The drop in market value for biopharmaceutical companies and a need to diversify portfolios have set the stage for a surge in M&A in 2020 even as the coronavirus pandemic and market volatility stall near-term deal-making, experts said.

The number of deals in the pharmaceutical space is likely to rebound when markets and financial institutions stabilize in the wake of the crisis, Moody's Senior Vice President and pharmaceutical analyst Michael Levesque told S&P Global Market Intelligence in an interview.

"Our expectations in the big picture haven't changed in that we believe most of the rated large pharmaceutical companies will continue to look at M&A as a way to enhance growth and bolster the pipeline," Levesque said. "But the coronavirus likely delays a lot of deals that might otherwise have happened because of the distraction related to employee health and safety, business operations and some destruction in the capital markets."

S&P Global Ratings said in a March 18 report that "even for companies not directly impacted by the outbreak, there could be increased pressures on liquidity ... due to adverse developments in the economy and/or the financial markets."

Waiting for stabilization

Although the market decline and focus on virus-related operations has likely slowed down progress on deal-making, the conditions are also ripe for a surge in M&A as equity valuations are lower and high levels of cash burn a hole in drugmakers' pockets, Senior Vice President & Managing Director of Healthcare Banking at Huntington Commercial Bank John Langenderfer said in an interview.

And biopharma markets have been volatile — the Nasdaq Biotechnology Index, which rose above 4,000 in mid-February, fell to just over 3,000 by March 15, according to S&P Global Market Intelligence data. The index has mostly recovered, closing April 14 at 3,878.15.

"It's difficult to put a price in the market where revenues are uncertain, but you're going to have to wait for things to stabilize for M&A to pick up," Langenderfer said. "But I would say large pharmas could capitalize on smaller biotechs, and whether that is through partnerships or outright purchases, they certainly have the liquidity to make those transactions happen."

Most pharmaceutical companies were in a position to execute acquisitions before the pandemic began, and those conditions have not changed, Moody's Levesque said.

For example, Merck & Co. Inc.'s portfolio is increasingly concentrated on its cancer blockbuster Keytruda, particularly after the company said in February that it would shed its women's health, biosimilars and legacy products in a spinoff. Levesque said the need to diversify would continue to drive Merck toward acquisitions to develop its business.

Similarly, drugmakers Amgen Inc. and Gilead Sciences Inc. have aspirations in oncology and would likely turn to M&A to build up their pipelines, Levesque said.

Upcoming patent cliffs

Levesque also pointed to upcoming patent cliffs as motivation for drugmakers to build a cadre of newer products behind those that would lose revenue from the onslaught of competition. Among those with the most to lose in that respect would be Bristol-Myers Squibb Co. with the upcoming patent expiration of newly acquired cancer medication Revlimid as well as the cardiovascular drug Eliquis and Pfizer Inc., which "has a series of patent cliffs in the 2026 to 2027 range," Levesque said.

Still, the coronavirus pandemic has put these plans on the back burner for many companies as they struggle to cope with the financial implications, Andreas Dirnagl, managing director and head of global healthcare research at Mitsubishi UFJ Financial Group, said in an interview.

"The COVID-19 outbreak doesn't change the environment that drove the strategies behind M&A," Dirnagl said. "It's clearly going to impact the timing, and I think it's certainly clear that financing in the current environment is much more difficult than it was just a few weeks ago.

"Is it going to be easier a few weeks and a few months from now? Yes. And the current environment will probably create some opportunities that might not have been created otherwise."

For one, vaccine development could gain a renewed interest in an effort to get in front of any future outbreaks, Dirnagl said. Companies in the oncology and cell and gene therapy spaces, already highlighted as M&A targets in 2020, should continue their pursuits despite temporary coronavirus-related setbacks, he said.