2019 was a banner year for billion-dollar life sciences M&A transactions. A wave of big-ticket transactions by global pharmaceutical companies drove life sciences M&A activity to its fourth-largest year on record in 2019, with aggregate deal value in the pharmaceutical, medical and biotech industry reaching $234.2 billion – almost double the value of deals announced in that same sector in 2018, despite the number of deals decreasing from 705 in 2018 to 519 in 2019. And, in general, we saw large pharmaceutical companies deploy substantial amounts of capital in 2019 to acquire innovative biotech companies that are advancing the development of novel therapies for oncology, orphan diseases and other unmet medical needs.
Year of the Life Sciences Mega-Deals
M&A transactions with eye-popping price tags solidified 2019 as the year of life sciences mega-deals, which included Bristol-Meyer Squibb's $74 billion acquisition of Celgene; AbbVie's pending $63 billion acquisition of Allergan; Takeda Pharmaceutical's $62 billion acquisition of Shire; Pfizer's $12 billion sale of its off-patent business to Mylan and $10 billion acquisition of Array BioPharma; Eli Lilly's $7 billion acquisition of Loxo Oncology; and Novartis' $6.7 billion acquisition of The Medicines Company. In fact, the Bristol-Meyer Squibb-Celgene transaction was the largest pharmaceutical M&A transaction (based on deal value) on record. Other notable deals that passed the $1 billion mark in 2019 included Vitrolife's acquisition of Parallabs for £1.9 billion; Audentes Therapeutics' sale to Astellas for $3 billion; Ra Pharmaceuticals' pending sale to UCB for $2.5 billion; and Synthorx's sale to Sanofi $2.5 billion. Whether the wave of mega-deals will continue remains to be seen. The general strength of the capital markets throughout 2019 provided biotech and pharmaceutical companies with access to capital and an ability to add cash to balance sheets to fund clinical development over a longer period of time, as well as alternative paths forward if the premium offered by the potential acquirer did not fully recognize the value of their assets. If, however, capital markets and the economy weaken in 2020, M&A transactions may be the only viable option for life sciences companies to access capital, in which case we would expect to see more M&A transactions by number, but they would likely be paired with lower purchase prices and/or more highly structured.
The Art of the Life Sciences Deal
In contrast to more traditional M&A transactions, life sciences provides fertile ground for dealmakers to use creative deal structures. Acquisitions of private life sciences companies continue to be regularly structured as transactions where only a portion of the potential purchase price is paid upfront and the balance is paid through milestone payments that, depending on the stage of development, may be based on regulatory events, frequently including receipt of marketing approval and/or commercial milestones. As we noted in our blog post earlier this year – Use of Earn-Outs to 'Bridge' the Valuation Gap – using post-closing purchase price adjustments or arrangements, such as milestone payments, to bridge valuation gaps may simply create additional valuation disputes down the line. In fact, of the deals surveyed in the 2019 SRS Acquiom Life Sciences M&A Study, only one-third of milestone events due by mid-2019 in private life sciences companies acquisitions were actually achieved and paid out and just under a third of deals with milestones will have some dispute regarding these post-closing payments. That said, these structures are often the lynchpin that hold a deal together and cannot be simply dismissed because of the specter of post-closing disputes if there are greater risks in not doing a deal at all. Also, as an added advantage in the public company context, milestone payments, or contingent value rights, may be structured as a contractual right rather than a security requiring registration with the SEC, allowing such deals to be completed on faster timelines than deals that require the registration. Consistent with past years in the public company context, a number of public life sciences deals in 2019 employed earn-out arrangements (typically in the form of a contingent value right or milestone payment) more frequently than in other industries, including in Sobi's $835 million acquisition of Dova Pharmaceuticals.
For earlier-stage target companies that may lack adequate proof of concept, potential buyers continue to use collaborations combined with options to acquire. For example, in 2019, Genentech and Convelo Therapeutics entered into a structured acquisition deal to implement a strategic partnership and exclusive collaboration. Under the terms of the agreement, Convelo will receive an upfront payment, as well as research support from Genentech for the development of new therapies for multiple sclerosis and other myelin disorders and, in return, Genentech will retain an exclusive option to acquire Convelo at a fixed purchase price in the future. Using this kind of flexible option structure can help biotech and pharmaceutical companies structure around the risk of failure of a clinical or product candidate while allowing the target company to obtain much needed capital. Unlike other sectors, the life sciences sector remains ripe for these type of post-closing purchase price adjustments or arrangements because there are more discernable regulatory hurdles and outcomes that dealmakers can use to structure the contingent portion of the deal.
