Coming off a wildly successful year in mergers and acquisitions, pharmaceuticals and others in healthcare should continue to produce a steady flow of deal activity in 2015. That's one conclusion of a panel of experts during a recent roundtable, "Healthcare Deals: Big Pharma, Megamergers & IPOs." The Deal and RR Donnelley's Venue® virtual data room co-produced the Webcast.
Panelists included Darren Carroll, senior vice president of corporate business development at pharmaceutical giant Eli Lilly and Company (LLY); Adam Dolder, a managing partner and head of private equity at Great Point Partners LLC, a healthcare-related investment management company; and Christian Hodneland, a managing director within the healthcare investment banking group at investment bank and wealth management firm William Blair & Company; Mark Aiello, Vice President and General Manager of RR Donnelley's Venue® virtual data room moderated the panel.
"There are a number of targets out there that a number of companies have looked at," Hodneland said, talking of deals in the $20 billion range. "We would anticipate seeing a few more of those in 2015."
According to Hodneland, deal fundamentals remain strong. "Many pharma companies have strong balance sheets today," he said, adding that publicly traded companies making acquisitions "are largely being rewarded in the form of stock price appreciation."
In part, pharmaceuticals-related M&A is following the robust deal environment in general, Dolder said, citing ample access to financing and the booming equities market.
However, some dynamics are propelling this sector in specific ways. For example, many of the targets of large, acquisitive pharmaceuticals are "single-asset companies that are far along [in the approval process] or approved," Hodneland said. "Those [deals] tend to be much easier to get done and just make a lot more sense in the long run."
That contrasts with attempts to acquire "a larger platform company that's vertically integrated with many products," which requires far more complicated integration.
Carroll agreed. "Most of the assets that we'll look for are really based on specific molecules and then trying to figure out how can we get greater efficiency around those."
On occasion, he added, Eli Lilly works with venture capital funds to specifically develop a single molecule. They jointly invest in a startup, termed a "project-focused company," which is based solely around developing that molecule.
While venture capital firms have had a tough time making good returns off life sciences, they will continue to "make a large impact in companies moving forward," Hodneland said. Early-stage companies "require tremendous amounts of capital"-$20 million to $50 million-and VCs remain the major funding sources, despite an occasional early-stage IPO or reverse merger.
A lot of innovation over the past half-decade or so has come from VC-backed smaller biotech companies, Hodneland said. "Large pharma wants access to that and from the venture capitalist's perspective, it's a way to derisk early and to finance some of these early-stage opportunities."
Over that same period, Carroll added, the Food and Drug Administration has approved a number of "new molecular entities, really new novel medicines." Companies that didn't develop the molecule in the first place ended up sponsoring some 70% of those approvals, he said.
The pharmaceutical industry is in the midst of a fundamental change, the panel explained, with such technologies as gene therapy and RNA interference gaining traction and, Carroll said, new investment opportunities in such areas as oncology or immunology.
A major focus for the industry is on the development of biologics-therapeutic proteins derived from living cells. Most are very large molecules or mixtures of large molecules. In percentage terms, most drugs on the market are small molecules, but resources are being poured into large molecules, and the gap is narrowing.
Dolder laid out just how important large molecules have become. Some 40% of pharmaceutical products sold "are large molecules or specialty in nature," he said. "If you look at the clinical stage assets today, that's 60% to 70% of the pipeline and then put a dollar weighting on it, we're talking about 80% to 90% of ultimate total dollars spent in the United States."
That rise in the importance of the large molecule has come first "from the branded side and now from the biosimilar side," Dolder explained.
Biosimilars, marketed after patents expire, have properties similar, but not identical, to existing biologic products. They are in effect a generic version of large molecules. But there's an important difference between biosimilars and traditional generics. According to Carroll, most companies with large molecules "haven't really been exposed to the kind of decay of the sales curve that you see with small molecules." The danger, he said, are for those companies whose top line is dependent on one or two large molecules and more exposed to industry payers who are pushing biosimilars as a way to cut costs.
"Relatively few of the large pharma companies have gone whole hog into biosimilars," he said. "Most of us have done it on much more a kind of ad hoc basis." He cited a diabetes biosimilar Lilly is developing. "That is designed to really just help fill out our franchise, give us an additional offering."
Within healthcare, initial public offerings are again booming and because some early-stage companies are attracting very large valuations, IPOs have become a transaction of choice once more. That, however, is depressing some M&A activity, Hodneland said. "There's a negative correlation," he explained. "For platform technologies, it's very tough to see paying public market valuations for these early-stage companies."
For those companies that "generate positive data and continue to show that they're an attractive investment," follow-on financing is available, Carroll said. The calculus, he said, involves what is necessary to bring a product to market. In diabetes, for example, a Phase 3 trial involves thousands of patients and then a large commercial engine, whereas in some specialized areas of oncology, it might take a relatively small sales force "where you might be able to pull that off on your own," Carroll said.
According to Carroll, another dynamic is at work in large pharmaceuticals when deciding whether to pursue acquisitions. "Right now, we're actually making choices between some of the very interesting external opportunities and interesting internal opportunities," he explained. "When we go outside to go after something, we're usually giving up something internal."
Dealmaking isn't just a question of acquisitions. Collaboration, even between competitors, is taking place, the panelists explained. That's a way, Carroll said, to "allocate the risk of very large programs." Carroll described three "very large collaborations" Eli Lilly has participated in: an Alzheimer's disease project with AstraZeneca (AZN), a pain-related collaboration with Pfizer (PFE) and a multimolecule collaboration with Boehringer Ingelheim. The common thread, he said, is "some specific expertise that we had that we could bring to bear on it."
However, not just the major pharmaceuticals are partnering with each other. Dolder described strategic investments between his firm's portfolio companies and larger, more established corporations. He cited physician-related health information technology concern Allscripts (MDRX), which has invested in Portfolio Company Citra Health Solutions, and WebMD Health Corp. (WBMD), which invested in portfolio company Connecture (CNXR), a Web-based health insurance shopping network.
"Especially as we focus on the lower-middle market businesses, it's a way to more rapidly commercialize," Dolder said. "As a sponsor, partnerships, especially with strategics, are incredibly compelling."
According to Dolder, his fund focuses on what he termed the "pharmaceutical supply chain or infrastructure." That includes medical technology, medical devices and health-enabled services. "In those other sectors, especially the provider landscape, there is an incredibly fragmented marketplace," he said, citing healthcare IT in particular. "It's extremely fragmented. There just aren't the large consolidators out there."
Dolder said he believes consolidation will come, in part because of the demands of the Affordable Care Act.
"Whether it's services, whether it be IT, whether it be pharma, biologics or biosimilars, everything needs to come at a better value and a good patient system," Dolder said, "because we are moving to this value-based system versus a volume-based system. These are the fundamental underpinnings to something that will lower the average incident cost of a healthcare event 10 years, 20 years from now."