Six Trends Driving Biotechnology Mergers and Acquisitions According to Yelian Garcia

Yelian Garcia
Jun 7 · 4 min read

The biotech industry has seen its highs and lows in deal making over the last few years. Last year, 622 deals were closed, the second highest number of deals over the last six years. The highest number of deals recorded in this period was in 2015, with 629 deals closed. Already, 2019 is gearing to be a record-breaking year in biotech M&A with the announcement of the Bristol Myers Squibb acquisition of Celgene for around $74 billion.

Over the years, various factors have influenced biotech M&A deals, ranging from advances in biotech to changes in laws. Understanding these factors offers insights into how such deals are struck and what to look for to get ahead of these deals. To bring more insight into these factors, Yelian Garcia, an international finance and global affairs professional, recently took some time to explain six factors that are driving the current wave of biotech M&A deals.

1. Patent Expiry

Major pharmaceutical companies rely on a handful of blockbuster drugs for a sizeable chunk of their revenues. Celgene makes cancer drugs and gets close to two-thirds of its revenue from the blood cancer pill Revlimid alone, which brings in billions of dollars in revenue each year.

According to estimates from Evaluate Pharma, upwards of $215 billion in medication sales could disappear due to patent expirations between 2015 and 2020. As much as $31 billion was at risk in 2018 alone.

As more blockbuster drugs fall off the patent expiration cliff, major pharmaceuticals are looking for new ones. The answer to unlocking new drugs is looking for smaller, more innovative biotech companies and buying them up. As patent expirations accumulate, Yelian Garcia expects to see more biotech M&A deals come to the table.

2. Biotech Valuations

Over the last three years, Yelian Garcia has observed biotech valuations go through the roof. In 2017, fewer deals were done than in any of the three preceding years, yet the total value of deals was $4 billion higher than the second highest year. As valuations cool off, it is now turning into a buyer’s market as major pharmaceuticals come back into the market to do business.

Another aspect to note about valuations is that often, biotech companies are lumped together with the wider life sciences category of companies. As such, when speculation around areas like gene replacement rises, this has a knock-on effect on other companies in the space, even though they may only be working with chemicals for medicinal purposes.

3. Capital Repatriation

In the United States, most major pharmaceuticals preferred to keep profits overseas due to the taxes involved in repatriating the returns. With the United States Tax Cuts and Jobs Act of 2017 coming into force, this is changing. The TCJA effectively cut taxes on repatriated returns from 35 percent to 15.5 percent, making it cheaper for companies to repatriate returns.

With more cash coming in this way, major pharmaceuticals are more willing to make deals on biotech acquisitions. It is also clear that as the Sino-US trade wars continue, US protectionisms is making the US a better investment haven for US-initiated M&A deals because most US companies now feel the US government will do more to protect their interests.

4. Venture Capital

Venture capital is a major factor in the startup ecosystem. In 2018, biotech startups received $17 billion in funding from VC funds. As such, as biotech startups gain prominence, big pharmaceuticals are more frequently finding themselves seated at the table with venture capitalists, competing for biotech M&A deals.

What this means is competition for biotech companies will only increase as both camps seek to close deals albeit for different reasons — VC’s for profitable exits and Big Pharma for valuable drugs to add to their aging collections.

More specifically, says Yelian Garcia, in 2019 expect to see more deals done by biotech-focused VC funds compared to more generalist funds. This trend will only accelerate as corporate VC funds, a type of VC fund where a corporation sets up a semi-independent VC fund supported by the parent company, become more prevalent.

5. FDA Reforms

As innovations in biotech accelerate, the United States Food and Drug Administration has found itself struggling to keep up with applications for new drugs and treatment methods. This bottleneck has severely hampered innovations in the consumer health and wellness sector. Currently, the FDA is making efforts to streamline this process.

In 2018, the FDA approved 59 new drugs through its Center for Drug Evaluation and Research, a major improvement in drug approvals. This increased speed of approval will doubtless have a domino effect as additional innovations come into the pipeline, which could lead to more M&A deals as new drugs become commercialized.

6. Cancer Advances

The field of oncology has seen an awakened interest in M&A deals as major deals have been announced around the sub-sector. Deals like Bristol-Myers/Celgene and Roche/Flatiron Health point to an increasing interest in oncology biotech companies. Credit Suisse sees more oncology deals coming through in 2019 including bids for Clovis Oncology, Incyte, Sarepta Therapeutics, and BioMarin.

Although various combination therapies failed in 2018, major pharmaceuticals still see oncology as a major growth area, especially as the chances of discovery of a breakthrough cancer therapy become more realistic. Such a breakthrough cancer drug would be the world’s first trillion-dollar drug, something that every pharmaceutical is hoping to discover first.

Conclusion

Biotechnology is an interesting field from an investment perspective because of its lottery-type characteristics. With billions of dollars going into R&D each year, it takes only a stroke of luck for a biotech company, whether large or small, to discover a breakthrough billion-dollar drug.

Such discoveries fuel biotech valuations and are often the basis for M&A deals. Understanding the trends discussed above, says Yelian Garcia, should offer some perspective into what fuels biotech M&A deals.

Check out more information on Yelian Garcia.

Yelian Garcia

Written by

Yelian Garcia is an investor, a MBA/CFA candidate, working on his second career in finance. Yelian Garcia helped start insurance brokerage Legal Expense Canada.

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