The world's biggest drugmakers are likely to ramp up their M&A activity to recover revenue lost as the U.S. patents for many of their best-selling products start to expire.
Bristol Myers Squibb Co.'s blood cancer drug Revlimid and Roche Holding AG's eye drug Lucentis both face lower-cost competition as soon as this year. AbbVie Inc.'s arthritis therapy Humira — which brought in over $20 billion last year — and Johnson & Johnson's Crohn's disease drug Stelara will encounter cheaper rivals in 2023. Later in the decade, Bristol Myers' and Pfizer Inc.'s cardiovascular treatment Eliquis will experience similar market share loss, as will cancer blockbusters like Merck & Co. Inc.'s Keytruda and Bristol Myers' Opdivo and Yervoy.
To recoup these losses, pharmaceutical companies may take advantage of a drop in valuations of small- to mid-cap biotechs to refresh their drug portfolios, RBC Capital Markets analyst Brian Abrahams told S&P Global Market Intelligence. The SPDR Biotech Fund Index has dropped 24% since the start of the year.
"The lower valuations and a need for pipeline, especially in the face of a substantial number of patent cliffs by the end of the decade, is going to prompt greater M&A activity," Abrahams said. "There are some really interesting stories out there with some promising innovative technologies."
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Biopharma companies faced a similar patent cliff in the early 2000s when small molecule drugs lost as much as 90% market share in the first month of new competitors hitting the market. For today's biologic drugs, which are created using live organisms
For example, AbbVie expects biosimilars of Humira — the best-selling prescription drug in 2021 — to erode sales by about 45% in 2023 based on similar numbers in Europe, where the copies have already launched, executives said on a Feb. 2 earnings call. This would amount to an estimated loss of $8.4 billion in annual sales of the arthritis therapy.
"Biopharma has had some major patent cliffs in the past, and those have been major transformational moments for the industry," Ural said. "But there is going to be a kind of growth slowdown in the 2025-26 period, which is different."
From pandemic to purchase
Healthcare M&A in 2021 reached the highest volume and aggregate value since at least 2005, with deals amounting to $396.01 billion, according to S&P Global Market Intelligence data.
But the uncertainty around predicting a post-COVID-19 world made it harder to secure accurate valuations and stifled M&A risk-taking, Datasite Chief Revenue Officer Mark Williams said. Datasite is a platform to facilitate M&A that has been used in over 1,500 healthcare deals.
"The megadeals just didn't happen last year as a result of COVID," Williams said in an interview. "Now, we're on the cusp and we could see confidence return."
During the pandemic, biopharma has been entrenched in a seller's market with premiums giving pause to some bigger companies looking to bolster their drug pipelines via acquisitions, Ural said.
"Pharma needs to balance the growth gap through organic and inorganic means, and decide which therapeutic areas are important," Ural said.
The average one-day premium for biopharma companies developing new treatments was 112% between 2019 and 2021, according to a January report from EY. For companies developing cell therapies, that premium reached 150%, compared to 108% for those making antibody-drug conjugates and 94% for those developing gene therapies.
"At some point, the deal becomes too expensive for you to comfortably deploy," Ural said. "That comes to how desperate you are to make that call."
Building it back up
Companies that held off on purchasing during the risky pandemic period have since voiced their intentions to make business development a priority. J&J's strong cash position means the company can afford to be more aggressive in acquiring early-stage companies as well as larger deals, CEO Joaquin Duato said on a Jan. 25 earnings call.
The sale of Biogen's biosimilars business in February could mean the company is looking to build up the core enterprise via M&A as its multiple sclerosis drug Tecfidera faces competition and Alzheimer's disease drug Aduhelm continues to struggle, RBC's Abrahams said.
Similarly, Pfizer's COVID-19 vaccine revenues gave executives a large bank to draw from as they search for deals. When contacted by Market Intelligence, Pfizer pointed to CEO Albert Bourla's comments in a Feb. 8 earnings call that the drugmaker's goal is to be a growth company from 2025 to 2030, even with the patent losses expected during that period.