It is no secret that the failure of Bristol-Myers Squibb’s ($BMY) OPDIVO™ to meet PFS endpoints in CheckMate-026 was a major set-back, leading to a dramatic reduction in market cap (~20%) in its aftermath. BMY undoubtedly has a high-potential pipeline gained mostly through its string-of-pearls acquisition and partnership strategy over the years. However, the rumour mill has once again started churning, and the BMY sweepstakes seem to be back in play for boardrooms among major pharmaceutical companies.
The new year is already shaping up to be a big year for pharma deal making. With a valuation of over USD 90B, a BMY takeover would potentially make it one of the largest ever seen in the industry. Naturally, deals of this magnitude can yield short-term benefits for shareholders, but the question is, how can longer-term benefits be ensured, not just in terms of sustainable revenue growth, but also with regard to meaningfully-improved patient treatment options?
Not many companies have the means to go forward with an acquisition of this calibre, but amongst those that may, PFIZER ($PFE), NOVARTIS ($NVS), and ROCHE ($ROG) are expected to be potential suitors. PFE may be the most likely candidate in light of its significant financial reservoir, with typically a reported cash on hand of over USD 25B, and a clear appetite for such a substantial effect on its portfolio and commercial infrastructure. Looking beyond immediate reward, careful portfolio evaluation must be conducted to understand synergy with regard to a diversifying landscape of influential stakeholders. Doing this will help bring the potential acquisition’s effect on portfolio / pipeline and long-term commercial strategy into focus.
M&A: ARE YOU A GOOD FIT?
The organic pace of pharmaceutical commercial impact is naturally slow. With an increasingly complex set of requirements within clinical trial design to address stakeholder needs, drug development timelines can extend into full-decade range, and so M&A can be viewed as the most achievable means of satisfying stringent shareholder expectations by assimilating assets that are either already commercialised, or in later development stages and having showed promise. However, such a short-term growth obsessed philosophy may lead to unforeseen consequences over time. ASTRAZENECA ($AZN) was aware of this potential misalignment when, after PFE’s final $119B bid was rejected, AZN’s chairman, Leif Johansson, communicated that “PFE’s approach throughout its pursuit of AZN appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimisation […] and would present significant risks for shareholders, while also having serious consequences for the company, our employees and the life-sciences sector in the UK, Sweden and the US.”
McKinsey published a paper in 2014 titled “Why pharma megamergers work”, which argues that whilst conventional wisdom has it that mergers of such calibre are ultimately detrimental, some in fact “have been critical for the longer-term sustainability of acquirers”. Here, their analysis of 17 large deals in the 1995-2011 period yields the following three conclusions that corroborate this statement:
- Megamergers create shareholder value: companies expanded EBITDA margins by 4% and ROIC by 14%
- Consolidation deals generate greater economic profit: deals between companies with notable portfolio overlap yielded larger changes in economic profit, EBITDA margins, and ROIC
- Growth-oriented deals change longer-term expectations: growth-platform deals increased trading multiples by more than 60%, possibly because of the growth contribution from the acquired company in launching new products
But referring again to Leif Johansson’s remark begs a couple of questions. Will a new pharmaceutical behemoth favour innovation in the industry and ultimately produce benefits for patients greater than those that might have been achieved by the independently-functioning companies? Do the synergies that lead to a favourable due diligence process also manifest themselves when it comes to the development of new efficacious treatments and increasing patient options? These are questions that must be asked, but here is where McKinsey’s article may fall short of comprehensively assessing the situation. The crux of the deal or no-deal question is whether the potential of both the acquirer’s and the target’s pipelines will be fully unlocked, which is a matter of long-term strategy on part of the acquirer, and an issue that should be thoroughly evaluated before proceeding.
Envisioning what might have been had a merger not occurred is not that simple for a number of reasons, the least not being that any particular clinical trial programme could have been terminated due to lack of efficacy. Thus, blindly postulating that companies operating independently will always result in more treatment options for patients is not a substantiated argument in its own right. To better gauge what the long-term consequences of a putative BMY merger may be, it is necessary to first evaluate its products and pipeline and subsequently define the therapeutic areas it operates in or may so do in the future. From this, we can evaluate how BMY’s potential suitors could fare with the acquisition of its portfolio if the deal were to come to fruition, and how the current pharmaceutical landscape might be altered.
