As mega deals slow, private capital becomes the driving force behind 2020 M&A
M&A volumes more than doubled between 2005 and 2019. By comparison, 2020 has been a slow year, with a marked decline in deal activity and a sharp drop in overall deal value.
Mega deals have been sparse – last year opened with Bristol-Myers Squibb (BMS) announcing its $74 billion acquisition of Celgene, and Abbvie’s $63 billion bid for Allergan punctuated the half year mark.
M&A at the start of a new decade has been subdued, with nothing breaking the $5 billion barrier in the first six months, and Gilead’s $4.9 billion acquisition of Forty Seven registering as the largest deal. The second half of 2020 has been more exciting, with Gilead closing its $16 billion acquisition of Immunomedics (more on this below), BMS announcing its $10 billion bid for MyoKardia, and Illumina announcing a $6 billion bid for GRAIL. Whilst a positive sign that things are moving in the right direction, this doesn’t make up for the ground already lost – at the time of writing deal volumes are down 20% and value is down 67%.
This shouldn’t surprise us; 2020 has seen pharma tussle with supply chain issues as a result of COVID-19 and undertake an impressive shift to focus on vaccine development, all against a backdrop of depressed public market valuations. Meanwhile, significant venture capital (VC) funding remains available for biotechs, allowing more of them to progress molecules to commercialisation themselves. However, with big pharma undertaking significant debt issuance this year (by mid-year, more debt had been issued by pharma and biotech companies in the US than during the whole of 2020), holding large cash reserves and having a record low Phase III pipeline, this slowdown in deal activity is likely to be temporary. Private markets, not so quickly impacted by public valuations and supported by significant dry powder in the private equity (PE) community, have seen hotspots of M&A, especially in the pharma services sector.
Although 2020 will go down in history as a quiet year for biotech M&A, Gilead has been doing its best to lift the market. The company has maintained its focus on oncology, a strategy it adopted in 2010 and cemented with the 2017 acquisition of Kite Pharma. It opened 2020 with the $4.9 billion acquisition of cancer drug maker Forty Seven, bringing on monoclonal antibody Magrilomab, a non-cell therapy programme that complements Kite’s pipeline of cell therapies for haematological cancers, and in June it acquired a 49.9% stake in Pionyr for $275 million, bringing in a myeloid tuning platform and pipeline of antibody therapeutics. Gilead went on to close this year’s biggest single transaction, and one of 2020’s few mega deals, by acquiring Immunomedics for $21 billion, bringing on board the Trop-2 directed ADC lead candidate Trodelvy (sacituzumab govitecan).
Gilead will expand access to Trodelvy for patients with triple negative breast cancer globally and look to explore its potential in other forms of cancer. All of this would have paled in comparison to the rumoured $240 billion merger between Gilead and Astra Zeneca – it would have been the largest ever in the industry and taken 2020 deal activity to a level easily rivalling last year, emphasising the impact of mega deals on overall trends, but this wasn’t to be.
In October, BMS agreed to acquire MyoKardia for $13.1 billion, expanding its cardiovascular portfolio. The deal brought in MyoKardia’s potential blockbuster mavacamten, which is in Phase III trials for symptomatic, obstructive hypertrophic cardiomyopathy (HCM); BMS plans to file a new drug application (NDA) in early 2021. Within that indication alone, mavacamten could reach sales of $2.5 billion. BMS plans to explore other potential indications for the drug as well as developing MyoKardia’s portfolio of cardiovascular-focused clinical stage products. This strengthens BMS’ cardiovascular portfolio and should offset the anticipated loss of sales in its current top selling drug Revlimid (lenalidomide), which faces generic competition in 2022, and Opdivo (nivolumab) which has seen stiff competition from Keytruda (pembrolizumab).
Elsewhere, Illumina is placing its bet on early cancer detection by announcing its intention its intention to pay $8 billion to acquire the 85% of GRAIL it doesn’t already own. Illumina’s genome sequencing machines are at the heart of a growing movement to use blood tests for the early detection of cancer. Illumina has historically focused on selling the equipment and leaving others to undertake the testing, as demonstrated when it spun GRAIL out of the wider business in 2016. Since then, GRAIL has focused on developing the liquid biopsies for early cancer detection, raising $2 billion to do so. While this gives Illumina access to a cancer test market it estimates will be worth $75 billion by 2035, it also has the potential to pit it against its current client base, many of whom buy Illumina’s sequencing machines to develop their own liquid biopsies. The market has reacted negatively to the news with Illumina shares falling after the announcement.
