The market may not value smaller pharmaceuticals but cash-rich large healthcare firms are willing to pay over the odds to snap them up, says Worldwide Healthcare (WWH ) investment trust.
Sven Borho, fund manager at OrbiMed, which manages the trust, said mergers and acquisitions (M&A) would be ‘the biggest theme’ in pharmaceuticals this year.
‘M&A is the most important theme. Everyone is looking for new drugs and drug categories with limited competition,’ he said, adding that oncology drugs were particularly attractive to larger pharmaceutical companies.
There are two main reasons why large companies are hunting smaller pharma businesses. The first is US president Donald Trump’s planned tax break for companies repatriating offshore money back to the US.
He plans to introduce a flat-rate one-off 10% tax on money brought back onshore in a bid to boost the US economy, and provide him with funds to invest in promised infrastructure projects. It is estimated that US companies are holding as much as $2.5 trillion offshore.
‘There are tremendous cash piles offshore and everyone is waiting for repatriation,’ said Borho.
‘[Trump] wants the US companies to bring cash back…and put that money to work in the US. It is going to be a very important driver [for M&A]. [Pharma companies’] cash piles are sky high and building.’
The second reason is the cost of developing new drugs, making acquisitions more cost effective. Borho said Pfizer (PFE.N) spent between £7 billion and £8 billion each year on research and development (R&D) but would bring just two drugs to market for that cost.
‘It takes $4 billion to get a drug to market,’ he said. ‘It costs them that much so it is much cheaper to go outside and acquire, and that is what everyone is realising.’
The benefits of acquiring have accelerated the race to snap up small pharma companies and Borho said were are a number of targets on the horizon.
Borho said ‘anyone can get acquired’ in the emerging biotechnology space and that oncology group Tesaro (TSRO.O), focused on liver cancer treatments, was ‘almost a given’ to be acquired this year.
Drug company Aerie Pharmaceuticals (AERI.O), which focuses on the treatment of glaucoma and other eye conditions, ‘could get acquired’ this year too.
Rare disease treatment company Alexion Pharmaceuticals (ALXN.O) is also in a vulnerable position due to the departure of its chief executive David Hallal and chief financial officer Vikas Sinha last March.
‘Alexion has not got a chief executive and that is a sweet little target,’ said Borho. ‘There is a very good chance that [Alexion] is not going to be independent in 12 months time.’
In terms of acquirers, Borho said French pharma giant Sanofi (SASY.PA) was ‘still looking’ for a target and ‘they are not going to go away – they will be buying something, somewhere soon’.
Whichever companies are acquired, Borho said the deals were unlikely to be influenced by the political firestorm around price gouging. He said the rhetoric from US president Donald Trump on drug pricing, echoing the campaign rhetoric of rival candidate Hillary Clinton during the election campaign, would not depress acquisitions.
He gave the example of Medivation, seller of a prostate cancer drug, which was acquired by Pfizer last year for $14 billion.
Medivation shares fell on the back of senator and presidential hopeful Bernie Sanders’ comments on the high price of the drug.
‘The shares were trading at $26 [a share] and then a bidding war started for Medivation,’ said Borho. ‘The company was acquired at $81.50 [a share] – three times the efficient market price.’
However, he said even though the market price looked as though Pfizer had overpaid, the deal was ‘accretive for Pfizer over one year’.
‘All of the growth is coming from M&A, not R&D,’ he added. ‘The values are low, and the big companies will make offers [this year].’