Private Equity and Pharma/Biotech Sectors

There has been a recent flurry of M&A activity in the pharmaceutical and biotech industries, including: 

• Danish pharmaceutical company Novo Nordisk bid €2.6 billion for Belgium biotech Ablynx.
• Japan's Takeda Pharmaceutical agreed to acquire TiGenix, also in Belgium, for €520 million. 
• U.S.-based Celgene agreed to buy Impact Biomedicines for $1.1 billion up front and a potential $7 billion in total depending on performance.
  Several analysts predict a robust 2018 year for M&A across the life sciences sector -- what is driving this view? 
• The massive cash balances (estimated at over $500 billion) held by life sciences firms. 
• The reduction in research capabilities by the largest pharma companies, as facilities and talent has been shed over the past few years.
• The overhaul to the U.S. tax code that was signed in December, which will reduce some of the credits for R&D and development of orphan drugs, offset by making the tax on the repatriating cash held overseas more favorable.
• A worn-out biotech IPO market damaged by some recent failures of high-profile drugs like Axovant’s intepirdine program for the treatment of dementia.
• Continued spinouts of new companies with innovative technologies from academia and industry.

The combination of those abovementioned forces will likely encourage biotech and pharma companies to BUY rather than BUILD innovative new treatments over the coming year.   And it is generally believed that the deal sizes will grow.  We continue to see the convergence of technology and life sciences with artificial intelligence and big data outlining significant sources of potential de-risking of assets – and there is huge private equity and venture capital money behind these technologies.  Deals combining AI into health care startups increased 29% year-over-year to hit 88 deals in 2016, and are already on track to reach a six-year-high in 2017, according to industry report CB Insights. The top round so far recently has been a $65 million Series A round raised by AI-based diagnostics startup Freenome in Q1’17, backed by smart money VCs like Data Collective, CRV, and Andreessen Horowitz, as well as corporate investors like GV.

2016 saw two $100 million plus mega-deals, both to health care AI unicorns: Shenzhen-based iCarbonX raised a $154 million Series A from Tencent Holdings and Vcanbio, while New York-based Flatiron raised a $175 million Series C from Casdin Capital and Baillie Gifford, among others. Together these deals accounted for 41% of the total funding in 2016.

If analysts' predictions for a big year in 2018 hold true, there would be a transformation in the decreasing M&A trend-line over the past few years.  In 2015, there was $390 billion in deal value from 432 deals, compared to $300 Billion in deals in 2016, and $180 billion across just 351 deals in 2017, according to a PitchBook report.

Many of the above factors expected to drive M&A were also in place in 2017, and the M&A market declined.  So time will tell.