Healthcare M&A activity rebounds in Q2'21 as pharma companies scan for deals

Healthcare deal-making surged in the second quarter, boosted by life sciences and health technology companies as drugmakers build up their balance sheets and watch valuations.

The number of healthcare deals announced in the quarter almost doubled from the same period a year ago, when the burgeoning pandemic stalled purchases. Aggregate deal value grew more than four-fold to $81.3 billion year over year. Although second-quarter deal volume reached its highest level since at least 2016, those transactions were smaller on average than in 2019, when aggregate deal value was $142.98 billion.

The largest M&A announcement of the quarter was Thermo Fisher Scientific Inc.'s purchase of life sciences company PPD Inc. for $21 billion, expected to close by the end of the year. Another life sciences giant, Danaher Corp., agreed to pay $9.6 billion for Aldevron LLC in the second-largest deal.

"The life science sector has benefitted from a strong COVID-19 related tailwind," S&P Global Ratings analyst Arthur Wong wrote in a July 29 healthcare sector update. "Companies have used the windfall to invest in complementary businesses."

Beyond the pandemic, the life sciences industry — which produces laboratory equipment, gene sequencers and other equipment for biotech and pharmaceutical companies — is likely to benefit from increasing research and development activity while remaining relatively insulated from the pricing pressures in other subsectors of the healthcare industry, Wong wrote.

Health tech notched the third-largest deal of the quarter: Datavant, Inc., a Johnson & Johnson-backed company that uses artificial intelligence to help with clinical trials, agreed to merge with Merck-backed CIOX Health, which operates a platform that provides health and clinical data. The $7 billion transaction comes as the pharmaceutical sector recognizes the need for AI and data sharing due to the COVID-19 pandemic.

Biopharma ripens for deals

Pharmaceutical acquisitions stood at a relative standstill in the quarter as the largest companies recover from the impact of the pandemic, with only six of the 20 largest deals involving that sector. The largest of those six deals was Clayton Dubilier & Rice LLC's $3.94 billion purchase of UDG Healthcare PLC.

MorphoSys AG's purchase of Constellation Pharmaceuticals could be the "tip of the iceberg" for an uptick in pharmaceutical deal activity, driving increasing interest in the space, RBC Capital Markets analyst Brian Abrahams said in an interview.

"There are several reasons why we might see M&A picked up over the rest of this year," Abrahams said. "Biopharma balance sheets are very strong and many companies face patent cliffs by the end of the decade or are slowing growth as their products mature — and asset prices have come down to potentially more attractive levels, as well."

As of July 30, the S&P Biotechnology Select Industry Index, which measures the stock performance of the types of companies large drugmakers typically buy, is down about 28% from Feb. 8, its peak in 2021.

Of larger companies potentially looking to make a deal, Abrahams mentioned Vertex Pharmaceuticals Inc. and Gilead Sciences Inc. And among companies seen as possible targets in the biotech space due to valuation and pipeline opportunities are 89bio Inc., Karuna Therapeutics Inc., Karyopharm Therapeutics Inc. and IGM Biosciences Inc.

The healthcare industry is expected to grow, with aggregate annual EBITDA likely to rise by 4% to 6% in the 12 to 18 months following a June report from Moody's Investors Service analyst Michael Levesque.

The industry growth could fuel acquisition activity in 2021 and beyond, especially in key areas like oncology, rare diseases and gene therapy, Levesque said.

Although the timing of a rebound in activity is difficult to predict, the relative dearth of deals as a result of the volatility in the markets is likely to come to an end in 2021's second half, Abrahams said.

"Anytime that there's been a downtick in M&A activity deal flow or total aggregate due to value in the last five years, it's always been followed by a pickup," Abrahams said.

Dropping hints?

On their second-quarter earnings calls, executives at J&J and Biogen Inc. indicated a willingness to seek out deals of all shapes and sizes.

"We're very focused on business development, and it's something that we recognize we need to do to augment the pipeline," Merck CEO Rob Davis said.

At J&J, the world's biggest healthcare company by market value, innovation is at the heart of every deal, Executive Vice President and Worldwide Chairman of Pharmaceuticals Jennifer Taubert said on the company's July 21 earnings call.

"One of the things that helps us be really successful here is that we're truly agnostic to the source of innovation," Taubert said. "As a result, about 50% of our products come internally, 50% externally."

J&J CFO Joseph Wolk said the deals could fall under any of the healthcare giant's core businesses.

"We've just got to find deals that really fit the financial construct in a disciplined way," Wolk said. "So whether it's in med tech, pharmaceuticals or consumer, we look across the board monthly, if not more often, at opportunities that may fit nicely within the Johnson & Johnson business."