Jefferies Yee - M&A Expert Advisory Call: Key Takeaways
Americas / Biotechnology: M&A Expert Advisory Call: Key Takeaways
Key Takeaway
Consistent with our positive underlying sector thesis in biotech - according to M&A advisory and tax experts on today's call, 2018 should continue to be a robust year for deal activity driven by companies' need for top-line growth and to fill in revenue gaps, additional firepower available due to tax reform, continued evaluation of strategic alternatives and cost efficiencies, and managing drug/product life cycles. **Contact us for dial-in replay information**
The advisers highlighted several key points that we think, importantly - for investors - will keep an underlying bid in smid-cap biotech and tailwinds to support higher valuations for innovative, scarce and blockbuster assets. One key question that has come more frequently these days and remains outstanding (and non-consensus!) is whether "big biotech" could ultimately become a target as well given low valuations/multiples, familiarity to big pharma, potential to eliminate cost structures and diversification of assets.
1) Repatriated cash: a variety of options are being considered that should help investors: M&A allocation, but also buybacks, dividends, internal investments and employee benefits. Point being that the newly-repatriated cash on the balance sheets of large biotech and pharma gives flexibility to benefit all stakeholders. We acknowledge that in biotech investors primarily want capital deployed for mid/late-stage M&A and BD as they face top-line issues which is keeping the multiple compressed, and buybacks do not really solve that issue.
2) On therapeutic areas of interest: advisors see expansion beyond oncology (still very important), and we think neurology is a key next move: SAGE, AVXS, SRPT, and others, could make sense given late-stage, de-risked, profiles and blockbuster revenue visible (consistent w/ our note on BIIB). Additional therapeutic areas of interest are autoimmune disorders and rare diseases - especially cell and gene therapy approaches. Companies have also expressed interest in differentiated modalities such as mRNA therapeutics, stem cell therapies, and enabling technologies around manufacturing and development (see note discussing potential M&A around gene editing, including SGMO, NTLA).
3) Deals could vary from small to large size, outright acquisitions to partnerships and JVs... Expectation is that most deals will continue to be in the $1-10B range, with likely limited mega-mergers as a percentage of total deal volume, but those are not completely off the table. Our experts mentioned that their corporate clients are especially focused on filling "revenue gaps" due to drug/product life cycles and diversifying their pipeline's in order to mitigate risk from failures in the clinic (CELG, BIIB, AMGN particularly seem to fit this theme).
4) Although current M&A valuations are relatively high, our experts note companies are willing to acquire at even higher valuations and potentially drive demand further down pipelines into Phase I/II asset: The experts mentioned that they conducted a survey of dealmakers in the industry at the end of 2017, and many indicated that they felt valuations are "high," but also are likely to continue rising, given the high levels of cash on balance sheets and the need to do deals. While a lot of the focus is on quality later-stage de-risked assets, there will likely be a push downward into earlier stage programs and technologies that could fill out pipelines for several years... another potential positive tailwind for smid-cap biotech, consistent w/ our thesis.
Bottom line: We believe today's announcement of CELG's acquisition of JUNO (see note here) and SNY's acquisiton of BIVV, along with several previously announced deals such as Roche for RXDX last month and CELG for Impact Biomedicines (private), indicate a continued appetite for activity. We expect to see a continuation of this trend which should be positive for the sector, especially for emerging SMID cap companies. Contact us for our M&A biopharma table and our list of top SMID M&A candidates for 2018.