Following 2015’s significant rise of mergers and acquisitions (M&A) in the Pharmaceutical industry, Price Waterhouse Coopers’ Health Research Institute’s 2015 annual report suggested that the year of 2016 would be “the year of merger mania” for the Pharmaceutical and Life Sciences industries. Although 2016 had started out to be exactly that, the second half of the year is not turning out to be what was expected. According to FiercePharma, Life Sciences deals for 2016 are down 65% from 2015.
An Overview of Q1 to Q2’s M&A Drivers and Trends
The urgency in Pharmaceutical M&A from Q1 to Q2 can be contributed to the combination of desired growth, current status of the stock market and pressure from investors.
All Pharmaceutical companies want to greater develop drug distribution, research channels, products and services, geographical reach and earnings. Yet, possibly the most important factor for these corporations is the growth of revenue and share price. In more recent years, revenue growth has decelerated as a result of the increased resources companies are dedicating to the pursuit in developing the next blockbuster drug. Many large corporations face fierce competition from small generic companies. In turn, it became in the large corporation’s best interest to acquire a rival generic company in order to boost their market share in the industry and cut costs by eliminating any overlapping divisions.
The availability of cash, stock performance, payer environment and tax inversions all contributed to the surge in Pharmaceutical M&A from Q1 to Q2. Arris Partners and George James Ltd.’s Life Science Trends 2016 concludes that the market rewards corporations that take part in M&A. Many companies pursued mergers and acquisitions to create a more rapid return on investment. For example, looking back to mid-year 2015, the top 10 M&A purchasing companies’ stock performances totaled in a 64% greater return on investment when compared to the overall large-cap pharmaceutical index (DRG, Arca Pharmaceutical Index).
Fortune Magazine states that M&A is considered the best option for Pharmaceutical companies to generate revenue as fast as their investors anticipate. It is less expensive to acquire the next blockbuster drug than it is to develop it in-house.
So what brought the fall of M&A in Q3?
Price Waterhouse Coopers’ Global Pharma & Life Sciences Deals Insights Q3 2016 Update concluded that the Life Sciences’ deal activity has declined in both volume and in value compared to 2015’s Q3. Following a powerful M&A market in 2015, only two out of the last six quarters included total deals worth more than $50 billion.
There were a few factors that contributed to the third quarters’ declining M&A landscape. First was the significant decrease of large-scale M&A deals worth more than $1 billion. Second was a combination of market forces, including “potential interest rate movements and industry specific factors.” Price Waterhouse Coopers also states that the recent talk about the uncertainty of the future of drug pricing has lowered “deal volume in the specialty pharma space as potential acquirers wait to see how this trend develops in the next few quarters.”
Many predict that deal volumes have the opportunity to increase once again in the near future, however, the deal values are likely to remain low until corporations are certain about the industry specific factors.
An Outlook to 2017
Although Price Waterhouse Coopers does not expect to see a quick turnaround in the Life Sciences market, the latest outcome of events in the 2016 election has brought about a new outlook for the industry’s M&A landscape. FiercePharma reported that in the upcoming year, we could potentially see another M&A spree in the Biotech and Pharmaceutical industries due to lowered corporate taxes, regulation focused on the patient needs for new and innovative medical products, dropped concerns for drug pricing, increased stocks and an influx of foreign money. BioPharmaDive says that pharmaceutical companies with large capital alone currently hold as much as $98 billion overseas, while biotech corporations are keeping even more money overseas. If organizations are able to bring this money back to the U.S. with a lower tax break and without the uncertainty of industry concerns, M&A deals are projected to sky-rocket.