The Biotech Buying Bonanza: Why The FTC's Amgen Battle Won't Chill The Spree
Big Pharma has a serious problem and a plan for solving it. What is the problem? The problem? A looming patent expiration date that will bring generic competition to some of the biggest industry moneymakers. What is the solution? The solution?
The U.S. regulatory system could put a kink in this biotech M&A plan. Federal Trade Commission has filed a lawsuit to stop Amgen from acquiring Horizon Therapeutics for $27,8 billion. The lawsuit raised new arguments against mergers that the FTC had routinely approved in the past, when there were no competing drugs on the market.
Analysts believe Amgen (AMGN), will close the Horizon acquisition eventually, but may have to fight a long court battle. Drug companies' plans to avoid revenue losses are at risk as key patents expire, and government pressure on drug prices looms.
Biotech stocks, and the investors who hold them, are also at risk. Many companies are unable to make a profit, and do not have the resources necessary to market their product. They sell out their R&D success to larger companies.
M&A pace is 'Blistering.
By mid-April this year, pharma companies announced $64 billion worth of biotech mergers, including big names such as Pfizer (PFE), Merck (MRK), and others. According to Torreya Investment Bank, now part of Stifel, this puts biotech at a "blistering pace" in terms of M&As by 2023.
As biotech stocks retreated from recent gains, the Amgen-Horizon blockade from Biden's FTC was heard across the industry. Shares of Seagen (SGEN), and Prometheus (RXDX), two takeover targets, fell by 6% and 1% respectively on the day the FTC took action. Investor's Business Daily tracked 197 industries and, as of Thursday, biotech stocks were ranked 11th out of 197 in terms six-month performance.
Some experts do not expect the pace of biotech stock M&A to slow down despite regulators' cold tone.
The macroeconomic climate, politics, drug costs, patent cliffs, and regulatory concerns, are all in constant flux. What remains the same? Biotech and Pharma need each other.
Biotech companies often lead the way in innovation. They lack the commercial strength that pharmaceutical companies bring to the table.
It doesn't change where the pharma industry is going to buy, said Stephen Morehouse. He advises life sciences companies as a partner of PA Consulting. They need to. The industry is a part of the way it works. "There's a lot of innovation happening, and they will either acquire this innovation or look for other opportunities to grow and find more treatments."
Experts say that a number of factors have driven the biotech M&A frenzy, with much of it dating back to the early days of pandemic.
Biotech Stocks: Valuations
Biotech stocks soared in 2020, as the world turned to companies such as Pfizer (MRNA) and Moderna for new vaccine technologies to save the planet. Covid-19 began to decline. The society began to reduce the number of measures taken to combat the virus.
Big Pharma could have waited for clinically promising news before jumping onto the M&A train.
Adam Golden, partner at Freshfields Bruckhaus Deringer, who assists life sciences companies with mergers, licensing agreements and collaborations, said that there had been a "dramatic shift" in valuations. "I think that it took buyers and sellers a bit longer to adjust to the new valuations."
Torreya, a banker, claims that only $127 billion worth of deals were announced in the last year.
Big Pharma has money to spend on M&A
The M&A fund of Big Pharma continues to grow. Experts estimate that the cash reserves of pharma companies are between $1.4 trillion to $1.5 trillion.
Pharmaceutical companies must buy. As patents expire, many pharmaceutical companies, such as Merck, Bristol Myers Squibb, and AbbVie, are faced with current or looming competitors for their most popular blockbuster medications.
Patent expirations will enable generics and biosimilars gain a foothold. In the U.S., biosimilars are now competing with AbbVie Humira for the first. Humira's sales in the U.S. fell 26% during the first quarter. AbbVie claims that the decline was expected and it is managing the erosion very well.
Severine Piot Deval, a fellow in health care at Hedder Research, said that more than 40 percent of the sales of the top 10 pharmaceutical firms are vulnerable to generic competition from now until 2030. She said that Pfizer expects to lose 17 billion dollars in revenue from generics between 2025 and 2030.
Experts say that generics could consume $200 billion to 250 billion dollars in revenue for the pharma industry by 2030.
Motives For Big Pharma
Morehouse, of PA Consulting, told IBD that "Big Pharma has a lot cash and they have some great opportunities to improve their portfolio as the market puts some pressure on valuations."
