16 October 2019
Biopharma deals have really taken off recently, featuring such megamergers as those between Takeda and Shire, Bristol-Myers Squibb and Celgene, and AbbVie and Allergan. But these humongous transactions aren’t necessarily healthy for short-term shareholder returns, one group of analysts has found.
All told, the 20 largest-cap biopharma companies have pulled off or committed about $738 billion in M&A in the past decade, with nearly half in just the last 20 months, thanks to those three high-profile ones contributing over one-third.
However, compared with smaller deals, those with values of over $50 billion—counting net debt—could be more destructive to the acquirers’ share prices, while purchases in oncology or hematology offered the most positive returns, an SVB Leerink report led by analyst Geoffrey Porges has shown.
Still, Porges argues these megadeals, though they have their risks, are easy to justify financially, what with significant added revenues for at least two to three years. But investors seem concerned.
Among more than 160 biopharma M&A transactions that were made public since 2009, those worth more than $50 billion saw the acquirers’ share price drop more than 15% on average three months after the deal announcement. By that same three-month mark, mean and median share prices among companies who made smaller deals had increased.
In these humongous transactions, Porges noticed the premium companies are willing to pay for target buys matches up with the amount they intend to wring out in cost cuts. That keeps the deals relatively manageable, “provided the acquirer can both extract the synergies and maintain the revenue momentum of the target company’s products,” he said in the first part of the report, sent to clients in September.
Is there a magic number at which a deal could almost guarantee a positive near-term stock return? That appears to be 50% of the acquirer’s enterprise value. When a deal’s total value came in below that threshold, chances were high that the return would turn positive by day 90, the report showed.
Three companies emerged as winners when it came to delivering the best post-transaction share price performance: Bayer, Gilead Sciences and Eli Lilly. The trio's stocks grew 2% to 5% on average over the 10 days after deal announcements.
But SVB Leerink's analysis only included biopharma targets—excluding those in agriculture, animal health and consumer health—so it left out Bayer’s disastrous $63 billion Monsanto takeover.
The German conglomerate recently said it would pay $240 million upfront and up to $360 million in milestones to completely buy out its cell therapy joint venture, BlueRock Therapeutics. The company’s stock, which has been suffering greatly due to the avalanche of lawsuits that claim Monsanto’s Roundup weedkiller caused cancer, immediately rallied at the news.
Gilead had a good run with the hepatitis C drugs it got through the $11.2 billion buyout of Pharmasset in 2011. But as competition mounted and its patient base shrank, the Big Biotech’s stock quickly spiraled downward around 2016 and 2017 until the big leap into oncology with its $11.9 billion deal for CAR-T specialist Kite Pharma offered a strong lift.
Lilly’s two back-to-back oncology deals in May 2018, the $1.6 billion it paid to acquire Armo Biosciences and an up-to-$575 million deal for Aurka Pharma—as well as its $8 billion Loxo Oncology deal earlier this year—all received positive responses from investors.
No thanks to their megamergers, AbbVie and Takeda landed as the worst deal performers 10 days post-transaction announcement. Over a 30- and 90-day period, the title belonged to Pfizer, according to the SVB Leerink tally.
What’s more, the team found investors also tended to react more positively to consolidating deals in areas where the acquirer was already active versus diversifying ones outside of a company’s core business.
Meanwhile, after looking at 48 important transactions with equity/cash considerations or upfront payments greater than $1 billion, Porges picked 15 that he could already rule successful, involving products that either had succeeded or generated sufficient revenues to justify the deal price. Among those, 11 (70%) were acquisitions of companies that had lead assets in oncology or hematology areas.
The gold projects Porges noted include Bristol’s $2.1 billion for Medarex in 2009, which helped bring in Opdivo and Yervoy and established Bristol as a leader in immuno-oncology. Also in the group were AstraZeneca’s 2015 deal for Calquence developer Acerta, even though that BTK inhibitor had an early data falsification scare; Amgen’s $10.4 billion Onyx buyout that gave it Kyprolis, along with royalties on Pfizer blockbuster Ibrance; and Roche’s $1.7 billion acquisition of Ignyta and its recently approved targeted cancer drug Rozlytrek.
But not all oncology cash burn turned out to be worth it. AbbVie’s $9.8 billion bet on cancer with Stemcentrx in 2016 was dealt a huge blow when candidate Rova-T disappointed again and again.Print
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