Whether happening in public or private, biopharma M&A is fiercer than ever. Experts point to patent pressures, herd mentality and a declining stock of available biotechs with mature assets.
Pharmas love to pile on to one idea hoping for the next big thing. That herd mentality, along with patent pressures and a declining stock of innovative late-stage biopharma assets, is leading to fierce battles to land M&A deals. Experts say intensediscussions are playing out behind the scenes in addition to the public bidding wars. As soon as one buyer shows interest, the phone will start ringing.
“The handsome guy at the dance is defined the moment that one of the handsome ladies at the dance walks up to him,” explains Jake Henry, a senior partner at McKinsey and coleader of the consulting giant’s M&A team. “Then everyone’s like, ‘Oh, well, if she’s talking to him, then he must be handsome.’”
The situation has become more acute as biopharma M&A has opened up. Deal processes are getting even tougher. Sellers are fielding multiple serious inquiries and deal terms are starting to adjust, with more cash offered upfront to gain an edge. Public unsolicited bids after a deal has been announced, like Pfizer and Novo Nordisk’s battle over Metsera or Lundbeck’s short-lived attempt to win Avadel Pharmaceuticals out from under Alkermes, have excited the business world even beyond pharma.
The end result is many spurned companies heading back to circle the wagons and try again—and pretty happy investors on the sell-side, experts told BioSpace.
“I do think that that herding dynamic is really there,” Henry said. “It’s a tragedy for our industry, because then we end up overpaying for these assets. And it’s really a game of chicken to see who can pay the most premium and who can put their balance sheet to work.”
‘Targets Have Leverage’
Market analyses conducted at Big Pharmas come to similar conclusions, leading companies to the same trending indications, mechanisms of action and possible ways to maximize products, Henry explained. Essentially, they narrow their own pool to the same group of potential target companies as everyone else.
And the same happens on the sell side. Investment bankers know exactly which group of companies to call when they have a biotech to shop around. When one company expresses interest, they pick up the phone and call the others in the group as part of due diligence.
“That’s the ultimate goal, is to create a competitive environment, because you’re going to eventually get better terms,” said Brett Reinke, a partner at the law firm Stradling who advises on private life sciences M&A transactions. And, if the deal you went with ultimately sours, a seller can circle back to those that were interested earlier.
Over the past few years when M&A was cooler, deal processes have mostly been bilateral, with just two parties negotiating at the end, according to Kevin Cooper, a partner on Cooley’s M&A team. But now, things are starting to look a bit more like an auction, with multiple parties bidding higher and higher and deals coming right down to the wire. That means the biotechs are holding the cards.
“Targets have leverage. They’re able to say, this is a competitive process,” Cooper said. “You really have to put your best foot forward on price and deal terms, and it isn’t certain sometimes until the night of signing which way it’s going to go.”
Henry said sellers, particularly those with later-phase data or a derisked asset in hand, can push for more money upfront in this environment, instead of having a back-ended deal heavy on milestones.
Reinke is seeing the same competitive dynamics on the private side. Valuations are going up—not as high as during the pandemic when the market was flooded with interest, but prices were likely inflated then and more realistic now, he explained.
At the same time, funding for early-phase biotechs has plummeted. Reinke said this is feeding into the frenzied M&A cycle, because biotech stock is not being topped back up as the more advanced companies get bought out.
“When you have fewer exits, whether it’s M&A or IPOs, then it impacts the VC community, because they’re not getting their exits, they’re not then being able to put money into new companies,” Reinke said, adding that these VCs are having to prop up their existing portfolio companies instead.
With that in mind, pharmas are willing to be more aggressive—even if their hand may be forced by the competitive dynamics, he said.
Cooper has had to make many phone calls lately informing a potential buyer that they were not successful.
Usually, that’s the end of it. But sometimes—as with Metsera—the unsuccessful party doesn’t want to let go.
Jumping the Line
Unsolicited bids—sometimes called deal jumping as in a recent report by Cooley—are rare. That biopharma has had two in recent months is exceptional. But the uptick is not just a biopharma phenomenom—the market conditions appear unusually encouraging of such public battles. Henry and Cooper pointed to the recent skirmish between Netflix and Paramount for Warner Bros.’ Discovery, which ultimately ended in late February with Netflix walking away. Paramount won the prize for a whopping $111 billion.
Unsolicited bids are really exciting and garner wide attention outside the specific industry, Cooper said. He gets it—even his friends were calling to get the scoop on Metsera.
“I don’t get as many questions from non-M&A friends when a friendly deal has been announced,” Cooper said. But more and more people are paying attention to bidding wars, from friends to boardrooms, executive teams and potential buyers.
The law carefully outlines how these types of bids must be made, particularly for public companies. But boards are obligated to entertain another offer, Henry said, regardless of how happy they are with the original one. Cooper said that the incumbent offer is usually pretty hard to beat.
A rival bidder would have to pay a termination fee to the original one, too, so that needs to be factored into the cost of the acquisition. In the case of Metsera, the termination fee payable to Pfizer would have been $190 million had Novo ultimately secured the weight loss darling.
With deals more competitive than ever, the experts expect unsolicited, public bidding wars in biopharma could keep coming.
After all, an announced deal reveals the exact price and terms, giving a party that lost out all the details they didn’t have during private negotiations to top the bid, Cooper noted.
It’s one of the arrows in Big Pharma’s quiver as buyers navigate market dynamics that should firmly put the power in sellers’ hands. Indeed, neither Cooper, Henry nor Reinke would dub this a seller’s market, noting that pharmas are shrewd and careful.
“From the biotech side of things, a competitive environment helps you, but both parties are still sophisticated in these negotiations,” Cooper said.
Looking to the future, M&A negotiations may only get more intense, as available companies with Phase 3 assets have mostly been picked off. Henry said that pharmas are having to look earlier, with Phase 2 becoming a major battleground. Typically risk-averse Big Pharmas may need to start thinking even earlier, Henry said.
“The supply of ready-to-go assets with on-market products and clear Phase 3 pipelines dwindles more and more every day.”