Big Pharma has a problem, and a plan to solve it. The problem? A looming drug patent cliff that will unleash generic competition on some of the industry's biggest moneymakers. The solution? A breakneck M&A spree for biotech stocks, funded by a massive war chest built on drug companies' success in bringing new medical treatments to market.
But U.S. regulators could throw a wrench into this biotech M&A game plan. The Federal Trade Commission filed a lawsuit May 16 to block Amgen's $27.8 billion takeover of Horizon Therapeutics. The challenge raised new arguments against such mergers, which the FTC routinely cleared in the past when the companies had no rival drugs on the market.
Analysts expect Amgen will eventually close the Horizon buyout, but it may face an uphill court battle to get there. At risk are drug companies' plans to head off revenue hits as important patents expire and a government drug-price squeeze looms.
The stakes also are high for biotech stocks and investors who own them. Many companies never turn a profit and lack the business wherewithal to market their products. They capitalize on their R&D successes by selling out to bigger companies.
'Blistering' M&A Pace
As of mid-April, pharma companies had announced $64 billion in biotech mergers and acquisitions this year, with big names like Pfizer and Merck on the list of shoppers. That put biotech on a "blistering" M&A pace in 2023, according to investment bank Torreya, now a Stifel unit.
The Amgen-Horizon roadblock from President Biden's FTC reverberated across the industry, as biotech stocks pulled back from a recent run. Shares of takeover targets Seagen and Prometheus Biosciences fell 6% and 1%, respectively, the day of the FTC action. As of Thursday though, biotech stocks ranked a lofty 11th in six-month price performance among 197 industry groups tracked by Investor's Business Daily.
Despite regulators' chilly tone, some experts don't expect a pause in the M&A pace for biotech stocks.
The macroeconomic environment, politics, drug prices, patent cliffs and regulatory concerns are in constant flux. What doesn't change? Biotech and pharma need each other.
Biotech companies are often at the bleeding edge of innovation. But they lack the commercial power that pharmaceutical companies can bring to the table.
"It doesn't really change the game of where pharma is going to acquire," said Stephen Morehouse, a partner at PA Consulting, where he advises life-sciences companies. "They need to. It's part of how the industry works. There's innovation going on, and they're going to acquire that innovation or seek other opportunities to continue to grow and find new treatments."
Several factors are driving the biotech M&A spree, experts say, and much of the frenzy dates back to early days of the pandemic.
Valuations Of Biotech Stocks
Biotech stocks took off in 2020 as the world looked to companies like Pfizer and Moderna for new vaccine technology to save the world. Then, Covid-19 cases began to ease. And society peeled back many of the measures meant to keep the virus at bay.
Big Pharma may have been waiting for promising clinical news before jumping on the M&A bandwagon.
"There had been such a dramatic shift in valuations," said Adam Golden, a partner at the law firm Freshfields Bruckhaus Deringer who helps life sciences companies ink mergers, licensing deals and collaborations. "I think it took a little bit longer for buyers and sellers to kind of adjust to the new world in terms of valuations."
To their point, just $127 billion in deals were announced last year, according to banker Torreya.
Big Pharma Has Money To Spend On M&As
Meanwhile, Big Pharma's M&A coffers continue to grow. Pharma companies have between $1.4 trillion and $1.5 trillion in cash, experts say.
And pharmaceutical companies have to buy. Many, including Merck, Bristol Myers Squibb and AbbVie, are facing current or looming competition for their biggest blockbuster drugs as patents expire.
The patent expirations will allow generics or biosimilars to take a foothold. For example, AbbVie's Humira is facing biosimilars in the U.S. for the first time. In the first quarter, U.S. Humira sales tumbled 26%. AbbVie says the drop was expected and maintains that it's managing the erosion well.
Severine Piot-Deval, a health care fellow at research firm Hedder, says more than 40% of sales at the top 10 pharmaceutical companies are at risk of generic competition between now and 2030. Pfizer, for one, expects to lose $17 billion in revenue to generics from 2025 to 2030, she said in an email.
Generics could eat up $200 billion to $250 billion in pharma industry revenue by 2030, multiple experts say.
Motives For Big Pharma
"Big Pharma is sitting on a lot of cash, and there are some really neat opportunities on the market for them to strengthen their portfolio with the valuations under some pressure with the market," PA Consulting's Morehouse told IBD.