Companies facing patent cliffs will also likely face price pressure from the Centers for Medicare & Medicaid Services. Medicare officials are expected to begin negotiating prices for the 10 most expensive drugs in 2022, under a law passed in 2022. New prices will be introduced in 2026.
Michael Levesque is an analyst at Moody's Investors Service. He says that drugs from Bristol Pfizer AbbVie Eli Lilly (LLY), Merck Sanofi (SNY), and Novo Nordisk will most likely be included on the list.
What would a rational economic actor, in light of the patent cliffs or Medicare pricing do? Greg Grove is an attorney at the law firm Neal Gerber Eisenberg. Grove helps life sciences companies in their transactions.
Experts say that the best way to invest in promising new companies or drugs is to purchase them.
What Biotech Companies Want from Big Pharma
Pharma has done exactly that.
Manmeet Soni (President of Reata Pharmaceuticals, RETA) estimates that 15 to 20 pharmaceutical firms are interested in buying products. Reata, a biotech company, has a Relative Strength rating of 99. This puts its price performance over the past 12 months in the top 1%.
He claims that the acquisition strategy of Big Pharma has changed in recent years. In 2023, the focus was on small molecules rather than "platform" companies that had a new treatment technology. Small molecule drugs, which are usually pills rather than large biologicals that need to be injected or infused, are more common.
Big Pharma shops for drugs that are ready to be used now. The buyers are not interested in developing drugs that will take time and money. Companies facing patent cliffs or Medicare negotiations will need to find sales material sooner than later.
Matthew Gline, Chief Executive Officer of Roivant Sciences (ROIV), said in an exclusive interview that "it's a good time to have a portfolio of programs at the development stage." Because I believe we are witnessing a return of interest from Big Pharma, at least in late-stage pipeline assets.
Biotech stocks with late-stage assets
This is evident from the M&A transactions announced in this year. Prometheus (ISEE), Iveric Bio(BLU) and Bellus Health are all without approved drugs. They did, however, secure deals after revealing promising results from late-stage tests.
Merck will buy Prometheus, a company that makes drugs for ulcerative colitis. The purchase price is $10.8 billion. Astellas (ALPMY), will pay $5.9billion to purchase Iveric. Iveric may receive its first approval for an eye disease called age-related macula degeneration in August.
GSK is paying $2 billion for Bellus. This treatment, in late-stage research and development, treats chronic cough.
VectivBio's (VECT), which focuses on gastrointestinal diseases, is about to reveal Phase 3 results later this year. Ironwood Pharmaceuticals, which is also focused on gastrointestinal disease, has just agreed to purchase it for $1 billion.
Other Biotech M&A targets
Some of the recent M&A deals have been for biotech companies with assets in commercial stage that could be extended to other patients.
Amgen has bought Horizon and Pfizer has acquired Seagen for $ 43 billion. Sanofi also closed its $ 2.9 billion acquisition of Provention Bio last April.
Horizon's two top drugs - treatments for thyroid eye diseases and gout - brought in $2.68 billion combined in sales in the past year. Seagen produces a range of cancer treatments that are part of the antibody drug conjugate family. Adcentris was its top seller in the last year, bringing in $839 millions. Tzield, the drug that Provention will soon launch, is not yet available. The drug is intended to prevent the onset late-stage diabetes type 1.
The data shows that pharma has focused on companies with commercial assets, or assets that are nearing commercialization, to fill in the gap. This was stated by Matt Hughes, managing partner of the advisory firm Allele Capital Partners.
Are Platform Deals Coming Back?
Not everyone has closed the door to the possibility of M&A platform deals involving biotech stocks. Tim Opler, Torreya's Managing Director, said that a platform deal would be announced soon in a Biotech Hangout held on Twitter Spaces.
He said: "I am going to make an bold prediction." In the next three-months, we'll see a major platform acquisition either of a company that degrades proteins or one that specializes in RNA therapeutics. These two platforms are far too valuable, and there are many others that are equally good.
Protein degradation is a promising technology that could be applied to a large number of patients, similar to some announced M&A transactions. Arvinas and C4 Therapeutics are two publicly traded biotech companies that work in this area. This technology can be applied to many diseases that are caused by abnormal proteins.
