Will The Pharma Space Witness More Mega-Merger Deals In 2H?

The first half of 2019 saw two mega-merger announcements in the drug and biotech sector. Drug/biotech companies regularly merge with or acquire competitors in mega deals to achieve critical mass both in research and development (R&D) and sales and marketing.

While Bristol-Myers Squibb (NYSE:BMY) offered a whopping sum of $74 billion to buy leading biotech company, Celgene (NASDAQ:CELG) in January, last month, AbbVie (NYSE:ABBV) announced a definitive deal to buy Allergan plc (NYSE:AGN) for $63 billion last month. If successfully closed, these deals will be among the largest acquisitions in recent times.

Bristol-Myers, AbbVie and Allergan all carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, smaller biotech research firms investigating new therapies or interesting pipeline candidates have also attracted the attention of bigger players this year. Oncology and gene therapy have mainly been the focus areas for M&A activity this year.

Relatively smaller acquisition announcements in the oncology market this year included Pfizer’s (NYSE:PFE) offer to buy small cancer drugmaker, Array BioPharma for $12 billion; Lilly’s (NYSE:LLY) purchase of small cancer biotech, Loxo Oncology for $8 billion and Merck’s (NYSE:MRK) acquisition of Immune Design and pending acquisitions of small private cancer biotechs, Peloton Therapeutics and Tilos Therapeutics. In non-oncology deals, Roche is due to acquire Spark Therapeutics for $4.8 billion per a deal announced in February.

There are several reasons for the flurry of M&A announcements this year. Big pharma companies are cash rich, especially after the tax overhaul in 2017, which reduced tax rate. Given that it takes several years and millions of dollars to develop new therapeutics from scratch, large pharmaceutical companies sitting on huge piles of cash may prefer to buy innovative small/mid cap biotech companies to build out their pipelines.

Other than that, sloppy sales of mature drugs due to pricing pressure and generic/biosimilar competition, dwindling in-house pipelines, government scrutiny of drug prices and emergence of big tech firms, most notably Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL), in the healthcare industry are some other factors that fuel the M&A appetite of large drugmakers. Another important factor leading to acquisitions this year is the decline in biotech/pharma valuations toward the end of 2018

The big question now is whether the long-awaited M&A boom of the first half of 2019 will continue in the second half?

Though the spate of M&A activity is expected to continue, a few factors may put brakes on the momentum. If the Trump administration passes a law to bring down the prices of drugs, it may hurt the sector’s sentiment and create an uncertainty around the M&A environment. Meanwhile, big pharma CEOs may consider the failed acquisitions made in previous years, which may deter them from striking future deals.

Meanwhile, macro factors like the trade tensions between the United States and China, and Brexit could slow down M&A deals. Nonetheless, despite the fears, the pace of M&A activity in the pharma sector is expected to be brisk over the rest of this year due to growing availability of capital for biotech/pharma firms and innovation in the sector.

However, it should be kept in mind that 2018 had also began with a bang with expectations of record-breaking activity in the year. However, the number of mergers and acquisitions dwindled after the first few months, probably because potential acquisition targets demanded a premium. A repetition of the scenario cannot be ruled out.

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