The same companies facing patent cliffs also are likely to face pricing pressure from the Centers for Medicare and Medicaid Services. Under a 2022 law, Medicare officials will soon begin negotiating the prices of the top 10 most expensive drugs. The new prices will launch in 2026.
Michael Levesque, an analyst with Moody's Investors Service, says drugs from Bristol, Pfizer, AbbVie, Eli Lilly, Merck, Sanofi and Novo Nordisk will likely be on the list.
With patent cliffs and Medicare pricing in mind, "What would the rational economic actor do?" asked Greg Grove, an attorney with the law firm Neal Gerber Eisenberg. Grove assists life sciences companies with transactions.
The clear answer, experts say, is to buy promising new drugs or companies.
What Big Pharma Seeks In Biotech Companies
And that's exactly what pharma has been doing.
Manmeet Soni, president of Reata Pharmaceuticals, estimates 15 to 20 pharmaceutical companies are looking to buy products. Reata is a biotech stock with a perfect Relative Strength Rating of 99, putting its 12-month price performance in the top 1% of all stocks, according to IBD Digital.
He says Big Pharma's acquisition strategy has changed of late. Rather than seeking "platform" companies with a new technology to treat disease — such as CRISPR gene editing or messenger RNA companies — the buyouts in 2023 have been for small molecules. Small molecule drugs are typically pills, rather than large biologics that must be infused or injected.
And Big Pharma is shopping for medicines that are ready for prime time now. Buyers are less interested in drugs they will have to spend time and money to further develop. The companies facing patent cliffs and Medicare negotiations need sales fodder sooner rather than later.
"It's a nice time to be a company with a robust portfolio of development-stage programs," Roivant Sciences Chief Executive Matthew Gline said in an interview. "Because I think we are seeing a return to interest from Big Pharma in at least late-stage pipeline assets."
Biotech Stocks With Late-Stage Assets
That's evident in the M&A deals announced this year. Prometheus, Iveric Bio and Bellus Health don't have approved drugs. But they snagged deals to be taken over after unveiling promising late-stage test results.
Merck is buying Prometheus for $10.8 billion on the hopes its efforts targeting a ligand called TL1A will pay off beyond ulcerative colitis. Astellas Pharma will pay $5.9 billion to buy Iveric. Iveric could win its first approval in August for a drug that treats age-related macular degeneration, an eye disease.
And GSK will pay $2 billion to buy Bellus, which has a treatment for chronic cough in late-stage development.
VectivBio is on the cusp of revealing Phase 3 results for its gastrointestinal disease treatment later this year. Ironwood Pharmaceuticals, which also is focused on gastrointestinal diseases, just agreed to buy it for $1 billion.
Other Biotech M&A Targets
Other recent M&A deals are for biotech stocks with commercial-stage assets that could be expanded to other patients.
Along those lines, Amgen is buying Horizon, Pfizer is snapping up Seagen for $43 billion and Sanofi closed its $2.9 billion takeover of Provention Bio in April.
Horizon's top two drugs — treatments for thyroid eye disease and gout — brought in a combined $2.68 billion in sales last year. Seagen makes a suite of targeted cancer therapies in the antibody drug conjugate class. Its top seller last year was Adcentris, which brought in $839 million. Provention is still in the early stages of launching its drug, Tzield. It is designed to stave off the onset of late-stage type 1 diabetes.
"The data tell us that, unsurprisingly, much of pharma's orientation has been with companies that own commercial assets or near-commercial assets to fill the pending gap," Matt Hughes, a managing partner at the advisory firm Allele Capital Partners, said in an email.
A Return To Platform Deals?
But not everyone is shutting the door on the possibility of platform-type M&A deals with biotech stocks. In a recent Biotech Hangout on Twitter Spaces, Torreya Managing Director Tim Opler said a platform deal is coming — and soon.
"I'm going to make a bold prediction," he said. "In the next three months, we will see a significant platform acquisition of either a protein degrader or an RNA therapeutics-type company. Those two platforms are too valuable and there are too many good ones out there."
Like some of the announced M&A deals, protein degradation could be used in a massive number of patients. Publicly traded biotech stocks working in that space include Arvinas and C4 Therapeutics. The technology could be used in many diseases where abnormal proteins are the driving factor.
The biggest names in RNA include Arrowhead Pharmaceuticals and Alnylam Pharmaceuticals.
