The search for innovation and new drugs drives pharma dealmaking
Akrevia, headquartered in Cambridge, Massachusetts is a biopharmaceutical company operating at the vanguard of tumor-targeted immuno-oncology therapeutics.
Joseph Farmer is Chief Operating Officer at Akrevia, having joined the company earlier this year. Joseph is an experienced M&A practitioner, having led the US$5 billion sale of Tesaro to GlaxoSmithKline earlier this year and the US$9.5 billion sale of Cubist Pharmaceuticals to Merck in 2015.
Speaking to Deal Dynamics, Joseph provided his views on deal activity in the Life Sciences market, which remains one of the most active sectors in the M&A market.
Why do you think Life Sciences continues to be one of the most active sectors for M&A in 2019?
When I think about what’s really driven M&A in the sector in the last five years, it is very simple: large pharmaceutical companies need to fill their pipelines. There are a number of reasons for this. A lot of the largest companies’ big commercial drugs are coming off patent protection, while the pace of internal research and innovation coming from big pharma has, perhaps, not been as swift or productive as many might have expected. This has driven consolidation and activity in Life Sciences and will continue to do so.
So why are large firms operating in the sector unable to replenish their pipelines organically – why is M&A a preferable option?
M&A is a more attractive route because the most groundbreaking innovation is coming from the smaller, emerging biotech companies. Looking ahead, I do not see this dynamic materially changing anytime soon. One can consider wider market analyses of the cost of capital and interest rates, and I’m sure that is having an impact on margins. However, at the end of the day, the fundamental issue is the same: mid and large biotech and pharmaceutical companies need to grow their pipelines with future commercial assets. The most efficient way to do this is to buy the smaller biotechs.
So why are smaller firms operating in the Life Sciences sector able to innovate more readily compared to their larger peers?
In my opinion, larger companies are very bottom line, EPS (Earnings Per Share) driven, as opposed to the smaller emerging biotechs who can spend more readily. Spending on R&D at the smaller end of the capitalization spectrum is viewed more positively, whether your company is public or private. From the larger corporations’ perspective R&D investment is essentially outsourced.
The smaller companies do this work, making investments and then, when the larger companies are willing, at a stage when they have a clear sight line to revenue, whether it be existing or potential revenue, they are willing to pay well for that innovation and M&A begins. It is also worth mentioning that the market is more forgiving of those big companies that pay significant premiums for revenue generating or imminently revenue generating assets. Internalizing all this research, development and innovation will have this negative impact on larger firms’ bottom lines and the market is much less forgiving of failure.
So is this structural shift in the way large companies in the life sciences use M&A to buy-in R&D and innovation capabilities likely to continue or not?
It is really hard to see this trend changing in the foreseeable future. The pressure is on large companies in the sector and their bottom lines, seeking to squeeze out costs where appropriate. Of course, there is still a lot of important R&D happening at a lot of the big pharma players. There is also little doubt in my mind that, in an ideal world, the larger players would like to be spending more on innovation and research. But it is clear where the investment is taking place. Money is flowing into the life sciences sector and emerging biotechs from venture capitalists, and I get no sense that this appetite is waning at all.
What other trends are at work in the Life Sciences sector, helping to drive M&A?
Corporate venturing is now a much more visible element in the market. Large pharmaceutical companies are using their venture arms to buy into smaller emerging biotechs. For many large firms this represents a much more effective way to make investments into R&D. It’s another way to put bets on the table, get the research done, keep the costs off the books, but be in a position to access innovation when it is most needed.
I guess this is not a really new phenomena – many of these venturing arms have been around for a decade or more – but the point is that they continue to be funded each year and they are growing in size. The pace of investment in corporate venture arms seems to be, anecdotally at least, increasing.
So the cheap cost of capital is not significantly fueling the continued M&A boom we are observing in the global Life Sciences sector?
I’m sure it matters – if interest rates were ten percent then life would be different – but is a quarter or a half a point going to move the needle anywhere? It really does not seem to me that it would.
As we move into 2020, there do not seem to be many headwinds likely to stymie M&A in the Life Sciences sector?
There is one clear headwind to my mind – it is an election year in the United States and that inevitably brings instability with it. I do think that people will be more cautious, whether they are considering M&A or the public equity markets, IPOs, or secondary offerings. Most people that I speak with in the banking community think 2020 is going to be a ”wait and see kind of year.” We are seeing that there are lots of IPOs in the queue right now and a lot people are saying “get it done” by early 2020 at the latest because after that, there is an expectation of a pause.
Life Sciences is a market that is subject to lots of regulation, for obvious reasons. But the regulatory environment is perceived to be particularly benign at the moment. Do you think this might change in 2020?
I don’t look at the impending election as one that might usher in a tighter regulatory regime or not. Ironically, the one issue that both the Republicans and the Democrats are aligned on is drug pricing. For me it’s about the macro environment and tax policy. Uncertainty brings instability, so if you are a CEO or CFO weighing up a deal, it will inevitability have an impact on if or when you execute on a piece of M&A.
And finally, can you tell us about Akrevia and the immuno-therapy sector that it successfully operates in? Is this a section of the Life Sciences market that is likely to undergo change in the coming years, from an M&A perspective?
Before joining Akrevia I was part of the team that worked on the US$5 billion sale of Tesaro to GlaxoSmithKline. It was a deal driven by a strong immuno-oncology pipeline. The market has been generally buoyant for some time, however, I do think people are starting to become a little more cautious in our world. There have been a number of disappointments from some companies operating in the sector, which has inevitably prompted the market be more careful. Investors are demanding to see and understand how firms in the sector are sufficiently differentiated from their peers. There’s no doubt that the market has set the bar higher. But it is a great sector to work in – a real privilege.
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