The drug giants that abandoned more than $200 billion of takeover attempts last year didn’t spend long licking their wounds.
Merger-hungry companies from AbbVie Inc. to Valeant Pharmaceuticals International Inc. spent the first three months of 2015 scooping up smaller targets, and driving an overall rise in takeover volumes, after failing to seal a string of more ambitious deals in 2014.
Although the targets are smaller in size, the motives haven’t changed: cash-rich buyers are looking for promising drug candidates and portfolios of medicines with a long shelf life, as patents for older products expire. The competition for biotechnology assets in particular has led to several takeover battles, even as premiums reach records.
“Big pharmaceutical companies are sitting on phenomenal piles of cash,” said Will Thompson, head of European healthcare investment banking at Barclays Plc in London. “They will be forced to look at M&A amid the current biotech exuberance.”
Biotechnology and pharmaceutical deals accounted for almost $100 billion of the $815 billion in overall global purchases agreed to in the first quarter. While global M&A is outpacing the start of last year, drug deals are racing ahead -- with volumes more than doubling from the first quarter of 2014.
Certainly there was some heady dealmaking outside of the pharma sector during the quarter as well. The largest deal announced was a $55 billion merger between H.J. Heinz and Kraft Foods Group Inc., in a deal orchestrated by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc., for example.
Still, drug companies were the most active dealmakers, and four of this year’s top five pharmaceutical takeovers involved companies that attempted larger deals last year, sometimes even with each other.
This time around, they’re thinking smaller.
The largest of the quarter, AbbVie Inc.’s $21 billion bid for Pharmacyclics Inc., came six months after its plan to buy U.K. drugmaker Shire Plc fell apart, while Shire itself bolstered its defenses against potential suitors by acquiring NPS Pharmaceuticals Inc. for $5.1 billion.
Pfizer Inc. switched its attention from AstraZeneca Plc to Hospira Inc., snapping up the provider of injectable drugs in a transaction valued at about $17 billion -- downgrading its ambitions from what would have been the industry’s biggest-ever takeover.
And Valeant Pharmaceuticals International Inc., which spent much of 2014 embroiled in a hostile takeover battle for botox-maker Allergan Inc., found itself at the center of a competition for Salix Pharmaceuticals Ltd.. Valeant eventually beat rival Endo International Plc with a more than $11 billion offer.
Even companies that weren’t involved in last year’s failed deals are joining the fray -- though without much success so far. Johnson & Johnson took on AbbVie in the contest for Pharmacyclics’s jewel, the cancer drug Imbruvica, only losing out in the final hours of negotiations.
The contest is driving premiums to record highs, with buyers able to take advantage of cheap financing to raise additional cash for knock-out bids. It’s also leading bidders to take a chance on drugs that haven’t yet been fully cleared for use, such as Salix’s biggest selling drug Xifaxan, which is yet to receive secondary approval from the U.S. Food and Drug Administration as a treatment for irritable bowel syndrome.
Buyers “are making big bets as valuations are gigantic and risks of integration are very high,” said Walter Van Dyck, head of the healthcare management center at Vlerick Business School in Brussels, in a phone interview. “The prices seen in recent transactions are just crazy. They’re paying big money for high uncertainty.”
While deal activity so far has been focused in North America and Asia Pacific, where volumes have more than doubled, hungry acquirers may soon have to switch their attention to Europe.
“As some of the big specialty pharma companies run out of targets in the U.S., it will be interesting to see whether they also look at opportunities in Europe,” says Barclays’s Thompson. “If the dollar remains strong versus the euro, European health-care companies will be more attractive for U.S. buyers.”
And though buyers haven’t tried to match the mega-deals of 2015, that doesn’t mean the rest of the year won’t yield bigger transactions, according to Kevin Kedra, an analyst at Gabelli & Co. Pfizer waited until May last year to begin its failed courtship of AstraZeneca, while AbbVie and Shire broke the usual summer lull in deals by revealing their tie-up in July.
“Last year started off relatively tame compared to what it ended up being,” said Kedra in a phone interview. “There’s still the opportunity, and you still have big pharma out there with a lot of cash.”