https://www.globenewswire.com/en/news-release/2020/09/08/2090474/33016/en/Trillium-Therapeutics-Announces-25-Million-Equity-Investment-From-Pfizer-Inc.html
3. https://www.globenewswire.com/en/news-release/2021/08/23/2284697/33016/en/Pfizer-to-Acquire-Trillium-Therapeutics-Inc.html
4. https://www.csl.com/news/2021/20211214-csl-csl-limited-announces-tender-offer-to-acquire-vifor-pharma-ltd
5. https://www.merck.com/news/merck-to-acquire-acceleron-pharma-inc/
6. https://investor.jazzpharma.com/news-releases/news-release-details/jazz-pharmaceuticals-acquire-gw-pharmaceuticals-plc-creating
7. https://www.pfizer.com/news/press-release/press-release-detail/pfizer-acquire-arena-pharmaceuticals
8. https://www.businesswire.com/news/home/20210602005571/en/MorphoSys-to-Acquire-Constellation-Pharmaceuticals