Arrowhead Pharmaceuticals and Alnylam Pharmaceuticals are the two biggest players in RNA.
Opler also says that immunology and cardiometabolic segments are very hot, as evidenced by Prometheus' takeover. Oncology has always been a popular area.
Raghav Mittal said that in an email, the assistant director of research firm Acuity knowledge Partners stated that acquisitions by biotech companies working to develop immunology or oncology treatments could range from $5 billion up to $25 billion per company.
What biotech stocks are you buying?
Freshfields' Golden does not expect platform deals to return. He says that pharmaceutical companies are trying to fill in gaps in their pipelines and portfolios. He does, however, expect announced deals to boost biotech stocks that are working on competing products.
Take Apellis Pharma (APLS). After the Astellas/Iveric merger announced on April 30, the biotech stock rose about 5%. Apellis has been working on an eye disease treatment similar to this.
Several pharmaceutical companies announced mergers and acquisitions plans in 2023. Merck stated on its most recent earnings call that it wanted to "pursue" additional science-driven and value-enhancing transactions. Merck is getting ready for patents protecting cancer drug Keytruda, which will expire in 2028.
Bristol Myers wants to "further expand its portfolio and enhance its long-term outlook".
Generic competition is threatening the company's Revlimid, a cancer treatment acquired from Celgene. Revlimid's sales fell 37% in the first quarter to $1.75billion. Eliquis blood thinner, a Pfizer product, will compete with generics by 2028.
GSK hasn't sat back after the Bellus acquisition. Reuters reports that Emma Walmsley, GSK's Chief Executive Officer, said the company planned to replenish its vaccine and therapy pipeline in February.
Pfizer Looks To Add Revenue Via Takeovers
Brad Loncar was recently interviewed by Daniel O'Day, Chief Executive of Gilead Sciences. He said that the company is planning to be a top ten oncology company in 2030. Loncar, the CEO of Loncar Investments, provides indexes to two exchange-traded biotech funds.
Daphne Zohar is the chief executive officer of PureTech Health. Zohar spoke at the same Biotech Hangout as Torreya’s Opler.
Pfizer, which is already a major player in the mergers and purchases market, wants to increase its revenue by $25 billion by 2030. Levesque, an analyst at Moody's, says that it plans to achieve this through acquisitions. Piot Deval of Hedder says Pfizer will need $5 billion in additional acquired revenue for them to reach that goal.
Levesque stated in a report that Bristol, Merck, and Royalty Pharma are the most likely biotech stocks to be acquired this year. AbbVie (BIIB), Biogen (BIIB), Gilead (Pfizer), and Viatris are "moderately" likely to make deals.
Biotech stocks have many drivers.
Grove, an attorney at Neal Gerber Eisenberg acknowledges that buyouts are not without obstacles.
He said, "But I believe the drivers are pushing more than the limiters." He lists Amgen and Horizon as limiters.
It's not the first time that the FTC has objected to a medical merger.
Illumina (ILMN), is trying to purchase its own spin-off Grail. Grail produces a cancer-detection test called Galleri. Illumina, which is the leader in next generation sequencing (a way to read human DNA), is also a leading company. The FTC said that there were reasons to block this deal due to anti-competitive concerns.
The Amgen-Horizon deal raised a new concern. Amgen, according to the agency, could suppress competition in thyroid eye diseases and gout if it bundles Horizon's products together with its top-selling drugs. This would cement the monopoly of the two products. Both companies claim they do not plan to bundle their products.
Will the FTC challenge slow biotech M&As?
Christopher Raymond, an analyst at Piper Sandler, said that the FTC's pushback may have dampened the buyout spree of biotech stocks. The deal was "a slam-dunk" before.
In a client note, he stated that if the reports were true, the FTC was signaling a punitive, arbitrary approach.
Grove, an attorney, suggests that sophisticated buyers might have to reconsider their strategies.
Buyers might ask, "If I can only buy one company, which would you recommend I go for first?" He said that if a buyer is successful in one area and then tries to purchase another that he believes is different, but that the FTC has determined is the same, he might not be able to do so.
Will the motives for buying biotech companies override that? Grove affirms that yes.
He said: "I believe there is such an overwhelming amount of pressure and buying power that this limiter is just noise, not a signal."