Following a quiet 2017, the number of big M&A deals in the pharma industry increased in 2018, accompanied by extensive media reports and commentary. PR has played a major role: the chances of closing deals are higher when companies boost their communications strategies. Analysing the 2018 coverage, we discovered which pharma companies were most often mentioned for their M&A activities and which deals were in the spotlight.
The value of the pharma sector’s M&A activity in 2018 reached 136.5 billion, compared to just $79 billion in 2017 and $107.2 billion in 2016. This is the conclusion of Evaluate Group’s analysis, which claims that “the quick-fire takeouts of Tesaro, Celgene and Loxo Oncology over the past few weeks might cause many to forget just how quiet the biopharma M&A scene was last year”, adding that even in the years following the financial crisis the sector managed to sign more deals than in 2018.
Other commentators described 2018 in slightly more positive terms: the Pharma Letter wrote that there was an “M&A resurgence” and a “significant upturn” in 2018, estimating that the total number of M&A deal announcements came to 111, compared with 101 in 2017, but still below the boom years of 130 in 2016 and 155 in 2015. In 2018, there were 26 deals with a potential value of over $1 billion, compared to 15 in 2017.
McKinsey also expressed a more positive sentiment, noting that 2018 saw “impressive growth”, although this would not be surprising when we view it in a larger strategic context: “The pharmaceutical sector’s behaviour is not unlike that in similarly acquisitive industries, like telecommunications, media, and energy, where new technologies are altering the cost of doing business and pushing companies to continually look outside for innovation. In this context, Big Pharma’s high-volume dealmaking becomes the norm rather than the exception.”
The consultancy explained that the passage of US tax reform in late 2017 is the latest in a series of market forces, such as the work on blockbuster drugs and biotechnology, which have influenced the way pharma companies have perceived and pursued dealmaking over the past decade or more.
On the other hand, the Business Insider claimed that healthcare deals hit an all-time record in 2018, citing data from Refinitiv, which shows that big pharma companies, health insurers and care providers have agreed to about $421 billion in transactions, with the value estimated at the time of announcement, without all transactions being ultimately completed. According to the magazine, the main driver behind industry partnerships is the search for new capabilities or new ways of treating diseases in the face of pressure to improve performance, discover new treatments and lower costs for patients.
Pharma M&A deals are subject of extensive coverage not only in business and healthcare outlets but also in daily publications. As Pharma Intelligence puts it: “A staple of consumer magazines and tabloid newspapers involves coverage of celebrity relationships – who has been seen together? Who is dating? Will they become a permanent item? And are they going to live happily ever after? Readers can’t seem to get enough of it. Interestingly, while maybe not so racy as the celebrity goings-on, pharma industry watchers are keen to follow company couplings. Talk of mergers and acquisitions, one of the ways that companies can build scale, always attracts attention.”
Changing sentiments
It’s interesting to trace the change of media sentiment throughout the year. The coverage was palpably more positive at the beginning of 2018: a good example is the Financial Times’ article “Big Pharma makes strongest start to M&A for a decade”, published in January. The newspaper explained that pharma companies announced almost $30bn of acquisitions since the beginning of 2018, as they try to replace ageing blockbusters by paying high prices for new medicines. “As Big Pharma is confronted with drugs going off patent and weak research and development pipelines, they have no choice but to do significant acquisitions despite pushing valuation metrics,” said Frank Aquila, a senior corporate lawyer at Sullivan & Cromwell, told the publication.
Commentators, including executives, lawyers and bankers, who voiced their opinions in the beginning of the year, suggested that the January deals enthusiasm could mean an M&A-rich 2018, as US pharma giants would try to buy innovative rivals with the billions of dollars of cash from Donald Trump’s tax reforms, which could have overheated the sector, according to some executives. In a recent interview with the Financial Times, Rob Davis, chief financial officer of Merck, said: “Given the access to cash that this pool of companies now has, will we see the value of potential targets run up? I do think that’s a risk.”
Other examples of more enthusiastic coverage on the first half of the year are Pharma Phorum’s piece “Biotech and big pharma heading for an M&A filled 2018” and Pharma Times’ article “Pharma M&A booms in H1 2018”, which claimed: “The biotech space has seen remarkable growth in M&A activity over recent years, as targeted treatments, such as CAR-T cell therapies come closer to approval. The increasing investor appetite has been driven by the effectiveness of the treatments, despite ongoing concerns regarding the high costs.”
In contrast, the coverage at the end of the year was soberer – for example, the Evaluate Group wrote that 2018 “provides a low bar to beat” and cited historical data from EvaluatePharma illustrating the extent of the dealmaking slowdown. Pharma Times noted that a slow second half puts us a long way off 2015’s record numbers.
The Evaluate Group notes that the last three years all opened impressively, but then dragged behind: „It is also notable that, more recently, activity seems to have been focused in the early months of the year. The desire to win column inches throughout the high profile JP Morgan Healthcare conference, which takes place every year in January and winds up tomorrow, is probably a factor here.”
