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Did Pharma & Biotech M&As Pick Pace in Q1?

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2016 was not exactly a great year for pharma and biotech stocks with the sector facing a lot of criticism for rising drug prices. The year also marked a slowdown in M&A (mergers and acquisitions) activity in this sector representing a stark contrast to both 2014 and 2015 which saw several deals being signed.

With companies remaining wary about the drug pricing issue and the political climate ahead of Nov 2016 election results, there was a significant drop in M&A activity last year with just a few standout deals being announced -- Pfizer’s (PFE - Free Report) Medivation acquisition (worth $14.3 billion), the Shire - Baxalta merger (worth approximately $32 billion) and the Teva (TEVA - Free Report) -Allergan (AGN - Free Report) deal for the latter’s generics business (worth approximately $33.4 billion in cash and about 100.3 million of Teva’s shares) -- to name a few.

However, post Nov 2016, M&A hopes for the pharma and biotech sector shot up significantly on expectations that the drug pricing issue would take a backseat and the President’s pro-business stance including his plans for tax reforms and cash repatriation would work in favor of the sector.

Large Cap Pharmaceuticals Industry 5YR % Return

What Do the Numbers Say?

According to a report issued by Mergermarket earlier this month, 314 deals worth $76 billion were signed in the first quarter of 2017 in the global pharma, medical and biotech sector. This represents a 14.8% decline in value compared to the first quarter of 2016 which recorded 379 deals worth $89.2 billion. Moreover, Johnson & Johnson’s (JNJ - Free Report) Actelion agreement alone accounted for $30 billion or 39.5% of the total deal value in 1Q17. However, deal activity in 1Q17 was at par with or better than the last three quarters of 2016. Apart from the J&J – Actelion agreement, other M&A deals announced/completed in the first quarter of 2017 include the Takeda-ARIAD deal.

Factors that Should Drive M&A Activity

Several pharma and biotech companies are facing loss of exclusivity and generic/biosimilar competition for key revenue generators. For these companies, M&As are a way of boosting the product portfolio, strengthening the pipeline and driving long term growth. Instead of developing a product from scratch, which involves a lot of funds and time, many of these companies pursue deals with smaller players that have promising mid- to late-stage pipeline candidates. Licensing agreements have also picked up significantly.

Companies with innovative technologies and pipelines are highly sought after. Important therapeutic areas like cancer, immuno-oncology, Alzheimer’s, central nervous system disorders, rare diseases and immunology/inflammation have always attracted a lot of M&A interest as have niche disease/technology areas like nonalcoholic steatohepatitis (NASH), gene therapy, CRISPR and CAR-T. Treatments for orphan diseases are also much sought after with quite a few deals being signed in these areas.

Other factors like potential tax reform, cash repatriation, cutting down of regulations to make the manufacturing process smoother in the U.S. and a speedier FDA approval process could help spur M&A activity in the sector. In fact, companies like Gilead (GILD - Free Report) are under a lot of pressure to pursue lucrative M&A deals. Big players like Sanofi (SNY - Free Report) , a Zacks Rank #2 (Buy) stock (you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here), have expressed an interest in pursuing M&A deals as well.

However, stretched valuations and headline risks like drug pricing could play spoilsports and impact M&A activity.

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