A report that U.K. drugmaker AstraZeneca PLC considered Gilead Sciences Inc. an acquisition target has spurred speculation that M&A activity could be making a comeback in the pharmaceutical sector after a pandemic slowdown.
Although experts disagree about the potential of such a deal, AstraZeneca's reported approach hearkens back to predictions from 2019 that M&A would rise because of attractive valuations and the amount of cash that pharmaceutical companies had in their coffers. With Gilead's market value at just under $97.3 billion, according to S&P Global Market Intelligence data, any takeover of the company would be one of the biggest in the industry's history.
While the coronavirus pandemic has curbed deal-making in 2020, it may also have created opportunities for post-pandemic transactions, PA Consulting's U.S. healthcare strategy lead, Bret Schroeder, said in an interview.
"What we now know after the last six months is there's a lot of change and uncertainty in pharma in terms of supply chains, regulatory approvals, fast-tracking certain drugs over others," Schroeder said. "If I'm a pharma company, I'm looking at this environment and these economics, and I think that those types of conversations, those types of mergers maybe make a lot more sense than they did six months ago."
Companies looking to adapt to the new environment may be willing to take more drastic action than in a more stable market, Schroeder said.
"It may be an easier time to change than in the past," he said.
At the beginning of the year, analysts predicted smaller deals to drive the deal-making in 2020 after two megadeals in 2019: the acquisitions of Celgene by Bristol-Myers Squibb Co. and Allergan by AbbVie Inc.
Whether the pharmaceutical industry is ready to see the next huge acquisition in AstraZeneca and Gilead, or another large combination, depends on the strategic needs of each company, Moody's Senior Vice President and pharmaceutical analyst Michael Levesque told S&P Global Market Intelligence in an interview.
"We believe the drivers of pharmaceutical M&A are still intact and that stems from a desire to bring new growth drivers in-house," Levesque said. "There remains a focus on both internal pipelines supplementing that with business development, which could be anything from collaborations to acquisitions of pipeline-stage companies to larger transactions, which also have the expense reduction part of the rationale."
Levesque said that, during the height of the pandemic in April and May, valuations of potential M&A targets had declined to where selling would not garner a fair price. This could help explain a slowdown in dealmaking during that time.
"There was a lot of distraction that focused on internal operations that likely distracted from M&A, so all of that together did cause this delay," Levesque said.
A few of the industry's biggest players have built up stores of cash that could be used in future acquisitions. Sanofi's divestiture of its stake in Regeneron Pharmaceuticals Inc. and Pfizer Inc.'s raising $4 billion in debt give those drugmakers the fodder for possible M&A.
"A lot of these companies have cash on hand and their balance sheets are very strong," Arthur Wong, a director in Healthcare Corporate Ratings at S&P Global Ratings, said in an interview. "What are these strong balance sheets for if you're not going to deploy them for acquisitions?"
The main driver of M&A in the pharma industry is finding the next phase of growth not just one or two years down the road but longer term, Wong said.
"The best acquisitions these days are ones that get them pipelines, promising prospects or a new technology platform that would allow a company to enter a new space or expand their own technology base for future growth," Wong said. For Gilead and AstraZeneca, a merger would give both companies access to new therapeutic areas and growth opportunities, Wong added.
"Acquisitions like this are more complex and difficult, but at least they are two R&D programs worth merging," Wong said. AstraZeneca has a deep cancer portfolio while Gilead leads the antiviral space and has invested in cell therapy technology.
Drivers of M&A from the year before, including upcoming patent expirations and the likelihood of drug pricing legislation, still point to a need for collaboration and potential mergers.
Deals the size of AstraZeneca-Gilead are not outside the realm of possibility and could be the result of changes brought on by the pandemic, Schroeder said.
"The concept that the whole world is going to change in terms of the drug supply chain and drug manufacturing, my sense is that that in and of itself is a big enough lever to consider some of these larger deals," Schroeder said. "If you've got a company that has a lot of cash on hand and a geographically dispersed footprint, from a regulatory approval perspective, there might be more appetite for those types of things than in the past."
Cash for the deal
Gilead's share price had fallen from a peak in 2015 and only recently outpaced markets with the success of its COVID-19 therapy remdesivir. The company also reported cash and equivalents of $11.6 billion at the end of 2019, according to S&P Global Market Intelligence data.
"Any company with a lot of cash on hand is an interesting acquisition target," Schroeder said. "If I'm the buyer, I'm going to use the cash on hand to finance the purchase, and it also tells you they're well managed and have some good product lines."
Pricing pressures and the need to keep pipelines secure for years to come could likely lead to a post-COVID burst of M&A activity, Wong said.
"M&A has always been an integral part of the pharma industry's growth strategy, and it's become an even more critical part of a company's growth story," Wong said. "Going forward, it's going to increase in importance."
Levesque said that larger deals are more difficult to predict than smaller ones because of the many moving parts involved.
"[Megadeals] are definitely fewer and further between, just given far fewer targets and thinking strategically from a product portfolio and pipeline standpoint — these are more difficult things to come together," Levesque said.
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