While certain sectors experienced a shaky 2016 with respect to M&A activity, deal activity in the pharmaceutical and biotechnology industries held steady following record levels in 2015 and is expected to perform equally as well in 2017. In Prognosis positive: Pharma and biotech M&A outlook, a recent report by Mergermarket (the Report) on these industries, four experienced dealmakers outlined some of the key factors driving the optimistic outlook for the upcoming year and highlighted some of the deal trends that have emerged over the past few years in these industries.

Replacing declining revenues

According to the Report, the declining revenue levels of larger firms in the pharma market (largely brought about by the pricing practices and pressures of Medicare and other third-party providers as well as the expiration of patents of widely-used therapies and drugs) have resulted in a continual search by these companies for new and additional revenue streams. As most of these corporations tend to be highly capitalized with substantial amounts of cash on their balance sheets, they are often in a position to boost growth and revenues inorganically by acquiring and consolidating with smaller players in the market rather than fostering growth organically (and at a slower pace) through the implementation of in-house strategies. Additionally, there is a possibility that the new Trump administration may enact tax reform that permits the repatriation of overseas profits which would increase the funds available to pharma firms to pursue additional acquisitions. With an estimated US$98 billion in offshore cash held by global biopharma companies, such tax reform has the potential to have a significant impact on the number of deals pursued by these firms.

Another key to understanding the strong levels of deal activity in this sector is that irrespective of the performance of the economy as a whole, there is a critical and persistent demand for new drugs and therapies to treat illnesses and diseases. The demographics of North America, and the aging population in particular, will continue to fuel this high level of demand and, in the process, increase M&A levels among biopharma companies.

Continued focus on early-stage development companies

The Report also highlighted a recent shift in focus by acquirers to early stage companies. Approximately 19% of deals in 2016 involved companies with lead assets that had already received approval as compared to 49% five years earlier. Factors motivating firms to seek out acquisition opportunities with smaller, early stage players may be to ensure that there is less competition among bidders, lower valuations of the target (as compared to companies with advanced and well developed products), and the desire by the larger pharma companies to offer multiple drugs or treatment options for the same diseases. Smaller, early stage companies may also seek and encourage such buyers as part of a carefully planned exit strategy where their focus remains on developing products to a certain stage before selling it to an experienced player in the industry in order to avoid the difficult and costly exercise of building the infrastructure that is necessary to commercialize and market drugs and treatment therapies. This has led to a rising number of “option-to-acquire” deals between experienced pharma companies and early stage companies where the interested party purchases an option to acquire the target that is triggered upon the achievement of certain milestones by the early stage company.

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