After a pandemic-induced drought, Pfizer's [NYSE:PFE] USD 11.6bn acquisition of migraine drug maker Biohaven Pharmaceuticals [NYSE:BHVN] could be a sign that big pharma M&A is returning.
Following the onset of COVID-19 in early 2020, pharmaceutical players such as Pfizer, Merck [NYSE:MRK], Moderna [NASDAQ:MRNA] and Johnson & Johnson [NYSE:JNJ] pivoted to focus on developing treatments and vaccines for the coronavirus. Large-scale dealmaking aimed at replenishing drug pipelines mostly dried up. Now, cash rich from vaccine success and facing shrinking COVID sales, many wonder if big pharma will start striking mega deals again to secure future revenue streams.
So far it has not happened. While M&A involving North American-based biopharma targets reached a record USD 229.3bn in 2019 and registered a healthy USD 96.5bn in the pandemic’s first year, dealmaking slowed to USD 45.3bn in 2021 and has yet to recover, according to Dealogic. Year-to-date, biopharma deals worth USD 13.3bn have been announced, putting 2022 on track to match last year’s anemic numbers.
Replacing off-patent drugs
Some believe that is about to change. The Biohaven deal is the largest since Alexion Pharmaceuticals’ USD 42bn purchase by AstraZeneca [NASDAQ:AZN] in late 2020 and Pfizer's biggest since 2016.
Besides the hit from a shrinking COVID bonanza, Big Pharma faces patent losses on many of its most lucrative drugs over the next decade, according to Vamil Divan, a senior biopharmaceuticals research analyst at Mizuho. Those affected include AbbVie [NYSE: ABBV], Bristol Myers Squibb [NYSE:BMY], J&J, Merck and Pfizer.
"Pfizer is maybe most acute of all of them, with a number of products going off-patent," he says. "There's lots of pressure to find good assets."
One factor that could stymie M&A activity, however, is continued public markets uncertainty depressing the valuations of many mid-cap biotech players that are potential takeout targets, Divan warns.
Biohaven is one example— the company was trading in excess of USD 140 per share last year but had dropped to USD 83 the day before it sold. While Pfizer’s offer of USD 148.50 per share represented a hefty 78% premium, it was still a 14% discount to what Pfizer paid last November when it acquired 2.6% of Biohaven for USD 350m.
Sellers must decide either to exit at a depressed price or weather the storm to sell at a higher valuation later, Divan says.
Oncology and beyond
Most pharma players are still making bets on oncology, a treatment area which has long dominated pharma M&A. Outside of oncology, Divan points to a handful of biotechs focused on central nervous system treatments that could be ripe takeover targets. These include Karuna Therapeutics [NASDAQ: KRTX] and Relmada Therapeutics [NASDAQ: RLMD], both of which are set to announce pivotal data later this year, along with Exopharm [ASX:EX1].
The Biohaven deal comes at a time when the US is struggling with an opioid crisis and doctors want other forms of pain management medication. Biohaven's pill, Nurtec, is a new type of migraine drug called CGRP inhibitors. Research shows CGRPs could benefit patients with chronic pain from neurological disorders, and eventually could be an effective alternative to opioid-based drugs.
"There's an unmet need in pain management," Divan adds.
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