Health Titans Converge on San Francisco With DNA and Deals on Tap

(Bloomberg) -- Genetically modified babies. Drug store chains buying insurers. DNA companies solving crimes.

Health care is evolving at a breakneck pace. New technologies are putting more power directly into the hands of consumers and patients. Mergers and acquisitions are changing the way American consumers use and pay for health care. And with costs spiraling, those footing the bill are increasingly looking toward tech to help disrupt an ecosystem that has long benefited from a lack of transparency.

That rapidly changing landscape and its myriad challenges will form the backdrop as leaders of the world’s biggest health-care companies gather in San Francisco next week for the annual J.P. Morgan Healthcare Conference.

Merger Aftershocks

Bristol-Myers Squibb’s $74 billion play for Celgene Corp. -- the biggest pharma deal ever -- kicked 2019 off on a surprisingly positive note just as dealmakers were starting to fret that equity market volatility would slow mergers and acquisitions this year.

Dealmakers said the transaction showed that companies will keep buying, and that equity and financing market troubles won’t completely offset the fundamental factors propelling M&A.

“The combination of a focus on growth, robust corporate balance sheets post-tax reform, the valuation environment and the specter of rising rates on the horizon should lead to healthy M&A activity across health care in 2019,” said Philippe McAuliffe, health-care M&A partner at Perella Weinberg Partners.

Some of the biotech companies that analysts and investors expect could make an M&A splash in 2019 include Humira maker AbbVie Inc., which probably has to diversify as copycats of its blockbuster become more of a reality; Gilead Sciences Inc., which needs to expand its cancer footprint; and Amgen Inc., which has one of the industry’s biggest war chests -- almost $30 billion in cash and equivalents at the end of September.

Still, bankers are predicting a slightly slower year for deals overall in 2019, as companies grapple with trade disputes and rising geopolitical tensions. It’s “very difficult for a board of directors to strike a deal when your share price and the target’s share price are moving dramatically,” said Jim Forbes, vice chairman at UBS Group AG.

Fluctuations in debt markets could make it difficult for private equity buyers to come up with the funding needed to buy more levered companies in the sector, he said.

In 2019, Americans will also begin to see the consequences of two big mergers: CVS Health Corp.’s combination with insurer Aetna Inc., and Cigna Corp.’s acquisition of pharmacy-benefits manager Express Scripts Holding Co. The promise of those deals is that they will consolidate and simplify a convoluted drug supply chain. In the case of CVS-Aetna, the insurance business could attempt to steer patients to CVS’s retail clinics instead of more expensive settings.

The China Effect

China has long been considered a potential competitor to the U.S. in biotech, but its promise has yet to be fully realized. That may be changing.

One of the biggest surprises of 2018 came from a Chinese scientist who claimed to have tweaked the DNA of the embryos of twin girls, in an effort to prevent the transmission of HIV from their father. The scientist is said to have used Crispr, the buzzy gene-editing technology. The move was widely criticized by the scientific and health-care communities as an irresponsible use of an unproven technology.

But the announcement is likely to add to anxiety that scientists in China are pushing forward with biotechnological innovation at a rate faster than anyone had anticipated -- or is comfortable with.

In the less-headline-grabbing world of generic drugs, big players are increasingly worried about the competitive threat of China’s generic drugmakers. The off-patent drugs are commodity products, and they may be getting a boost from an approval-happy U.S. Food and Drug Administration, which is trying to get more lower-priced generics into the market.

China’s Crispr babies weren’t the only DNA headline captivating the public in 2018. It was the year that consumer DNA testing began to show promise -- and peril. Genealogy companies including 23andMe and Ancestry Inc. have sold well over 15 million at-home DNA testing kits. For 23andMe, all that data has led to lucrative partnerships, including a $300 million investment from GlaxoSmithKline Plc.

DNA data also led to some surprising uses, like hunting for serial killers in open-source databases. In April, police arrested a 72-year-old former police officer suspected of being California’s notorious Golden State Killer. Authorities used genealogical websites to identify the suspect’s relatives, which led to the apprehension.

In 2019, expect the prices of DNA testing to continue to drop as technologies improve, which will likely spur increasingly creative uses of it and debates about whether all that data is helpful or harmful.

High-Flying Pharma

Pharmaceutical companies, usually considered dependable investments rather than high-flying stocks, wildly outperformed the Dow Jones Industrial Average in 2018. Two of the biggest gainers were a pair of pharma giants: Merck & Co. (up 36 percent) and Pfizer Inc. (up 21 percent). The Dow fell 5.6 percent, the biggest annual drop in a decade.

Will it be possible sustain that momentum in the new year? Merck has benefited from the success of its top cancer drug, Keytruda, but investors will be looking for new growth drivers. Merck stopped developing an experimental osteoporosis drug and scrapped a study of an Alzheimer’s therapy over the past three years, while it continued to build up an expansive development program around Keytruda.

Chief Executive Officer Ken Frazier, who agreed to stay in his job despite approaching the company’s mandatory retirement age, will be under pressure to rebuild the pipeline, be it through deals or partnerships. In the company’s most recent earnings call, he touted vaccines and animal health as alternate drivers of growth.

For Pfizer, 2019 is the year it says goodbye to exclusivity for pain blockbuster Lyrica, which is projected to pull in $4.9 billion in sales in 2018, but just $1.35 billion in 2020, according to analysts polled by Bloomberg. The drugmaker has done a good job of building up its stable of potential new drugs, Gabelli Funds portfolio manager Jeff Jonas said. His firm owns less than 1 percent of Pfizer and Merck shares. “Pfizer has really been able to build a really solid cancer portfolio,” he said.

Spokesman Steve Danehy said Pfizer is prepared for Lyrica’s patent to expire and continues to foresee growth “with a wide range of opportunities to grow our core brands and deliver on our strong, deep R&D pipeline.”

Pharma companies based in Europe and the U.K. also confront a year of change. GlaxoSmithKline reached a pact to buy the U.S. cancer-drug maker Tesaro Inc. for $5.1 billion late last year, as Chief Executive Officer Emma Walmsley works to revamp the company’s pipeline. The drugmaker also combined its consumer health business with Pfizer’s. Now Walmsley has to show she can deliver on a pharma-focused approach.

The combined entity of Bristol-Myers and Celgene will probably overtake Swiss pharmaceutical giant Roche Holding AG in 2020 with about $29 billion in oncology sales, according to Bloomberg Intelligence. Analysts expect Roche’s cancer sales to slip to about $25 billion by then, based on estimates compiled by BI. Roche increasingly faces competition for its three biggest blockbuster cancer drugs.

©2019 Bloomberg L.P.