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PA IN THE MEDIA

AbbVie-Allergan tie-up has biopharma industry searching for next megadeal

Bret Schroeder, healthcare expert at PA Consulting, discusses megamergers in the healthcare and life sciences industries.

Read the full S&P Global Platts article here

AbbVie Inc.'s $84.2 billion Allergan PLC buy has industry watchers speculating which companies might be subject to the next biopharma megadeal.

The transaction value of the AbbVie-Allergan announcement is the third largest of 2019 in all sectors covered by S&P Global Market Intelligence, a list topped by Bristol-Myers Squibb Co.'s $95 billion purchase of Celgene Corp. at the beginning of the year.

Besides the fear of missing out on the next big deal, pharmaceutical companies have several pressure points that suggest they may be ready to buy or be bought.

Bret says: "The reason for the acceleration in M&A is continued poor financial performance among the players — not only the acquirers but the organizations being acquired. Competition and regulatory changes are forcing these companies to take a good hard look at the future and say, the world of the past just isn't going to be there for us, so what do we do now?"

Factors of a deal

Looking at the market performance of the industry's top players, those with lower price-to-earnings ratios tend to be the most volatile and primed for a deal as either buyers or targets. Among selected companies with market capitalization higher than $10 billion, S&P Global Market Intelligence data shows that Celgene, Bristol-Myers and AbbVie — all megadeal participants in 2019 — have some of the lowest price-to-earnings ratios.

The other two — Biogen Inc. and Gilead Sciences Inc. — have similarly low price-to-earnings ratios of 8.2 and 11.1 as of July 9, but differences in their performance tell two contrasting stories.

Biogen's share price has dropped almost 19% year over year, and with such a low price, the company would appear to be available for a premium. But a potential Biogen buyer would have to consider more than just the valuation: the company's growth prospects took a major hit when two late-stage Alzheimer's trials were discontinued in March, causing the stock to plummet. Biogen has only $1.22 billion in cash and $5.94 billion in debt.

Meanwhile, Gilead's stock has only fallen 3.3% year over year. The company also has $17.9 billion cash on hand, bested only by pharmaceutical giant Johnson & Johnson at $18.1 billion, according to Market Intelligence data. That, coupled with its relatively low price-to-earnings ratio, suggests the potential for dealmaking.

Bret adds: "In general, what you would want to look for is a company that has a strong balance sheet, so they have some cash on hand, some assets on hand that companies tend to use as part of that acquisition process. I think of strategy pretty simply — either I'm going to grow into new markets or new products or a combination of those two."

Accelerating M&A

The AbbVie-Allergan deal was announced halfway through a year in which industry insiders expected to see a flurry of M&A activity due to lower sales forecasts, continued interest rate hikes and 2017's tax reform.

Bret notes that while risk in the industry heightens, so does the number of megadeals. The previous five years saw buyers making smaller, additive acquisitions, but more recently the deals have grown in size. "My sense is you've seen more of that in the last 18 months because there's been this realization that, to win in the end, we're going to have to matter. You see some of that manifesting itself in the size of some of these deals happening now — to say, listen, if we're going to make a difference, we're going to have to play big, and playing big means we're going to be a top-five player."

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