Strategic trends in big pharma dealmaking

Viewed simply, each deal has a buyer and a seller. In deals focused on pharmaceutical assets and technologies, sellers are typically smaller companies looking to grow by raising capital and accessing expertise or capacity through partnership. Buyers, on the other side, are usually larger companies looking to increase their portfolio, expand into new therapy areas, access novel technology platforms or introduce synergies to strengthen their organizations.

We set out to understand the strategies being employed on the buy-side of the dealmaking landscape by reviewing the key transactions—mergers and acquisitions (M&As), options to acquire, licensing deals/joint ventures and research-only deals—announced in 2016 by the top 50 pharmaceutical companies (identified by total 2015 revenue). Of these companies, 22 announced four or fewer buy-side deals, and five announced no deals at all. We examined the remaining 23 companies (that is, those companies that disclosed at least five buy-side deals in 2016) in more depth.

Revenue roughly correlated with announced transaction volume for these companies, although there are a few notable exceptions (Fig. 1). Celgene, for example, was ranked 27th by revenue with $8 billion, but 10th by deal volume, with ten announced buy-side transactions. Similarly, the 17 deals announced by Allergan made it the 5th most active dealmaker, although the company was 19th when ranked by revenue.

A dissection of deal volume by transaction type shows that several large pharma companies are working hard to innovate by executing research-only exploratory transactions (shown in the green portion of the bars in Fig. 1). These may be to evaluate clinical combinations (for example, in cancer) or to fund very early-stage technology-based research. Active exploratory dealmakers included Johnson & Johnson (J&J), Roche, Merck & Co. and Merck KGaA. The typically small or non-existent dollar value of the research-only transactions means that these and other companies probably made additional such exploratory deals without public disclosure.

Licensing deals and joint ventures (shown in the blue portion of the bars in Fig. 1) were the most active category; 166 such deals were announced among the 23 companies examined. Five of these active dealmakers—J&J, Pfizer, Roche, Takeda and Bayer—announced ten or more deals in this category, and three—Amgen, GlaxoSmithKline (GSK) and Otsuka—announced only deals of this transaction type.

M&As (shown in dark blue in the bars in Fig. 1) made up a smaller proportion of the total volume of deals overall and for most individual companies, with the notable exception of Allergan, which was involved in nine M&A deals on top of its eight license agreements.

Early-stage or late-stage?

Examining the mix of development stages of the accessed assets and technologies can provide insights into corporate strategies with respect to dealmaking.

Charting the 23 companies according to the level of transactions for early-stage assets highlighted the fact that such assets (the light blue portion of the bars in Fig. 2) made up 50% or more of the deal volume for eight companies in the group. At the top of this list is Sanofi, for which early-stage projects made up over 70% of transaction volume. This is in line with the goals of the Sanofi Sunrise initiative, which was set up in 2013 to focus on very early-stage science with transformative potential.

Other companies focused on early-stage deals include AbbVie, Boehringer Ingelheim, Celgene, Takeda, GSK, Amgen and Pfizer. AbbVie Ventures states that it is seeking to augment the core R&D interests of the company via access to next-generation science and scientific leaders. In 2015, Boehringer Ingelheim launched a five-year R&D investment program that included €1.5 billion for collaborations with external partners. Celgene has helped pioneer ‘build-to-buy’ acquisition option transactions, a relatively infrequent but important approach for working with early-stage companies. Takeda, Amgen and GSK have all stated their interest in adopting open innovation models for areas of great medical need and scientific challenge, and have placed innovation centers in key research hubs around the world.

At the other end of the spectrum, several of the 23 companies focused primarily on deals for clinical-stage assets. Allergan announced the largest number of clinical-stage deals but just one transaction for a preclinical program, whereas Merck KGaA focused all of its deal activity around Bavencio (avelumab), an immuno-oncology drug recently approved by the US Food and Drug Administration. Some of these deals were for companion diagnostics for Bavencio; others were clinical-stage alliances to test Bavencio in combination with other development-stage drugs—a common scenario that contributes to the high volume of deals in oncology.

Half of the companies (12 out of 23) also announced at least one deal for approved assets. Again, many of these were for the testing of oncology combinations, in this case with drugs already on the market. The remaining transactions for approved assets represent the more conservative but useful approach of adding marketed drugs to the company portfolio, often within limited territories.

All but one company on the list (AbbVie) also invested in nonpharmaceutical assets—most notably J&J, Lilly, Bayer and Biogen, which each invested over 50% of their deal efforts by volume in nondrug assets. The nonpharma deal space for these companies comprises mainly technology platforms, but also can include medical devices, diagnostics, animal health products and more, reflecting the breadth of the companies’ interests.

Therapeutic focus

A breakdown of top buy-sider deals by therapy area illustrates the well-known importance of oncology to the industry (Fig. 3). All but one of the 23 companies (Biogen) made at least one deal in oncology, with 11 companies announcing five or more transactions. The aggregate deal volume for these 23 companies was fivefold greater in oncology than for the next-largest therapeutic areas of neurology, inflammation or infection. The promise of immuno-oncology and the substantial unmet medical need in cancer continue to drive the prominence of this therapeutic area.

At the other end of the popularity scale for dealmaking is cardiovascular disease—once the leading therapeutic area in the pharma industry. Despite the fact that ischemic heart disease and stroke remain major causes of death worldwide, companies appear to be focused on other unmet needs. The size, length and thus expense of clinical trials in this area are key factors driving drug developers to look elsewhere for market opportunities. The area is not completely devoid of innovation, however, for example, 2016 saw Amgen and Pfizer announce deals for preclinical-stage cardiovascular assets—an RNAi program and a gene-therapy vector, respectively.

Between oncology and cardiovascular disease, a number of companies continue to explore deals in neurology, inflammation and infectious diseases. Thirteen companies did at least one deal in neurology, with six announcing two or more. This is an expansion of industry interest over years past, as innovators strive to solve the very difficult problems of neurodegenerative disease.

Finally, company strategies by therapeutic area range from broadly to narrowly focused. Of the 23 companies we studied, only four announced deals in more than five therapy areas (Allergan, 10; J&J, 9; Pfizer, 8; and Novartis, 6). Allergan’s vigorous dealmaking activity is strongly indicative of its strategy to be a global participant in diverse markets. On the other end of the spectrum are companies such as Merck KGaA and Celgene, which announced deals in only a few therapy areas, suggesting an external strategy to have a deeper presence in more narrowly defined fields.