Delving For The Drivers Of Pharma's Disappearing Deals

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by: EP Vantage

The drop in deal-making among biopharma companies this year is undeniable - but where exactly has activity been fading? A deeper dig into EvaluatePharma's M&A data over the past few quarters hints at a couple of trends.

Most apparent is a dip in the number of small transactions, those classified as less than $250m. At the same time option deals appear to have become more popular. Overall, however, the picture is of drops across the board, as acquirers continue to adopt a cautious stance (see analyses below).

The analysis includes deal data from the beginning of 2015, when the biotech bull run was still charging ahead. Earlier this month EP Vantage's look at longer-term M&A data revealed a big drop in the number of transactions in the second quarter, prompting this closer interrogation of the numbers (Second-quarter deals show a sector set on pause, July 3, 2017).

The 24 M&A deals tallied by EvaluatePharma in the second quarter fell substantially below the five-year quarterly average of 57. Of course the 61 counted in the previous three months was very strong, so big swings can and will happen. Looking over 10 quarters should be enough to detect any signals.

EvaluatePharma classifies several types of deal as M&A. As well as straight takeouts it includes minority and majority stake sales, reverse takeovers and option deals, and the spread of these deal types is highlighted below. For brevity, only four quarters are displayed.

The apparent increase in option deals, as a proportion of all deals announced, would certainly fit the theory that the sector is less willing to commit its cash at the moment. Clarity in the US on both tax reform and any repeal of Obamacare remains poor, although presumably these would be factors affecting big-ticket takeovers, rather than deals at the smaller end of the spectrum.

Still, the analysis also shows that higher-risk moves like full takeouts and stake-building do seem to have fallen since the beginning of 2015, as a proportion of all transactions announced.

In terms of the actual numbers (not shown here) only reverse takeovers and option deals have shown any stability over this period, with the volume of all other types of transactions dropping notably since early 2015.

A second analysis below, slicing deals by transaction size, suggests that the number of deals involving small companies has declined faster than other brackets. A third of the 24 transactions announced in the second quarter involved companies bought for less than $250m, compared with half of the 73 deals announced in the first quarter of 2015.

With small companies tending to be backed by venture capital, this is perhaps a worrying signal for these investors. However, the healthy state of start-up financing seemingly paints a different picture here, and there is no doubt more to this finding - a further analysis to be published will dig further into the types of companies being bought and sold.

It should also be remembered, of course, that the relative value of these types of deals - either small company takeovers or option deals - is almost insignificant when looking at the total sums spent by biopharma on M&A each quarter.

For example, sub-$250m deals in the first quarter of 2015 might have accounted for half of all the deals announced, but their combined value was a mere $1.9bn, out of the $70bn in total.

As it stands, complaints about the dearth of the big deals will mostly be heard from deal bankers and lawyers. But, however the data are cut, it is hard to find a number that is growing. With no sign of a pick-up in activity, these grumbles could soon begin to be heard more widely.