After years of growing through new product launches, biotech giants are facing pressures that may compel them to join big pharmas in pursuing new mergers and acquisitions (M&A), EY said in its annual industry report released today.
Beyond borders: Reaching new heights, said biotechs could turn to M&A to fill revenue gaps expected to arise from two factors. One is pressure to contain drug costs, as U.S. payers join European government agencies in challenging sky-high prices for many new treatments.
The other factor is increased competition, including biosimilars. In March, the FDA approved the first biosimilar for the U.S.—Zarxio™, a variation of Amgen’s Neupogen (filgrastem), to be marketed by Novartis’ Sandoz unit.
“Larger biotech companies have lots and lots of cash. Their stock is at all-time highs. They have a lot of currency to do deals. And yet they were probably less pressured because their internal growth was so high with their recent product launches,” Glen Giovannetti, EY’s Global Life Sciences Leader, told GEN. “Next year and the year after that, those growth comparables become harder, because those new launches are baked into their numbers.”
“If you’ve got a shareholder expectation, and the market price of the stock reflects high growth, you may go look for it via M&A,” Giovannetti added.
Biotechs will be better able to carry out M&A than in recent years, since their capacity for deals has improved based on growing market valuations, debt capacity and strength of balance sheet—what EY calls “firepower.” According to Beyond Borders, that firepower grew 30% for biotech giants, compared with 13% for big pharmas.
M&A has been the growth route taken by big pharma since the 2007–09 recession and subsequent “patent cliff” loss of exclusivity of numerous blockbusters. In 2014, the top two M&A buyers of biotechs were pharmas, with Merck & Co. spending $13.4 billion (to acquire Cubist Pharmaceuticals and Idenix Pharmaceuticals), and Roche $10 billion (mostly for InterMune but including Iquum, Santaris Pharma, and Genia).
Pharmas stepped up their deal activity last year, acquiring 27 biotechs in 2014, the highest number since 2008, according to EY.
Last year saw 68 M&A deals where one or both partners were biotechs, with a combined total value of $49 billion. EY’s M&A tallies exclude “megadeals” valued at $5 billion or more; on that basis, total value for 2014 rose 46% from the previous year’s $33.5 billion in some 50 M&A deals.
“Biotech, we think, will be more in the game, and it will stay a seller’s market, and we’ll see pretty good premiums paid,” Giovannetti said.
R&D: Spending spurt continues
The report also showed a 20% year-to-year global increase in 2014 R&D spending by biotechs, to $35.4 billion, paced by biotechs in the U.S. (up 22%) and Europe (up 14%).
R&D spending growth outpaced revenue growth for the second year in a row, according to EY.
For biotechs, the R&D increase was “clearly driven by more capital being available, period,” Giovannetti said. That capital came primarily from capital markets as investors warmed up to the industry, though collaboration payments accounted for a significant percentage.
During 2014, biotech licensers saw total upfront payments for alliances nearly double (up 96%) to $5.1 billion from $2.6 billion the previous year. Pharma in-licensers spent 88% more on upfronts, which climbed year-over-year to $3.4 billion.
The average upfront deal value ballooned by 78% to $41 million in 2014 from $23 million a year earlier, making 2014 the most lucrative for biotechs looking to sign alliances.
“Because you have financing options, you can reliably go to the public markets to raise more capital, you’ve got more bargaining power in collaborations,” Giovannetti added.
Other highlights of Beyond Borders:
- Most IPOs ever: 94 U.S. and European biotechs went public in 2014, shattering the previous record of 79 IPOs in 2000. The IPOs raised a combined $6.8 billion, higher than any year except 2000 ($7.8 billion).
- Near-record VC—Biotechs in the U.S. and Europe raised 28% more in venture capital last year over 2013—$7.6 billion compared with $5.8 billion. Companies raising early-stage rounds racked up $1.8 billion, the highest amount in at least the last decade.
- Net income triples—Net income reached an all-time high of $14.9 billion, up 231% from 2013. Much of the jump was attributable to Gilead Sciences due to its rollout of hepatitis C drug Sovaldi, yet overall net income still doubled without the company’s numbers.
- Two record highs—Debt financing climbed to a new record high of $26 billion, spurred by low interest rates. Also setting a new record was capital raised in follow-on offerings, which zoomed 49% over 2013 to $13.8 billion.