Everyone Wants to Be a Biotech Banker Now
(Bloomberg Opinion) -- When snow isn’t on the radar, and then two storms hit in a row, you start to question the forecast. That’s how the market for mergers and acquisitions may feel right now.
M&A is set to slow in 2019, yet early signs are to the contrary. Two multibillion-dollar biotechnology deals have already been announced in the new year, resulting in the busiest start to global dealmaking on record. Eli Lilly & Co. agreed on Monday to buy Loxo Oncology Inc. for about $8 billion, on the heels of Bristol-Myers Squibb Co.’s $74 billion takeover last week of Celgene Inc. In each case the transaction is the acquirer’s largest ever.
But this winter deal flurry may stay confined to biopharma. In particular, megamergers in the $20-billion-and-up range will become less frequent, as I wrote last week. The five-year deal boom is winding down, and now acquirers must try to digest all these deals and pay special care to their bloated balance sheets.
The drug space may be the biggest exception because acquirers’ needs aren’t as cyclical, and the transactions tend to be less about timing the M&A and debt markets and more about seizing an opportunity to gain a specific new drug. In many cases, the buyer has a narrow window to beat rival suitors to winning a medicine that’s been recently approved or may soon be, and which has the potential to generate lots of money — even if it treats only a small group of people that have an uncommon disorder. Loxo has just one drug on the market, which works to shrink cancer tumors in patients who have a rare gene mutation called TRK fusion. It was approved late last year by the U.S. Food and Drug Administration, and in four years the therapy is expected to top $1 billion in annual sales.
The Celgene megadeal may be somewhat of a one-off situation as well. Bristol-Myers pounced as Celgene’s market value slipped to below $50 billion, providing a relatively cheaper way to restock its own dull pipeline, as my colleague Max Nisen explained. A Stifel Nicolaus & Co. analyst, Stephen Willey, called it “more of an idiosyncratic acquisition” in a note to clients. “Our enthusiasm around the overall pace of biotech M&A remains relatively muted,” Willey wrote, but added that Loxo was on his list of top takeover candidates given Big Pharma’s “historical proclivity for paying large sums of money for long-duration oncology assets.”
Takeover valuations broadly have started to come back down to earth after reaching record levels in recent years. But prices for biotech assets tend to remain elevated because of their unique nature and ability to treat diseases that may not yet have alternative therapies. Regardless of overall M&A activity, pharma buyers are willing to pay up for promising new drugs, especially when their own have flopped or are facing competition after a big patent expired. Bloomberg News has a handy list here of drug companies — such as AbbVie Inc., the maker of Humira — that are under pressure to diversify and may turn to dealmaking.
Just don’t look to the drug industry as an M&A bellwether. Megadeals are still losing their potency.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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