PM Perspectives: Charting M&A in Health Care After Tax Reform
Tax reform in the U.S. has opened the doors to increased mergers and acquisition activity among large U.S. health care companies, many of which have indicated they’re in the market to buy mid-size companies with near-to-market products that boost the buyers’ strategic advantage. Portfolio Manager Ethan Lovell shares his outlook.
Since the beginning of the year, there have been three substantial acquisitions made of biotech companies by large multinational pharmaceutical companies. Those are Ablynx, Bioverativ and Juno.
Either they have products that are on the market already or products in very late stage development that have been substantially de-risked. And that’s attractive to the pharmaceutical companies, because right now what they are doing is trying to replenish their pipeline, that means that they tend to be fairly chunky acquisitions. So in the case of Ablynx, you are talking about a $4 billion transaction and up to $11 billion for Bioverativ.
Typically the business development people want to see that de-risked asset, but also if they can get it, access to a technology platform that they themselves don’t have access to at that point in time. So Ablynx, for example, has a platform called the Nanobody Technology platform.
And what these companies were waiting for was resolution on the proposed tax reform. So that became law and now really, the gloves are off. The CEOs that were a little bit coy about wanting to be disciplined around what the financial metrics of an acquisition might look like are now going on offense and basically saying you should expect a very active year in 2018.
Now, these companies have full access to their cash and their future cash flows that are generated overseas. So up until this point, companies like Pfizer had 90% of their cash held overseas and they really couldn’t access it without it affecting their tax rate and their financial flexibility back at home. If you’re looking at biotech companies that could be acquired, many of them are U.S. companies. So, they become much more aggressive in talking about transactions and we have already seen the prices of those transactions start to trend higher and we think it probably ends up that they will trend even higher from here still.
If things are going to accelerate, what else is potentially of interest? So there are companies out there that fit the bill. Take, for example, Neurocrine Biosciences, where they have a drug that has been recently launched and it is launching ahead of expectations. It’s a neurological asset; those tend to be a little bit harder to come by. That is clearly a name that could be integrated very quickly by a large pharma company.
Another example, Nektar. They have an asset in immune-oncology, which is one of the hottest spaces that is in the biopharmaceutical industry today.
And then you are talking about kind of the theoretical areas where the large pharma companies have expressed the greatest interest. So, cancer, oncology assets, I think that is an area where we will see multiple transactions this year.
Rare disease assets, so, orphan diseases where you can address that market in a very financially efficient manner. For example, those companies that Sanofi acquired, and Bioverativ and Ablynx, those are rare disease assets as well.