Pharmaceutical sector shows steady deal flow

With our latest analysis of Pharmaceutical (Pharma) merger and acquisition (M&A) deals our specialists, Michelle Ritchie, Steve Aherne, Lucy Stapleton, Andrew McKechnie and Jo Pisani talk about what current trends and future opportunities we are seeing in the market. Our analysis is based on the deal tracking done by Dealogic and we have found that Pharma is not immune to the economic downturn, and this has clearly impacted the number of deals that have happened this year.


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Pharma M&A

As we launch our analysis of Pharma M&A deals in the market for Q2 2012 we thought we would gather today and talk about what we are seeing in current trends as well as future opportunities. A bit of context - our analysis is based on the deal tracking done by Dealogic and then there are themes coming out of that from the fact that Pharma is not immune to the global impact and the economic downturn has clearly impacted the volumes as well as, it’s definitely a global market and volume /activity shifts, whether they be in Asia in the second half of 2011, or in Europe in Q2 2012.

From a valuation perspective, Steve, what are you seeing in the market?

Thanks Michelle. I think there are two key areas I wanted to touch on. The first is the broad trends in listed Pharma valuations and some of the deal premium paid in M&A transactions. So for listed Pharma, the challenges have been well documented with R&D productivity, pricing pressures in key markets and patent expiries for key drugs. Over the last ten years we have seen a gradual decline in average PE ratios for the sector, with a bit of an uptick in the last year. And, it’s quite acute for some companies more than others at the moment and that’s perhaps explaining why we see a wide variation in PE ratios at the moment. But, with the challenges there are opportunities. So, for those with strategic or late stage assets, it can help Pharma mitigate some of those risks. Over the last two quarters we’ve seen some substantial deal premium paid ranging from 50 to 90% in some cases. So, the opportunities are out there and Pharma are willing to pay for it where there appears to be some strategic value.

Excellent, from a private equity perspective Lucy, what are we seeing in the markets?

Well, private equity is relatively lightweight in Pharma, and indeed, actually in 2011 the volumes in healthcare overall increased. There are four key areas of focus for private equity -the outsourcing market, secondly, the generics market and the recent announcement by TPG to buy Par Pharmaceuticals, thirdly, OTC and lastly, of course, Specialty Pharma, which they compete head on with the corporates as well.


Just picking up on one of those Lucy, the outsourcing market - there are some pretty fundamental reasons why that’s an attractive market for private equity. So, as Big Pharma fundamentally look at their business models, and they are looking to outsource a lot more of their activities, and that includes a lot of their clinical research. So, it’s a market that’s been growing at 10-12% over the last couple of years, did have a bit of a hiccup in 08 and 09 because part of the market is driven by the availability of capital, particularly the biotech part of the market, but that has come back and when you look at what private equity’s thesis is for investment in the sector its good organic growth, a fragmented market, so it enables you to grow through acquisition and fundamentally they will be building businesses which will be attractive to the larger CROs upon exit.

Excellent, very interesting. Jo, any particular hotspots or areas of interest in Pharma, which we should be watching going forwards?

There is one area of particular interest. That is biosimilars and we highlight that in the report. Biosimilars also called biogenerics, follow on biologics, but in essence it’s when the originator patent expires on a biological drug and people can come to market with a molecule that’s equivalent to the originator. Now, the key is the word ‘equivalents’. With biological molecules, you can never prove that your molecule is absolutely identical to the originator and through that you have some unique technical and commercial challenges that really then shape the dynamics and the deal environment around it as well. Currently, the biosimilars on the market are pretty much technically the easy ones to get to market. The real prize is the monoclonal antibodies and we are currently on the cusp of seeing the first monoclonal antibody being biosimilar – being approved in Europe, for that Celltrion and Hospira’s copy of Remicade, coming through. Now, the prize though is $50 bn worth of monoclonal antibodies coming off patent in the next five years for areas such as Cancer and things like Rheumatoid Arthritis – a very compelling commercial prize from it. But, having said that, the technical challenges are great. Regulatory pathways are still being formed and in some cases, such as the US, a really high hurdle rate to get a product approved there. Europe is actually much more pragmatic in terms of regulatory pathways. You are getting a lot of molecules coming into market and the emerging markets, which are not really bioequivalent, but nonetheless are getting approval and getting airtime from that. Commercial challenges are great too. No one really can predict what pricing might prevail. Is it going to be generic pricing and prices going through the floor or will they maintain differentiation on that? And also, originators can employ all sorts of defence strategies such as second generation products as well. So, consequently for the deals, we are seeing a lot of deals in the Big Pharma side of things. In fact, for Big Pharma it’s an area they know well. In fact, the risks, indeed the R&D risks a lot of the time (see the deal that Merck has done with Bio-Calm, Hospira with Celltrion and last month Merck KGA doing a deal with Dr Reddy’s). I think you are going to see more things on the technology side of aspects, particular things from improved cost of goods and manufacturing methods. Again, that will stimulate contract manufacturing of biologics and also things to differentiate the products, so things like new devices and new delivery mechanisms.

Excellent, very interesting, Jo, thank you. So what I’m hearing is that private equity is underway in healthcare and pharma and they are going to be interested, going forward, especially on the services side. CROs is going to be of particular interest. Biosimilars are going to be of interest to the corporate and financial sponsors, but it is going to have some risk attached to it, something interesting to watch for. And valuations are going to demand a premium for attractive asserts and people are going to be willing to pay as they look for growth. Thank you, thank you for joining us.