Lightning bolt-ons and partnerships drive 2021 life sciences M&A

26 February 2021 - 02:02 pm UTC

by Yiqin Shen in New York and Sydney Halleman in Charlottesville, with analytics by Melody Ren  

  • Big pharma's search for innovative assets spurs bolt-on deals
  • Flexible deal structures used to mitigate R&D risks
  • Partnership deals establish paths to buyouts
 

 

M&A in the life sciences is likely to remain busy with a spree of bolt-on acquisitions and strategic partnerships in a few hot areas, according to sector advisors. While the coronavirus pandemic halted clinical trials briefly in 2020, areas including mRNA, antibody drug conjugates (ADC) and cell and gene therapies could see a surge in deal activity.    

 

Last year, at least 273 biotechnology and pharmaceutical-related M&A transactions were announced, with a total value of USD 143.2bn, according to Mergermarket data. The value of 2020 life sciences M&A deals dropped more than 35% from USD 224.5bn in 2019, but the level of activity, both by value and count, is significantly higher than in 2017 and 2018, the data shows.  

 

  

 

Big pharma’s bolt-on craze   

 

Big pharma companies will continue to be major acquirers in the space, said Peter Behner, Global Life Sciences Transactions leader at EY. Smaller, bolt-on transactions had been their main focus last year, and this trend is likely to remain in 2021 as life science deal activity begins to rebound, he said.

 

One of the key drivers for bolt-on deals is the established companies’ continuous search for innovative assets, Behner said. He noted an increasing share of big pharma’s revenue has come from externally acquired products over the past 20 years, now close to 70% of their total sales on average.

 

“Big pharma essentially is a huge oven that constantly burns IP; you constantly have to throw new IPs in, because at the tail end, you know your products would lose patent protection and you need new drugs, otherwise, you can’t grow,” he said.

 

Kristin Pothier, Global and National Healthcare and Life Sciences Strategy Leader at KPMG, echoed that bio pharma companies are hunting for innovation. On the other hand, “the science in the clinical world is ready (for deals) -- we have the appropriate platforms and pipelines in the market,” she said.   

 

Additionally, a symbiotic relationship exists between big pharma and young discovery companies, Behner said.

 

Innovative biopharmaceutical companies have generally weaker areas of later-stage clinical development, manufacturing, and commercialization, which is where big pharma companies can step in. Big pharma can also pay huge valuations, he said.

 

Also appealing is the relative ease of bolt-on transactions, especially as the coronavirus is still raging across many regions, which makes it difficult to conduct due diligence for complex and large deals, Behner said.

 

At the JP Morgan Healthcare Conference held in January, executives from big pharma companies including Merck [NYSE:MRK], Pfizer [NYSE:PFE], and Gilead [NASDAQ: GILD], mentioned their intent to boost bolt-on acquisitions into this year.

 

According to Mergermarket data, the percentage of biotechnology and pharmaceutical deals worth over USD 2bn dropped from 7.6% (25 out of 328) in 2019 to 6.5% (21 out of 322) in 2020.

 

So far this year, a few major transactions in the life sciences sector also settled within the USD 2bn range. Sanofi’s [EPA:SAN] January takeover of the UK’s immuno-oncology drugmaker Kymab, hit a price tag of USD 1.1bn. This week Merck inked a USD 1.8bn acquisition of autoimmune-focused Pandion Therapeutics [NASDAQ:PAND].

 

Partnership deals on the rise, a potential route to takeover   

 

Meanwhile, life science companies are adopting more flexible deal structures, such as minority stake investments with buyout options or licensing partnership deals with an equity component.

 

Pothier with KPMG noted that deals have been utilizing more creative structures.

 

"As biopharma companies look for innovations, they need to diversify the way they are thinking about a deal,” she said.

 

Behner at EY sees partnership deals as “a great vehicle for risk mitigation"--especially if the biopharma companies don’t want the full piece, or are unsure about efficacy before shelling out the full amount,” Behner said.

 

He said such a trend is particularly rising in the gene and therapy space, where acquirers are looking beyond buying a product to buying a technology platform that could potentially spawn many different products and indications.

 

It also allows biotech startups to keep their clinical programs well-funded while having their partners “at arm’s length” to conduct standalone research programs, he added. In five-six years, once the programs grow bigger, they would have the chance to be integrated, he said.

 

For example, last year Sanofi acquired Principia Biopharma for USD 3.68bn. The parties had a partnership deal in 2017 to co-develop a multiple sclerosis drug candidate, where Sanofi agreed to provide an upfront payment and future milestones. The buyout transaction came months after that drug candidate reported positive phase 2 data.

 

Also last year, Nestlé [SWX:NESN] swallowed up the rest of Aimmune Therapeutics for USD 2.6bn shortly after the target company secured the first FDA-approved drug to treat peanut allergies. Prior to the transaction, Nestle owned roughly 25% of Aimmune.

 

Hot areas to watch: mRNA, ADC, cell and gene therapies 

 

The coronavirus pandemic shone a spotlight on new and innovative therapies with the mass distribution of the COVID-19 vaccine using mRNA technology. The massive need alone for mRNA COVID-19 doses will keep the technology hot for years to come, Behner noted, adding that the coronavirus is here to stay, and mRNA will continue to be used for booster shots in the future and as needed for viral mutations.

 

The mRNA market alone is projected to yield USD 100bn and could be an attractive space for consolidation among buyers in the space looking to add a notable platform to their company.

 

Antibody-drug conjugates, so-called ADC, is another attractive area, Pothier said, as its technology platform has the potential to work on multiple tumor types. "That’s exactly what you want to see in the next generation of oncology-- it gives you a renewable portfolio in one particular platform,” she said.

 

Cell and gene therapies have also been a lucrative space for dealmaking.“The cell and gene space, in general, is just on fire,” said Pothier.

 

The cell and gene space harbors potentially curative therapies for diseases, and companies first to market with those drugs could capitalize on high valuations, she said. Deals in this space are being forged at an earlier stage in order for potential buyers to secure the assets, she added.

 

Additionally, the biopharma services and supply chain business for the pharmaceutical industry has been a sweet spot for investors, Pothier noted. 

 

“One of the biggest issues with biologic products going global or to more remote parts of the US is to be able to be housed in a way that remains viable”, she said.   

 

This area also has attracted strong interest from private equity firms, which are looking at targets in cell and gene therapy manufacturing, diagnostics and laboratory tools, and other services that could support patients in their journey, she said.