Shareholder Activism—Failed Clinical Trials
A notable trend in the shareholder activism space has been the attempt by certain activist investors to acquire a position, or leverage their existing position, in biopharmaceutical companies that have announced a failed drug trial or other serious adverse regulatory event – and then push for an immediate liquidation of the company or a seat at the table (by way of a board seat) to determine whether the company uses the remaining cash on its balance sheet to focus on its remaining internal pipeline (if any) or seeks new drug assets through an M&A transaction (and provide an opinion or recommendation on the assets it should purchase). Because the public trading price of such companies often trade below the cash value of the company, these activists are, in instances where the company has enough cash on its balance sheet where a liquidation is deemed viable, hoping to make a quick profit by forcing these companies to return any excess capital to shareholders immediately. In our experience, however, activists employing this tactic underestimate the time it takes and the costs involved in winding down a public company, including its clinical trials, which, in part, explains why the share price may trade below the cash balance position (well, at least to those of us who still adhere to a semi-efficient theory of markets) and why more publicly traded life science companies are not liquidated. Because activists continue to screen for these opportunities and because the tactics the activists use in these scenarios are low cost (public letter writing), we do not expect this trend to abate any time soon.
Changes in CFIUS Oversight
The Committee on Foreign Investment in the United States (CFIUS) reform legislation passed into law in 2018 reflects in part a heightened concern regarding foreign access to, among other things, sensitive personal data of US citizens and certain technology, including certain chemicals, pathogens or toxins used in the biotech and pharmaceutical industry. 2019 saw several high-profile enforcement actions by CFIUS, including an action requiring Shenzhen-based iCarbonX to divest its majority stake interest in PatientsLikeMe, an online community for patients seeking treatments for common diseases. In that case, the central issue was foreign access to sensitive data of US citizens, which may serve as a canary in the coal mine to life sciences companies that maintain or collect genetic or other identifiable information of US citizens. Because many foreign global biotech and pharmaceutical companies are serial buyers in the US life sciences sector, careful attention will need to be paid to the type of data collected and the types of inputs used in drug development to assess the potential CFIUS risk and potential filing obligations in proposed M&A transactions.
Trends in Antitrust Enforcement
Life sciences companies remain at the forefront of the FTC's enforcement agenda, with the agency focused on threats to current competition and, increasingly, harm to potential future competition – so-called killer acquisitions. In one example, the FTC sued to block Illumina's $1.2 billion acquisition of Pacific Biosciences, where Illumina was alleged to be the dominant supplier and Pacific Biosciences an increasingly close competitor. The FTC argued that the transaction would "eliminate a nascent competitive threat to maintain Illumina's monopoly." In another closely watched case, the FTC conducted a 10-month investigation into whether Roche's acquisition of Spark Therapeutics would reduce competition in treatments for hemophilia A. Specifically, Roche markets a hemophilia A treatment called Hemlibra, while Spark Therapeutics has a novel gene therapy in early-stage development that has potential to cure hemophilia A. The FTC devoted significant resources to investigate whether Roche would continue to be incentivized to bring Spark Therapeutics' gene therapy to market or instead would discontinue or delay its development to prevent competition with Hemlibra. The FTC ultimately voted 5-0 to clear the acquisition, but emphasized it would "continue to closely scrutinize acquisitions by incumbents of emerging competitors" and "not hesitate to bring enforcement actions against them where the facts support such action." The FTC also assessed potential competition issues in Bristol-Meyer Squibb's $74 billion Celgene acquisition, where Celgene was required to divest its marketed psoriasis product Otezla prior to the consummation of the transaction after the FTC alleged that Bristol-Meyer Squibb was developing a product that "will likely be the next entrant into the market and would compete directly with Otezla." Notably, even with the divestiture, the vote to clear the transaction was not unanimous. The two dissenters called for more aggressive enforcement, questioning whether the traditional approach in pharmaceutical transactions of focusing on product overlaps sufficiently addresses the "full scope of potential harms."
Looking Ahead to 2020
While the global economy may be preparing to react to upcoming geopolitical events like the US presidential election and Brexit climax, as well as increased regulatory scrutiny in the US, M&A is likely to remain a top strategic priority in the life sciences industry, where nearly two-thirds of executives report that their company intends to actively pursue M&A in 2020. Industry confidence, as well as recent deal trends discussed in this article, suggest that deal making will continue to be a dominant objective for growth among life sciences companies in 2020.
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