Last year’s largest M&A deal was Japanese giant Takeda’s acquisition of Irish rare diseases specialist Shire for $64 billion at the time of the first announcement. The tie-up emerged in the first quarter but was formally accepted in May, constituting the big news of the year. The really important metric, according to the Evaluate Group, is the number of transactions being announced in the following months, which would show whether underlying demand really is picking up, beyond “these headline-grabbing buyouts”.
Second on the list of largest deals was GlaxoSmithKline’s $13 billion acquisition of Novartis’ consumer health arm. Other major transactions include Sanofi’s buy of blood diseases specialist Bioverativ for $11.6 billion and Celgene’s purchase of Juno Therapeutics for $9 billion. Meanwhile, Novartis bought to take AveXis for $8.7 billion and Endocyte for $2.1 billion.
The Financial Times pointed out: “Their willingness to agree to such lofty prices underscores a perennial problem for Big Pharma: what to do when successful medicines lose patent protection and revenues evaporate. Large drugmakers have often turned to buying smaller biotech groups to replenish flagging pipelines, but a steady increase in the value of such companies has prompted some in the industry to warn of a bubble.”
Acquire and conquer
Researching the pharma M&A coverage in 2018, we discovered the most often mentioned companies:
Pfizer tops the list thanks to the many reports, analyses and speculations around its M&A activity. For example, it merged its consumer business with that of GSK, and there was a rumour that the firm might buy out Bristol-Myers Squibb, which went around many media outlets, prompting journalists to focus the pharma giant’s potential growth strategies. In “Pfizer’s Deal Potential Doesn’t Stop at Bristol-Myers”, Bloomberg healthcare columnist Max Nisen called Pfizer “the most megadeal-prone company in the pharmaceutical industry” and suggested that it can also consider other options such as Eli Lilly to Celgene. In addition, analysts claimed that Albert Bourla’s promotion to CEO of Pfizer isn’t surprising and should be viewed positively by investors, while Barclays commented that he would lean towards more aggressive deal-making.
Sanofi was reported to enter the M&A bonanza “with gusto”, buying haemophilia protein therapy-focused drugmaker Bioverativ for $11.6 billion (£8.1 billion), and then a week later purchasing Ablynx for €3.9 billion (£3.4 billion). In a conference call after the Ablynx announcement, Sanofi’s chief executive officer Olivier Brandicourt suggested that additional acquisitions are possible, adding that the company had about €20 billion as a general target for acquisitions.
Due to the deals with Ablynx and Bioverativ, Max Nisen called Sanofi “this year’s pharma M&A champion”, admitting that he has been critical of those deals in an earlier piece for the Washington Post. But he conceded that Sanofi probably needed the deals because of its tumbling sales: “Sanofi’s first-quarter earnings release on Friday cast them in a slightly more forgiving light – when your business is struggling this badly, even acquisitions with a tinge of desperation seem more justifiable.”
Novartis’ decision to sell its share in its consumer-health joint venture with GSK for $13 billion was extensively analysed. Some perceived it as suggesting that new CEO Vas Narasimhan won’t be shy about dealing with the long list of decisions his predecessor left him. Others have argued that the deal is a game changer for the pharma M&A scene by demonstrating that giants prefer innovative agreements to protect and generate shareholder value rather than executing expensive M&A.
The Financial Times said that the deal marked an unexpectedly early and decisive move for Vas Narasimhan, who has decided that “consumer health is an “adjacency” too far” and wanted to disentangle Novartis from part of the asset swap deal struck four years ago with GSK. The Telegraph cited Chris Stirling, global head of KPMG’s life sciences practice, who claimed that the innovative offer will offer a new template for dealmaking and expects more asset swaps to be discussed in the boardrooms of drugmakers with portfolios ripe for restructuring, such as consumer goods groups.
Novartis’ shares rose over 1.8% when it announced that it will acquire US-based cancer drugmaker Endocyte for $2.1 billion. This was viewed as an “M&A splash for Novartis”, with the company’s shares rising over 1.8%. Liz Barrett, CEO of Novartis Oncology, said: “Novartis has a strong legacy of addressing unmet needs with transformative therapies and is building a leadership capability in new, technology-driven platforms that address some of the world’s most complex health challenges, including cancer. Today’s announcement about the proposed acquisition of Endocyte builds on our growing capability in radiopharmaceuticals, which is expected to be an increasingly important treatment option for patients and a key growth driver for our business. We are also excited about the opportunity to break into the prostate cancer arena with a near-term product that has the potential to make a meaningful impact for patients in great need of more options.”
Celgene was mentioned for its purchase of Juno, a biotech group developing experimental cell therapies for cancer. Celgene paid $9 billion, almost twice the worth of Juno before rumours of a deal prompted a spike in the value of its stock, according to the Financial Times. Fortune reported that Juno’s stock was actually up more than 75% since rumours of the buyout began swirling, and rose more than 26% on the news, while Celgene’s stock remained relatively flat. The deal was branded as “smart” by journalists and analysts.
Johnson & Johnson was embroiled in speculations that it could boost its presence in the cardiovascular market by buying either Boston Scientific or its rival Edwards Lifesciences. CEO Alex Gorsky was also quoted for saying that the new tax law won’t change the company’s M&A strategy.
