Global Pharma, Medical and Biotechnology (PMB) M&A has totalled US$207.6 bn across 1,040 deals so far this year, falling 9.9% in value with 106 fewer deals compared to that seen during the same period last year. The sector continues to push towards the higher levels seen in the past three years as companies remain on the lookout for cost reduction and digital transformation in spite of uncertainty such as the potential repeal of Obamacare, also known as ACA.
Yet despite the slight dip in activity, the sector still commands a healthy 9.4% market share of global M&A values. Aligned with slipping values and deal count, last quarter’s market share contribution was the sector’s lowest of the year, with 305 deals worth a combined US$42.9 bn - the lowest quarterly value since Q3 2014 (US$46.3bn).
Gilead’s US$10.2bn takeover of Kite Pharma was the largest deal of the quarter. Its CAR-T treatment, Axi-cel, is expected to be approved in the US this quarter. Given that Gilead would be the only manufacturer of the complex treatment, it could hold a similar pricing power that it found itself having after its US$ 11bn acquisition of Pharmas set five years ago when it came into possession of Hepatitis C drug, Solvadi, This deal consequently boosted revenues and market capitalisation ultimately justifying the pricey takeover.
The Gilead/Kite Pharma tie-up boosted the Biotech sub-sector. already surpassing all annual values on Merger market record (since 2001), with 132 deals totalling US$66.4bn. This represents a 21.2% increase over 2009’s full year record value of US$54.8bn (86 deals)
Even without the inclusion of the US$29.6bn Q1 mega deal which saw Johnson & Johnson acquire Actelion, the sector still increased 34.9% in value compared to 2016 full year (178 deals, US$27.3bn) while recording a sixth consecutive YTD increase in deal count stretching back from 69 deals in 2012 to 131 last year.
Deal makers are paying sky-high premiums for biotech companies, based on one month before announcement - 54% - versus a five-year average of 45%. This year’s figure compares to a 43.8% premium in Medical in YTD 2017, and 21.3% in Pharma. The Pharma and Medical subsectors both dropped compared to the same period last year with a value down 53% to US$49.4bn and 12.6% to US$91.8bn respectively, across a total of 219 and 689 deals. Of the PMB sector’s total 1,040 transactions this year, 625 deals worth US$96.7bn were domestic - down 23.1% from the same period last year - while cross-border values swelled 6.3% with 13 fewer deals over the same period to 415 worth US$110.9bn.
On a YTD basis, US market share by deal count has seen its third consecutive decrease to 37.1% this year. As the country sees continued uncertainty as the potential repeal of ACA drags, the market share has dropped from a five year YTD average of 40.5%.
Elsewhere, 35.6% of deals were aimed at European entities and 15.9% was made up of Asian-Pacific targets, representing the lowest YTD deal count in both Europe and Asia since 2014.
Private equity firms have been increasingly active in the PMB sector with buyouts reaching their highest value since 2007 full year (212 buyouts, US$58.3bn) with 225 deals taking place worth US$46.5bn so far this year While each sub-sector experienced a rise in both value and deal count compared to YTD 2016, the most targeted was medical with 157 deals worth an aggregate value of US$17bn. The increase across PMB was mainly boosted by 11 deals worth over US$1bn for an aggregate value of US$32.7bn, contributing to about 17.9% of the total YTD M&A value in PMB.
Global PMB M&A activity is expected to continue growing as the industry goes through substantial transformations in the following years. Experts expect to see a shift from a fee- for-service care model to a more outcome- based care model and more partnerships and mergers with non-traditional competitors. This will drive the industry towards a more personalised care model by leveraging their technology and providing future healthcare payers with more ‘intelligent information’ and efficient services and treatments.
Advisors
Aligned with the global ranking across all sectors, Goldman Sachs & Co topped the financial advisor league table by value, moving up three places compared to the same period last year, after advising on 23 transactions worth US$71.4bn this year. With a value 22.7% up from YTD 2016, the advisory firm has been seen in many PMB deals where a private equity firm was involved. This quarter, Goldman Sachs advised Air Medical Group, a portfolio company of Kohlberg Kravis Roberts & Co since 2015, on its US$2.4bn bid for American Medical Response.
Meanwhile JPMorgan took the lead of the ranking by deal count, with a stable number of transactions from last year same period, advising on 27 deals worth US$44bn.
In terms of legal advisors, Skadden Arps Slate Meagher & Flom took the crown by value reaching US$70.8bn across 18 deals. The firm’s value was boosted after advising Gilead on their US$10.2bn takeover of Kite Pharma in late August. Regarding the number of transactions advised this year, Kirkland & Ellis made it to the top with eleven deals more than last year for a total of 38 deals worth US$23.8bn, including the US$5.9bn bid for Stada by Bain and Cinven in July.
Innovation in data and artificial intelligence–driven models of care will spur M&A across PMB, especially where it enables tailored and more efficient approaches to the delivery of care. Nabil Manzoor, Managing Director at Berkeley Research Group said that “in the next 10 years or so, millennials are likely to be moving into the next stage of their life changing events such as parenting and will require health and well-being services which are precise, personalised and available instantly”. He went on to add that these millennials “will be looking out for physicians or surgeons or whoever is the care provider, who know how to leverage technology-based healthcare solutions to provide highly precise and personalised healthcare.”
He added that “there is an emerging recognition that care outcomes need to be linked to human feelings and emotions, and healthcare providers will have to make use of insights from social platforms and integrate these into their operational intelligence in order to capture those emotions and consequently be able to provide a more personalised and efficient treatment to the patient” he added. Manzoor further explained that “whilst these trends clearly require a significant leap for most healthcare systems, progress is being made”. He continued to say that more recently, for example there has been an emergence of “application of data sciences and applied analytics in hospitals to optimise their operation in terms of quality, safety and from the cost perspective as well”.
On the other hand, pricing pressure is expected to continue rising in the US after the Senate’s “inaction” in September to repeal the ACA. Following three attempts this year to do so, odds are not in favour of the new administration and Congress. Additional efforts likely would be regarded as purely political strategies as the House and Senate seats elections take place in November 2018. The existing system will remain in place and, although it may experience small shifts like less funding to hospitals or home care services, government spending for the healthcare should be business as usual.
(Courtesy :Mergermarket's Global Pharma, Medical & Biotech trend report for Q3 2017)