Specialization continues to be a driving force in Q1 2016, especially in sectors such as OTC, rare diseases and oncology. KPMG’s Deal Thermometer indicates that the environment for M&A activity will remain moderately strong in pharmaceuticals.
Pharmaceutical deal values have dropped significantly – the value of the top 10 completed deals in Q1 2016 was $21.8 billion compared to $134.0 billion in Q1 2015. Deal activity in Q1 2016 was focused on smaller transactions to secure assets and enhance strategic portfolios. US remains the most targeted country, however interest in European assets is strong as market values decline.
The 2015 announcement of the Pfizer Inc. - Allergan PLC deal was expected to result in the largest ever M&A transaction in the sector. However, a further clamp down on tax inversion by the US treasury led to Pfizer calling off the deal. Shire PLC, on the other hand, has confirmed its intention to complete its acquisition of Baxalta Inc. Focus on specialization continues to drive M&A activity in OTC, generics, rare diseases, medical diagnostics and oncology. Big Pharma continues to pursue biotechs to enhance their portfolios.
In Q1 2016, OTC topped the announced deal list in terms of size with Mylan N.V. announcing the $9.9 billion acquisition of Meda AB to reduce its dependency on generic drugs. The deal adds to Mylan’s portfolio a $0.8 billion OTC business and a $1.4 billion high margin prescription drugs business. In addition, it expands its geographic presence to 16 new markets including China, Mexico and Russia. In 2015, Mylan failed in its attempt to buy OTC maker Perrigo Co. for $26 billion.
Generics continues to dominate the M&A landscape. A number of transactions in generics were completed in Q1 2016. Teva Pharmaceutical Industries Ltd. bought Rimsa Laboratorios for $2.3 billion, moving from a small presence to a leading position in Mexico, the second-largest pharma market in Latin America. Further generic deals were completed by British Hikma Pharmaceuticals PLC and Indian players, Lupin Ltd. and Cipla Ltd. Similar to the Indian transactions, the China-based Humanwell Healthcare Group Co., Ltd. announced a US generics acquisition to strengthen its commercialization and manufacturing. PE is also interested in the sector with CVC Capital Partners’ acquisition of DOC Generici S.R.L. making it to the list of top 10 announced deals.
Rare diseases continue to be an attractive investment area for pharmaceutical companies. Following its Q3 2015 deal announcement of orphan drug maker Baxalta Inc., Shire completed the $6.5 billion acquisition of Dyax Corp. in Q1 2016. This deal adds a blood disorder treatment to its rare disease portfolio. Through acquiring Crealta Holdings LLC for $0.5 billion in Q1 2016, Horizon Pharma PLC adds the first and only FDA-approved medicine for a rare arthritis disease, KRYSTEXXA, with intellectual property protection until 2027. The deal supports Horizon’s plan to generate 60% of net sales in 2020 from its orphan drug business.
As diagnostic testing moves closer to the patient and away from the laboratory, test results and patient outcomes are accelerated. This is becoming increasingly critical in dealing with deadly viruses. Responding to this trend, Abbott Laboratories has strengthened its capabilities in this area by announcing the $5.8 billion acquisition of Alere Inc. The deal will help it become the leading provider of point of care testing with sales exceeding $7 billion and expected synergies of $0.5 billion by 2019.
The larger oncology deals in Q1 2016 were European-based. The largest oncology player, Roche Holding AG, announced the $0.5 billion acquisition of Tensha Therapeutics Inc., boosting the exploration of Tensha’s TEN-010, a best-in-class BET inhibitor in two Phase I clinical cancer trials. In Q1 2016, AstraZeneca PLC completed the $4.0 billion acquisition of a 55% stake in Acerta Pharma BV, a leader in covalent binding technology. The deal enables AZ to complement its immunotherapy approach by adding acalabrutinib, a Bruton’s tyrosine kinase (BTK) inhibitor for blood cancers and multiple solid tumors in late-stage development.
Bristol-Myers Squibb exited this therapy area by selling for $2.9 billion its HIV R&D portfolio to ViiV Healthcare Ltd.. GlaxoSmithKline PLC, who owns 76.5% of ViiV reversed a decision to spin it off in 2016 due to promising new drugs and shareholder pressure to retain the business.
In Q1 2016, pharma indices lost ground and underperformed the MSCI World Index which grew by 1.1%. The US S&P 500 index (-3.7%) and the Bloomberg Asian Pacific index (-2.2%) declined moderately, whereas the Bloomberg European index (-12.1%) closed the quarter significantly lower.
Financial investors are also showing keen interest in the sector, particularly in OTC and generics. British Private Equity investor Charterhouse Capital Partners LLC completed the acquisition of OTC-maker Cooper Pharma for $0.8 billion from French investment firm Caravelle. Charterhouse further announced the sale of DOC Generici S.R.L, a leading Italian generics company with a market share of over 15%, for $0.7 billion to PE-firm CVC Capital Partners.
In Q1 2016, Index Ventures, known for its early investments in Skype and Dropbox, spun off its biotech unit, creating Medicxi Ventures, one of the largest independent Life Sciences-centric venture capital firms worth $1 billion. A new $0.2 billion fund focused on investing in European early-stage drug development was created backed by GlaxoSmithKline PLC and Johnson & Johnson each contributing 25%. Although GSK and J&J have no rights to the companies backed by the fund, they will benefit from the knowledge and insights gathered around R&D. Also in Q1 2016, J&J, GSK and AstraZeneca provided financing for a $0.1 billion fund with several UK universities to facilitate commercialization of academic research.
In Q1 2016, domestic deals dominated M&A activity in China with the exception of two deals, one of which is Humanwell’s acquisition of US generics player, Epic Pharma LLC.