Johnson & Johnson looked to broaden its leadership in immune-mediated disease and drive growth through expansion into autoantibody-driven disease via a $6.5 billion acquisition of Momenta Pharmaceuticals in August. The transaction includes global rights to nipocalimab, giving Janssen the opportunity to reach patients by pursuing indications across multiple autoimmune diseases. J&J predicts that through multiple launches, many as first-in-class indications, it has the chance of multiple indications exceeding $1 billion in sales in peak years.
Other significant deals during the year include Bayer’s $4 billion acquisition of Asklepios to expand its innovation base in cell and gene therapy, Sanofi strengthening its focus on autoimmune and allergic disease and taking full control of tolebrutinib via the $3.4 billion acquisition of Principia Biopharma, Merck’s $2.75 billion acquisition of VelosBio, and Takeda divesting its Japanese consumer healthcare business to Blackstone-backed Oscar A-co KK for $2.3 billion.
Private equity drives deal making in the UK
As we predicted in this article last year, PE direct investment and PE-backed businesses have been a key driver of M&A in the UK, particularly in the services space.
The year opened with Bridgepoint Capital’s investment in Fishawack Health, the third PE house to back the business’ successful ongoing consolidation of the medical communications sector. Expect to see more acquisitions from Fishawack with Bridgepoint’s assistance. This was closely followed by US PE house CD&R’s investment in UK based Huntsworth. It went onto support Huntsworth’s acquisition of one of the largest independent medical communication agencies in the world – UK based Nucleus Global. Ardian and GHO-backed Envision Pharma Group, a global provider of evidence-based communication services, acquired 90TEN, an independent healthcare communications consultancy, bringing on board its insight-led behavioural science model Feel-Think-Do. GHO went on to acquire Ardian’s stake in Envision for a record-setting sector multiple. Elsewhere in the medical communications sector, Prime Global completed its first acquisition, bringing on board Cambridge Medical Communications.
Before the year closes, we’re likely to see further deals in this space, which is lining up for aggressive consolidation as various PE houses back the sector’s consolidators.
The preclinical contract research organisation (CRO) space has also seen significant activity. The sector is benefiting from the underlying growth in early stage drug development as pharma and biotech clients work hard to replenish record low levels of Phase III assets, as well as a shift in outsourcing from East to West. As demand outstrips supply, high quality service providers are seeing significant growth. This is making investment partners who can support market consolidation and accelerate organic growth increasingly attractive.
The year opened with Charnwood Molecular, a CRO with deep chemistry expertise focusing on synthesis, medicinal chemistry and scale-up research, partnering with Synova Capital. Synova will support the business to invest in the team and infrastructure to scale Charnwood’s core capabilities, as well as broadening its service offering into complementary disciplines. The business will be looking at selective target acquisitions as part of this growth providing further potential for PE-funded deal activity in the sector.
2020 has also seen Sygnature Discovery, an integrated provider of preclinical drug discovery services, complete its second and third acquisitions since taking PE investment from Phoenix Equity partners in 2017. In June, the business acquired Alderley Oncology, a focused in vivo pharmacology provider for cancer drug discovery, strengthening Sygnature’s oncology and immuno-oncology capabilities – part of a continued focus on building deep therapeutic expertise. In September Sygnature closed the acquisition of XenoGesis, the UK’s largest independent laboratory-based CRO specialising in preclinical DMPK, significantly expanding Sygnature’s current capability in the area.
We’re likely to see a number of these trends play out across 2021. PE will continue to be a significant driver of activity, through direct investment and by supporting sector consolidation in key areas. The preclinical CRO, medical communication and CDMO sectors will all fall into this highly sought-after bracket, and with good reason. On the global scale expect to see big pharma deploying its significant cash reserves to replenish dwindling Phase III pipelines.
Tom Cowap is director, corporate finance, at Alantra, for more information visit www.alantra.com