Biotech M&A Off To A Strong Start In 2018: More Deals To Follow?

We have completed just three weeks in 2018 and the biotech sector is already seeing a significant pickup in merger and acquisition (M&A) deals. The year started off with Celgene Corporation CELG announcing its intention to acquire Impact Biomedicines.

Soon thereafter, Novo Nordisk NVO confirmed that it is looking to acquire Belgium-based biopharma company Ablynx. Novo Nordisk had initially proposed to acquire Ablynx for €26.75 per share in cash. However, the company came back with a revised offer when Ablynx rejected the first proposal. Novo Nordisk's latest offer includes an upfront cash payment of €28 per share plus a contingent value right ("CVR") worth up to €2.50 per share (total equity valuation of approximately €2.6 billion). This offer, too, has been rejected by Ablynx with the company's Board announcing that the proposal fundamentally undervalues Ablynx and its growth prospects.

Last week, Celgene was once again in the news on rumors that it is looking to acquire immuno-oncology focused Juno Therapeutics JUNO. Yesterday, the rumors were confirmed with the company saying that it will be acquiring Juno for approximately $9 billion. Another acquisition announcement was made yesterday – French pharma giant Sanofi SNY said that it will be buying biopharma company Bioverativ for $11.6 billion. While Celgene is looking to strengthen its presence in the cancer space with the Impact and Juno acquisitions, Sanofi is looking to expand its presence in specialty care and strengthen its leadership in rare diseases through the Bioverativ acquisition.

More M&A Deals to Follow?

With these announcements being made, expectations are pretty high for more such deals in 2018. In fact, last week Acorda Therapeutics's shares were up on rumors that Biogen BIIB is interested in acquiring the company.

Factors like growing biosimilar competition, slowdown in growth of legacy products, major pipeline setbacks, looming patent expiries, pricing challenges and growing competition have forced big players to seek deals and acquisitions to grow their pipelines and boost their revenue stream.

With tax reform expected to lead to an increase in cash repatriation, 2018 seems set for more M&A announcements. Companies like Pfizer, Amgen AMGN, Biogen, Merck, Johnson & Johnson and Gilead are expected to be on the lookout for suitable deals this year. At the end of the third quarter of 2017, Gilead (which had acquired Kite for approximately $11.9 billion in 2017) had a cash and equivalents balance of $41.4 billion including $32.4 billion of overseas cash. Amgen's cash balance was also $41.4 billion as of Sep 30, 2017 with about $38.9 billion being held overseas. Meanwhile, Merck exited the third quarter of 2017 with cash and equivalents worth $23.4 billion of which about 80%-90% is held overseas. Bristol-Myers Squibb's overseas cash holdings were approximately $9.4 billion at the end of the third quarter. Biogen's overseas cash balance was approximately $4.4 billion at the end of the third quarter of 2017. While some of this cash is likely to be used for share buybacks and dividend payments, these companies are also expected to use the funds for acquisition deals.  

Most of these companies are on the lookout for assets and technologies that are potentially transformational and/or address unmet needs. Immuno-oncology is currently very much in demand though companies are also focusing on rare disease and orphan disease areas. While valuations look high for cancer-focused companies especially ones involved in immuno-oncology, valuations appear to be more reasonable for specialty pharma companies and companies that are focused on central nervous system diseases and other such areas.

Although many of the large-cap players have expressed an interest in pursuing M&A deals, they have also pointed out that the deals should make sense from a financial perspective. High valuations and bidding wars could keep some of the key players on the sidelines.

Companies like AveXis, bluebird, BioMarin, Puma Biotechnology, Incyte, and Exelixis EXEL are often considered acquisition targets. Exelixis is a Zacks Rank #1 (Strong Buy) stock - you can see the complete list of today's Zacks #1 Rank stocks here.

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