Also, Torreya's Opler says the immunology and cardio-metabolic segments are hot — the former evidenced by the Prometheus takeover. Oncology is always an area of interest.
Raghav Mittal, assistant director at research firm Acuity Knowledge Partners, said in an email that acquisitions of biotech companies working on oncology or immunology treatments could be worth $5 billion to $25 billion a pop.
Which Biotech Stocks Are Buying?
Golden, of Freshfields, doesn't expect a return to platform deals. Pharmaceutical companies are looking to fill gaps in their portfolios or pipelines, he says. But he does expect momentum from announced deals to stoke biotech stocks working on rival products.
Take Apellis Pharmaceuticals. The biotech stock has jumped about 5% in the aftermath of the Astellas-Iveric deal, announced April 30. Apellis is working on a similar eye-disease treatment.
A number of pharmaceutical companies have announced plans for mergers and acquisitions during 2023. Merck said on its recent earnings call it wants to "pursue additional science-driven, value-enhancing transactions." Merck is preparing for the patents that protect cancer blockbuster Keytruda to begin expiring in 2028.
Bristol Myers said it wants to "further diversify its portfolio and strengthen its long-term outlook."
The company's Revlimid cancer treatment — itself an acquired product from the company's Celgene takeover — is facing generic competition. In the first quarter, Revlimid sales collapsed 37% to $1.75 billion. Blood thinner Eliquis, a Pfizer-partnered product, will contend with generics in 2028.
And GSK isn't sitting on its laurels after the Bellus deal. Chief Executive Emma Walmsley said in February the company plans to replenish its pipeline of vaccines and therapies, according to Reuters.
Pfizer Looks To Add Revenue Via Takeovers
Gilead Sciences Chief Executive Daniel O'Day told Brad Loncar in a recent interview the company plans to become a top 10 oncology company by 2030. Loncar is the chief executive of Loncar Investments and provides the indexes for two exchange-traded funds focused on biotech stocks.
That "would be a shift from (Gilead's) focus in HIV, so (what) I take away from that is that would likely happen through deals," said Daphne Zohar, chief executive of PureTech Health. Zohar was speaking at the same Biotech Hangout discussion as Torreya's Opler.
Meanwhile, Pfizer — already an active player in mergers and acquisitions — wants to add $25 billion in revenue by 2030. And it wants to do that through takeovers, according to Levesque, the Moody's analyst. Piot-Deval, of Hedder, says Pfizer needs $5 billion more in acquired revenue to hit that mark.
In a report, Levesque said Bristol, Merck and Royalty Pharma are most likely to find takeovers among biotech stocks this year. AbbVie, Biogen, Gilead, Pfizer and Viatris are "moderately likely" to do deals.
Plenty Of Drivers For Biotech Stocks
Grove, the attorney with Neal Gerber Eisenberg, acknowledges buyouts face obstacles.
"But I think the drivers are pushing harder than the limiters," he said. Among the limiters, he lists the FTC action against Amgen and Horizon.
This isn't the first time the FTC has pushed back on a medical merger.
Illumina is trying to buy its own spinoff Grail. Grail makes a cancer detection test called Galleri. Illumina is a leader in next-generation sequencing, a means of reading human DNA. The FTC has said there are reasons to block the deal on anti-competitive grounds.
But the Amgen-Horizon agreement raised a different concern. The agency says Amgen could stifle potential competition in thyroid eye disease and gout by bundling Horizon's products with its big-selling drugs for insurance companies and pharmacy benefit managers. That would entrench the monopoly for the two products. Both companies say they have no plans to bundle the products.
Will The FTC Challenge Slow Biotech M&A?
Piper Sandler analyst Christopher Raymond said the FTC pushback could put a damper on the biotech stocks buyout spree. The deal previously would have been "a slam dunk."
"If the reports are true, FTC would be signaling not just a more aggressive enforcement approach, but one that appears punitive and arbitrary, in our view," he said in a note to clients before the agency said it would block the deal.
Sophisticated buyers may have to rethink their strategies, says attorney Grove.
"Buyers might say, 'If I only get one company in this space, which company do I think I should go after first? Because if I'm successful there and then I try to buy another company that I think is different but the FTC says is the same, I might not get the chance to buy that,' " he said.
Will motives to buy biotech companies overcome that? Yes, Grove says.
"I think there's such overwhelming pressure and such overwhelming buying capacity that that limiter is part of the noise and not the signal," he said.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
