Last year was a mixed bag for biopharma dealmaking, and not just by the numbers. Lofty valuations tamped down M&A, with buy-side companies also awaiting the outcome of U.S. tax reform. Oncology assets continued to rule, although first-in-class approvals actually showed a decline. And with orphan indications continuing to dominate drug development efforts, the biopharma industry moved toward a state where approvals, increasingly, targeted smaller patient populations.
But with the arrival of breakthrough cell and gene therapies and an immuno-oncology space that’s exploding with activity, the pieces are in place for a transformative dealmaking year.
These were some of the observations of Laura Vitez, commercial insights manager with Cortellis, and Jamie Munro, global practice leader, portfolio and licensing, both of Clarivate Analytics, at the Deals and Portfolio Annual Review conducted in conjunction with the 36th Annual J.P. Morgan Healthcare Conference in San Francisco.
The analysis was based on 4,234 life sciences transactions valued at $364 billion that were captured in 2017 by Clarivate’s Cortellis database across therapeutics, medical devices, services, instruments, animal health, generics and related industries. Licenses represented approximately 45 percent of total deal volume while M&A accounted for 67 percent of deal dollars. Other types of transactions captured in the data included asset and business line purchases, distribution and co-promotion agreements, manufacturing arrangements and service deals.
Putting the numbers in context, Vitez said, deal volume was lower in 2017 than in the previous year across almost every type of deal structure, including M&A and licensing – in all, a drop of about 3 percent. Dollars also were lower in 2017 for the licensing sector but higher for M&A, which helped to push 2017 aggregate dollars about 6 percent higher than in 2016. The finding represented a reversal from the previous year, when deal volume exceeded that of 2015 but deal dollars were down.
Licenses and M&As, combined, represented half of the announced transactions and 90 percent of announced dollars. And despite some softening in dealmaking during 2017, “in general things are healthy,” Vitez pointed out. “There’s a great deal of capital that companies can and do access, and the pipeline is healthy.”
In 2017, life sciences M&As accounted for 11 percent of transaction volume and 67 percent of dollars. Looking across a 10-year horizon, deal revenues exceeded those of the first five years but fell below those of the past two years, despite a flux of capital and a healthy appetite for acquisition.
Overview of all life sciences deals captured by Cortellis in 2017 by percentage
Transaction types: M&A = 50-100%acquisitions, mergers, reverse mergers; Licenses = licenses, joint ventures, research collaborations; Asset Purchases = products and business unit acquisitions; Funding = acquisitions of < 50% equity, grants, loans, other funding types; Commercial = distribution, supply, co-promotion agreements; Service = contract services; Other = royalty buyouts, spin-outs, settlements.
Vitez attributed these findings to three key reasons. First, the IPO market was stronger for biopharma in 2017 than in the previous year, so companies on the sell-side had viable alternatives to tap the public markets and remain independent or to sell to big biopharma with the goal of creating more synergy in therapeutic pipelines.
Having that kind of optionality on the sell-side can result in elevated expectations at the deal table, however. Soaring valuation rates in 2017 represented a second factor restraining M&A activity, Vitez said. Finally, some U.S. companies with a hankering to acquire held back to await the outcome of tax reform. In that respect, they got their wish, boding well for the 2018 dealmaking outlook.
“We expect to see the new tax rates have a big impact on M&A, particularly the megamergers,” Vitez said, noting that U.S. biopharmas comprise one-third of the top 30 U.S. companies holding the most offshore cash. With the arrival of another tax repatriation holiday and a reduction in the tax rate affecting those dollars from 35 percent to 15.5 percent, “a considerable chunk of those tax savings will be spent on M&A,” she predicted.
In 2017, 20 life sciences deals exceeded $2 billion compared to 17 in 2016, according to Cortellis data, with five of the biggest M&As in both years targeting the therapeutic space. Among the major 2017 deals were Johnson & Johnson’s (J&J’s) $30 billion takeover of Actelion Ltd., Gilead Sciences Inc.’s $11.9 billion acquisition of Kite Pharma Inc., Takeda Pharmaceutical Co. Ltd.’s $5.2 billion bid for Ariad Pharmaceuticals Inc. and Bristol-Myers Squibb Co.’s potential $2.32 billion pick-up of IFM Therapeutics Inc. (See BioWorld Today, Jan. 10, 2017, Jan. 27, 2017, Aug. 7, 2017, and Aug. 29, 2017.)
Deals by therapeutic area
By therapeutic focus, companies with “diversified” portfolios – those working in multiple areas – represented the largest slice of the pie, or about 25 percent of M&As. That trend has remained relatively consistent, Vitez said. Also as usual, oncology deals took second place, yet “cancer M&A was an odd soft spot in our data this year,” she pointed out, with the number of transactions down in 2017 on a year-over-year basis in terms of volume and percentage of M&As, with 28 disclosed transactions compared to 48 in 2017.
“I suspect high valuations are a particular problem in this hot space,” Vitez said.
Dealmaking was downright dismal in neuroscience, with half as many M&As in 2017 as the previous year. Including a single deal focused on neurodegenerative disease.