Takeda’s acquisition of Shire for 45.3 billion pounds was described as “the largest overseas purchase by a Japanese company” and as the deal which will put Takeda among the top ten global drugmakers and one of the most indebted pharma companies. In the meantime, AstraZeneca was mentioned for its alliance with Merck, which “illustrates how large companies are willing to partner with one another in what are becoming extremely valuable deals”, according to EY’s 2018 M&A Firepower Report: Life Sciences Deals and Data. AstraZeneca also sold its core CNS products – Seroquel and Seroquel XR – to Luye Pharma Group.
Merck, which has been trying to unload its non-prescription drug groups, sold its consumer health division for €3.4 billion to Cincinnati-based consumer goods giant Procter & Gamble. Bloomberg noted that Merck has been pretty quiet on the M&A front and it hasn’t done much lately other than finding new partners for the immune-boosting cancer drug Keytruda. Roche, on the other hand, bought the remaining shareholders in gene sequencing company Foundation Medicine. In addition, the company’s dealmaker Kevin Sin was hired by GSK, with the latter company hinting at an intention to strengthen its drug pipeline through M&A.
Follow the money
We also managed to find out which of the biggest 2018 deals were mentioned most often in the coverage:
Deals in the pharma M&A coverage by number of mentions:
Takeda’s deal with Shire was analysed so extensively because it was the largest in 2018 and because it’s generally viewed as a deal that could re-establish the trend for mega-mergers in big pharma. The complexity of the take over can be traced on an interactive timeline designed by Pharma Intelligence and featuring a selection of the content tracking the whole courtship. Analysts asserted that Takeda and Shire’s deal marks a pivotal moment for Japan since long-term growth can only be found outside the country’s shrinking nation and should be bought in.
The deal is seen as the culmination of pressures across Japanese boardrooms as the Abenomics era, the economic policies advocated by Shinzō Abe, enters its sixth year. There is a demand for overseas acquisitions: the Financial Times points at several reasons for this, including a government that has been explicit in its support for outbound deals; corporate governance-driven pressure to produce better returns on equity; and a banking sector that sees acquisition financing as an oasis of growth in a domestic market starved of loan demand.
The coverage of the deal continues in 2019, since it was formally completed in the beginning of January, with titles such as “How Takeda’s $62 Billion Shire Deal Reshapes Pharma World”, “Shire deal done, Takeda turns to task of forging top pharma” and “As it digests Shire, Takeda plans to shed $10B in non-core assets to relieve debt burden”.
We also managed to find the banks which were mentioned most often in the coverage:
The banks were mentioned because of their participation in specific M&A deals, while some of them commented as third-party observers on the activities of pharma giants or on the market as a whole. JP Morgan led the way because of its prestigious annual healthcare conference, where many past and potential deals are discussed. At the 2018 event, the overriding sentiment was that the US corporate tax cut and repatriation of funds benefit will spur M&A activity in pharma and biotech. The bank also helped Takeda with foreign-currency funding, while Goldman Sachs and Nomura led the team behind the Takeda-Shire deal, which also included Citigroup and Morgan Stanley.
“It pays to pay for PR”
PR plays a major role in M&A deals: a study by Cass Business School’s M&A Research Centre, Titled ‘Selling the story’, found a clear link between good quality announcements and deal consummation, suggesting that companies can have better chances of closing M&A deals by bolstering their communications strategies and appointing a ‘properly resourced’ communications team early in the deal process.
“The research clearly shows the importance of properly resourcing deal teams’ communication efforts,” said Professor Scott Moeller, director of Cass’s M&A Research Centre. “This is especially the case given the proliferation of social media, and the need to be responsive to a much wider range of stakeholders. But it also throws up some surprising findings around the immediate market response to deal announcements. For instance, it appears that equity markets can –in the very short term at least – reward a lack of public information about an M&A transaction.”
Examining communications activity around 198 deals in the UK between 1997 and 2010, the study concluded that proactive announcements matter, since 84% of deals were announced as actual offers are completed, compared with around half of those which were announced in response to a leak. Other findings include: deals involving PR firms have a higher chance of completion than those without; announcements with statements from both companies’ chair/CEO are associated with significantly higher levels of success than those without; and leaked M&A deals, or announcements lacking information about the underlying strategic rationale, are actually rewarded by the markets in the very short term.
Those are valuable insights for the pharma industry, where the importance of M&A PR in is also underlined by numerous practitioners such as Steven Immergut, VP and head of communications of the pharmaceuticals division at Bayer, who noted the role communications play in “vetting candidates and companies from a corporate reputation standpoint”.
As we’ve pointed out, there is a positive correlation between enjoying a good reputation and implementing an on-going PR measurement programme: a study on corporate reputation management in the US pharmaceutical industry concluded that pharma companies with better corporate reputations demonstrated a greater commitment to measurement. The majority (88.89%) of pharma companies on Fortune magazine‘s “World‘s Most Admired Companies” list actively measure their corporate reputations. A data-driven approach is also the foundation of every successful PR strategy in the pharma M&A scene.