BMY: MORE THAN OPDIVO
Despite finding itself in a debatably faltering state at present, BMY is a decidedly strong contributor to the oncology milieu, and has a number of commercialised products, the most recent one being OPDIVO™, and multiple other biologics such as EMPLICITI™, YERVOY™, and SPRYCEL™. In support of its oncology portfolio, the company’s efforts in immunology through NULOJIX™ and ORENCIA™, as well as cardiovascular disease, fibrotic disease, and antivirals create a formidably diverse presence in specialty disease. A stumble with OPDIVO™ would not break BMY’s back.
PFE: ON THE HUNT AGAIN?
As is historically true, PFE is hungry for a deal – a big deal. After its failed $119B takeover bid of AZN and its thwarted $160B tax inversion merger with Allergan, PFE is still on the lookout whilst sitting on $80B of unremitted foreign earnings. So even though this pile of cash underscores why PFE’s merger attempts would have had clear tax benefits and that a BMY merger, being a domestic takeover, would yield none of these (except if Trump were to decrease corporate taxes), what strategic benefits could be derived from the combination of their portfolios?
Regarding its cardiovascular portfolio, PFE had a setback in its attempt to resuscitate the ghost of LIPITOR™ with bococizumab. However, the tie-up with BMY could lead to a significant and immediate revenue boost by capturing the full rights to ELIQUIS™, which it currently co-markets with its potential acquisition target. BMY’s pipeline of antifibrotics and anticoagulants could definitely be assimilated into PFE’s formidable development capabilities, which currently boasts other assets in similar indications.
BMY’s robust oncology portfolio would undoubtedly be an asset for any pharmaceutical company looking to expand its presence in this space. PFE’s recent addition, XTANDI™, acquired through its acquisition of MEDIVATION ($MDV), could be explored through clinical study to be used in combination with BMY’s immuno-oncologic portfolio. The same can be said for IBRANCE™ and upcoming PARP-inhibitor talazoparib, also from MDV. PFE also has underway several programmes for biosimilars to AVASTIN<™, RITUXAN™, and HERCEPTIN™, which could give it an extra competitive edge in the oncology space. These portfolio synergies could set PFE up to be a force to reckon with in the oncology space, with the potential to rival top drugs such as MERCK’s KEYTRUDA™ and to yield new effective combinations in several tumour types.
Furthermore, in the inflammation space, PFE has a REMICADE™ and HUMIRA™ biosimilars which could be complemented nicely with BMY’s successful ORENCIA™ and NULOJIX™. In the virology space, PFE’s presence is not significant, but the company is no stranger to exploring new therapeutic areas, and would likely retain EVOTAZ™ and DAKLINZA™ to overcome the headwinds that BMY has recently been experiencing. Finally, PFE’s CNS portfolio, consisting of smoking-cessation aid CHANTIX™, is unlikely to be significantly aided by the addition of BMY’s antipsychotic ABILIFY™, which encountered loss of exclusivity in 2015. However, the company’s schizophrenia pipeline could find eventual synergy with BMY’s commercial CNS infrastructure.
A VIABLE DEAL
Overall, PFE has the financial means and overall portfolio capabilities to readily assimilate BMY and its synergistic assets. If proposed corporate tax reforms proposed by the new White House become a reality, this potential ‘mega-merger’ is an attractive proposition for both parties. A commitment to investing in continued licensing activities, as well as some in-house R&D, will ensure that portfolio attrition would be limited, and could yield a combined entity with significant value and improved presence in oncology and cardiovascular disease, as well as other high growth specialty areas. Time will tell if number-crunchers and negotiators can reach a mutually-beneficial term-sheet – and if it does, companies competing in these areas will be exposed to a strong portfolio buoyed by marketing power and finesse.