“You probably saw the headlines that Pfizer is shuttering its neuro division and laying off several hundred people,” Vitez said. “But – and this is very interesting – the company is not exiting the area altogether. Instead, it’s setting up a neurology-dedicated venture fund.”
With neuroscience still a key focus of academic labs and early stage companies and with a great deal of unmet medical need, other big biopharmas may take a similar approach to keep a finger in the pie, she suggested. In fact, neuroscience remains the third largest area of pipeline drugs, representing about 11 percent of the total, following cancer and immune/inflammatory segments, each responsible for about 15 percent of drug pipelines.
The top percentile licensing deals – those representing $1 billion or more in disclosed value – also continued to flow in 2017, with 23 compared to 20 in 2016.
“We’re looking at total dollar size, or what we affectionately refer to as total biodollars,” Vitez said, which assume 100 percent success to achieve the full value across up front, equity, R&D and other milestones on all possible programs.
“This structure gives an advantage to discovery deals because they have many more moving parts and possible programs,” she added. “And, indeed, 13 of these 23 mega transactions in 2017 were for discovery collaborations.”
Of interest, the year’s biggest licensing deal – the $8.5 billion arrangement between AstraZeneca plc and Merck & Co. Inc. for approved drug Lynparza (olaparib)and selumetinib – was viewed by most analysts “as a fairly desperate ploy to bring down costs and generate some cash, and they weren’t happy that AstraZeneca gave away so much of that important drug,” Vitez said.
For the second straight year, J&J was the big pharma winner in deal volume, with 42 disclosed transactions, although the company’s healthy M&A activity was driven in part, by multiple medical device subsidiaries. Takeda also stepped up in 2017, with 24 licensing deals compared with 14 the previous year, and “clearly is a company to watch going forward,” Vitez said.
Neuroscience, immunology, infectious disease and gastrointestinal disease related-deals were more prevalent in 2017 than those in ophthalmology, metabolics, cardiology, musculoskeletal disease and respiratory disease.
Going forward, a big positive for the industry is the proliferation of technologies that are attracting deals, Vitez said, including those for CAR T and other cell therapies, bispecifics and antibody-drug conjugates, nanobodies, RNAi and mRNA vaccines, peptides, microbiome-related assets CRISPR gene editing.
Clinical stage deals also encompass more biomarker, diagnostic and imaging components than deals involving early stage and approved assets, Vitez pointed out, with the prospect of affecting how physicians profile tumors for more personalized treatment, monitor treatment response and anti-tumor activity and provide more accurate diagnoses for cancer.
In oncology, ‘the trend is to earlier deals’
Munro drilled down into the oncology space, which dominated dealmaking by accounting for the largest number of M&As by therapeutic area and by top licensing transactions, mirroring a business development shift in drug pipelines. Oncology deals, in fact, represented more than three times as many deals as neuroscience, the next most prevalent therapeutic area. All but one of the top 20 dealmakers was active in oncology transactions last year, he said.
In terms of 2017 licensing, both large and small biopharmas were active in oncology, with big pharma involved in about one-third as many deals as small biotech, but for nearly three times as many dollars. In terms of development phase, “the trend is to earlier deals,” Munro emphasized, with discovery and preclinical assets the focus of nearly two-thirds of oncology deals. Clinical assets across all stages of development representing most of the remaining universe.
In 2017, small molecules represented the largest number of oncology deals by technology, followed by antibody/protein/peptide assets, DNA/RNA/oligonucleotides.
Up-front payments for oncology deals increased significantly in 2017, although with wide variance, Munro said. The top 10 oncology licensing deals by size accounted for $2.853 billion in up-front payments and $16.8 billion in downstream milestones.
Of interest, the oncology dealmaking landscape by region appears in flux. Over the past five years, on the basis of biopharma company headquarters, some 40 percent of licensing flows by region occurred within North America, followed by inter- and intra-European deals. Intra-Asian deals represented about 6 percent of the total, while Asia to North America and North America to Asia deals represented about 5 percent and 6 percent, respectively. The trends are worth watching and are likely to shift going forward, Munro suggested, citing the 2017 deal between Celgene Corp. and Beigene Ltd. as the type that may begin to assume greater prominence. (See BioWorld, July 7, 2017.)
Oncology also has become a major driver of orphan drug approvals, representing approximately 40 percent of such approvals in 2017 according to Munro. The flip side of that equation is that a growing number of oncology approvals are targeting smaller patient populations, with 36 million fewer patients benefiting from initial oncology approvals in 2017 compared with 2010, and each 2017 approval targeting, on average, one-third the patient cohort of oncology drugs approved in 2010.
Although many oncology drugs subsequently reach greater numbers of patients through supplemental approvals – Keytruda (pembrolizumab, Merck) is a noteworthy example, Munro said – it’s debatable whether the universe of patients who eventually benefit from new oncology drugs is growing or shrinking.
For more information, we invite you view the on-demand webinar presentation: Clarivate Analytics Deals and Portfolio Review: State of the Industry 2017. Recorded onTuesday, February 6, 2018, the program looked back on the industry and dealmaking trends of 2017, and what that could mean for 2018. Our experts break down the year and provide insight into the industry’s transactions and developments. Watch now.