Deep pockets and an ongoing pipeline crunch are expected to spur an even bigger year of deals in healthcare…
We’re just ending month 2 of 2014, and already there’s been a flurry of activity in the great and wonderful world of biotechnology.
2013 ended with plenty of momentum in the M&A space, as two blockbuster deals were announced.
Shire Plc (NASDAQ:SHPG) bought out ViroPharma Inc. (NASDAQ:VPHM) for its treatments in rare diseases and ADHD in a deal valued at $4.2 billion
Just before New Year’s Eve, the Carlyle Group (NASDAQ:CD) stated that it is nearing a $4 billion agreement to absorb Johnson & Johnson’s (NYSE:JNJ) ortho clinical diagnostics unit, which makes blood-screening equipment and laboratory blood tests.
Then in early January, General Electric Co. (NYSE:GE) agreed to pay approximately $1.06 billion to acquire three business units of Thermo Fisher Scientific Inc. (NYSE:TMO), including its cell culture, gene modulation, and magnetic beads divisions.
These three businesses generated $250 million in revenues last year, and the cash provided by GE will enable TMO to complete its own $13.6 billion acquisition of Life Technologies Corp. (NASDA:LIFE) which is expected to be completed in a few months.
That same week, Forest Laboratories Inc. (NYSE:FRX) announced that it would be buying privately held Aptalis Pharma Inc. for $2.9 billion, which will give Forest various medications to treat gastrointestinal ailments and cystic fibrosis.
Following the announcement, Forest’s stock shot up 18% – the biggest jump in over three decades for the company.
Meanwhile, Paris-based Sanofi (NYSE:SNY) just purchased a 12% stake in Alnylam Pharmaceuticals (NASDAQ:ALNY) worth $700 million to access rare-disease treatments.
Then a few weeks back, Quest Diagnostics (NYSE:DGX) signed a definitive agreement to purchase privately-held Solstas Lab Partners Group in a deal worth $570 million.
Time to come up for some air…
Now, it’s uncertain whether or not 2014 is going to be a record-breaking year for mergers and acquisitions (that title currently belongs to 2011), but analysts and investors alike are bracing themselves for a busy year regardless.
The biggest reason, of course, are the slew of patent expirations that’s come up since 2010.
According to Bloomberg Industries researchers, over $60 billion in revenues were lost by big pharma to cheaper generic alternatives from 2010 to 2012. It’s estimated that a further $50 billion could be lost in the ensuing five years.
But instead of combatting lost profits with expensive research & development plans, major companies are opting to swallow up smaller players who already have critical products in the pipeline that they can exploit.
One particular class of ailments that big companies have taken a keen interest in is rare diseases.
The FDA estimates that there’s somewhere between 6,000 and 7,000 rare diseases affecting 2.5 million Americans.
The market for rare-disease drugs (also known as orphan drugs) is expected to grow at twice the pace of the pharmaceutical industry to $127 billion by 2018 from $83 billion in 2012, according to market research firm, Evaluate Ltd.
Not only are rare disorders usually treated with far more costly drugs (thus higher margins), but there are also generous incentives handed down by the FDA to help bring them to market sooner.
Developing orphan drugs can lead to quicker approvals and clinical trials, with tax benefits, and more importantly…longer patent protection.
Whereas drugs for more widespread illnesses typically get five years of protection, orphans receive seven.
As such, one company that has a big red target on its back is BioMarin Pharmaceutical Inc. (NASDAQ:BMRN).
They have a number of trials in the pipeline, and one of its most prized drugs, Vimizim, just received FDA approval.
Vimizim is being developed to treat patients with Morquio A syndrome – an inherited disease that causes abnormal bone development, including misshapen spines, skulls, and rib-cages. The disease is said to occur in 1 out of every 200,000 births.
BioMarin’s other trials and studies include treatments for phenylketonuria (PKU), breast cancer, Pompe’s disease, Batten disease, and achondroplasia in children.
While these products are still in testing phase, BioMarin is generating revenues through four successful drugs already in the market: Naglazyme, Kuvan, Aldurazyme and Firdapse. BioMarin also co-markets Aldurazyme with Sanofi.
Behemoths like Bristol-Myers (NYSE:BMY) and Merck & Co. (NYSE:MRK) have openly stated that they intend to invest externally rather than undertake internal R&D projects for cancer and specialty drugs to fill their portfolio.
With $6.3 billion and $18.2 billion in cash respectively, BioMarin could be a suitable acquisition candidate by these or other giants.
Any way you look at it, 2014 will be a big year for biotech deals. It’s just a question of how big.