• 2015 was `almost a perfect M&A environment,' banker says
  • Valuations may come down for some deals in biotech, pharma

When it comes to dealmaking, the health-care industry defied belief in 2015 with $605 billion of takeovers. While 2016 may be a good year, it’s unlikely to beat that record.

“We entered 2015 with what I would characterize as almost a perfect M&A environment: a generally stable economy, lack of volatility in the equity markets, low interest rates, tons of cash on companies’ balance sheets,” said Jeff Stute, head of health-care investment banking at JPMorgan Chase & Co. His firm is hosting its annual conference next week in San Francisco, where health-care executives flock to hold court with top investors.

Some of the most active acquirers, like drugmaker Pfizer Inc., are going to be busy digesting purchases instead of hungering for new ones. Pfizer last year agreed to buy Allergan Plc, itself a prolific merger partner, for $160 billion. And Valeant Pharmaceuticals International Inc., another major player, is busy resetting after a scandal in its drug distribution channels. The health insurance industry has largely consolidated, after Anthem Inc. and Aetna Inc. struck multibillion-dollar deals with smaller rivals Cigna Corp. and Humana Inc., respectively.

Then there is the public backlash against the rising prices of pharmaceuticals. That’s weighed on the valuations of drugmakers as investors question whether companies will be able to continue to charge high prices for treatments.

Valuations Down?

“You see more people talking about cost-containment -- that’s another theme that only seems to be growing,” said John Fraunces, co-portfolio manager of the Turner Medical Sciences Fund. “I generally think as we see a more sober environment, we’ll see the valuations of the deals come down.”

The tone for the year’s mergers and acquisitions will be set next week, at the J.P. Morgan Healthcare Conference. The event, which is entering its 34th year, has been the genesis of many past acquisitions.

And while some of the top players may be busy, there are still shoppers with big money to spend.

Gilead Sciences Inc. had $14 billion in cash and cash equivalents at the end of the third quarter. Since then, the Foster City, California-based biotechnology company has invested $725 million to buy a stake in Galapagos NV, which is developing a treatment for rheumatoid arthritis and other inflammatory diseases. Still, it has cash to spare, and investors have been waiting for a deal akin to its $11 billion acquisition of Pharmasset Inc. in 2012, which gave it the backbone of its blockbuster hepatitis C treatments.

Deal Appetite

Johnson & Johnson also has plenty of firepower, despite announcing a $10 billion share buyback program in October. The drugmaker was said to have been the losing contender last year in a bidding war for Pharmacyclics Inc., which eventually accepted AbbVie Inc.’s $21 billion takeover offer.

“I wouldn’t interpret the $10 billion share buyback as impacting our appetite for scale of any size in M&A at all,” Chief Financial Officer Dominic Caruso said on a conference call at the time.

And Shire Plc is in advanced talks for a potential $32 billion cash-and-stock deal for Baxalta Inc., people familiar with the matter have said. A combined company would have about $20 billion in sales by 2020, Shire said last year.

Investors are also watching the IPO market. Last year started off at a robust pace, as 53 companies in biotechnology, pharmaceuticals and health-care products and services priced a total $4.27 billion worth of public offerings in the first half of the year. That slowed in the second half, with 34 IPOs raising $3.18 billion.

New Offerings

Despite that brief lull, there is still a market for new companies to go public. At least six health-care companies -- Editas Medicine Inc., Corvus Pharmaceuticals Inc., Audentes Therapeutics Inc., Reata Pharmaceuticals Inc., Tabula Rasa Healthcare Inc. and Syndax Pharmaceuticals Inc. -- all filed for IPOs on Jan. 4, the first day of trading in 2016.

“As long as the quality is there, you will have investors,” said Brian Halak, a partner at venture capital firm Domain Associates. “I think valuations will be a little more muted and the number of companies that go public will be a little smaller, but I think we will have a reasonable amount.”

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