Financial results and trends for any industry are mainly driven by operational business imperatives, but external factors
can be significant as well.
Business issues include ongoing structural challenges in pharma and biotech such as a very different R&D/commercialization
dynamic; changing relationships with patients and providers; shifts in patent laws and regulation, reductions in government
spending and unpredictable behavior with regard to pricing, market access and IP. External factors include a global economy
struggling to resume growth and financial stability; continuing government efforts to prevent a Euro zone economic and financial
meltdown; political uncertainties linked to the phase-in of comprehensive health reform in the US; economic slowdown in emerging
market economies like India and Brazil; and a positive surge in Western stock market valuations.
These external factors have had an enormous incremental effect on the financial trends in pharma and biotech this year and
will continue to have an impact going forward.
A recent report "Pharma and Biotech Strategic, M&A, and Financial Trends Report" by Young & Partners covers the first three
quarters of 2013 and the outlook for 2014. The report presents a separate view of both the pharma and biotech industries and
» The strategic and business environment for both industries
» Stock prices and P/E ratios within proprietary index groups of pharmaceutical and biotech companies
» Completed M&A deals of $25 million and up
» Issuance of non-bank debt and equity.
Looking back, pharma merger and acquisition volume in 2012 was fairly soft in terms of the number of deals and dollar volume.
The slowdown was partly a function of a reduced number of larger deals across all industries as the uncertainties around the
European economic crisis, the US presidential elections and fiscal cliff negotiations, and concerns about a slowdown in China.
However, the strategic needs of Big Pharma were sufficiently strong to cause important, but smaller transactions to go forward.
Through the first three quarters of 2013, there was a further slowdown in dollar activity, but a similar pace in terms of
the numbers of deals completed, bolstered by a surge in Asia. As of September 30, only one deal above $1 billion in value
has been completed which was the acquisition of Bausch & Lomb by Valeant. Three other billion dollar plus deals had been announced,
but not closed.
The slower pace is driven by a number of factors. As was the case in 2012, Pharma companies have been tentative with regard
to larger acquisitions given the host of uncertainties they are facing. In addition, the valuations of publicly traded pharma
companies have gone up considerably, making public company acquisitions more expensive.
Pharma share prices performed well in almost every sector. The Young & Partners ("Y&P") Generic index and the Y&P Ethical
Pharma indices in the US and Europe were buoyed by a strong overall stock market. This has resulted in very strong P/E multiple
increases from what were previously anemic levels languishing far below their very high levels in the 1990s and earlier.
Debt issuance by the Pharma industry fell significantly during the first three quarters of 2013 along with the drop in M&A
activity. Over the past few years, much of the debt issuance in pharma has been tied heavily to larger M&A transactions. Equity
issuance was also relatively modest, including IPO activity.
On the biotech side, M&A volume has historically been very weak and was at low levels from 2007 to 2011. Acquirers were selective
and alternatives to M&A, such as partnering and licensing, played a prominent role. That changed in 2012 as biotech M&A picked
up to 2006 levels and higher with the $10.3 billion Pharmasset deal and four other $1 billion plus transactions completed.
This proved not to be sustainable. In the first three quarters of 2013, the number of deals has been healthy, but the dollar
volume was very weak. A combination of high stock market valuations and the bidding up of prices for late stage biotech companies
has dampened big Pharma's pursuit of certain biotech companies.
The stock market has renewed its ardor for the biotech industry. With relatively low market float, modest to moderate movements
of capital into the biotech sector have caused very significant increases in the price of shares as investors have searched
for places to invest in growth areas.
In terms of biotech financing, debt issuance has been at a virtual standstill as debt markets shun the biotech sector. However,
the situation has been quite the opposite in terms of equity offerings. The strong IPO market generally, coupled with the
equity markets' renewed attraction at least with biotech, resulted in a high level of equity issuance, including IPOs.