Mergers and acquisitions hit a very rapid pace in 2013, valued at close to $34 billion. The team at Bank of America Merrill Lynch sees 2014 being a promising year for biotech mergers and acquisitions (M&A). The firm even noted that M&A is a fundamental growth driver for many specialty pharmaceutical companies.
The $34 billion or so in the space was larger in 2013 than it was in 2012 and 2011 combined. Driving forces for continued M&A in the sector are easy access to capital and those companies with new management and/or tax structures become more acquisitive.
Merrill Lynch also cited that investors have rewarded acquiring companies, and these companies were able to raise more than $31 billion in debt capital in 2013. The Merrill Lynch analyst team issuing the report includes research from the firm’s Gregg Gilbert, Sumant Kulkarnia and Gregory Fraser. Stock prices are also at or challenging all-time highs in many cases in the sector. Where this is also interesting is that Merrill Lynch believes that tax-advantaged companies could become targets themselves.
Merrill Lynch did not exactly go out and name biotech and specialty pharma stock candidates that would be bought, but it did show which companies it believes will make acquisitions or which will be interested in them.
Endo Health Solutions Inc. (NASDAQ: ENDP) is executing on its own plan in the report. Merrill Lynch noted that it is agnostic to the therapeutic area, but will focus on specialty areas outside of the U.S. and look in emerging markets. They believe it will do deals in the $250 to $500 million range. Endo’s market cap is $7.4 billion and is listed as having made 5 acquisitions over the last ten years.
Jazz Pharmaceuticals PLC (NASDAQ: JAZZ) was shown to have a good balance sheet and in the middle of trying to close the Gentium acquisition for close to $1 billion. Merrill Lynch thinks that it will remain active after closing the deal and will focus on differentiated products that are on market or close to market. Those would likely need to have high margins and a targeted audience that can be handled with a relatively small sales force. Jazz has an $8 billion market cap and has made 4 acquisitions in the last decade.
Forest Laboratories Inc. (NYSE: FRX) is already closing on one deal, and was shown as having 3 deals under its belt in the last ten years. The Merrill Lynch report here shows that its focus is on primary care products within its current five therapeutic areas: GI, cardiovascular, CNS, respiratory, and infectious disease. They show that Forest is open to deals to replenish the drug pipeline with a high probability of success. Forest is worth more than $17 billion.
Allergan Inc. (NYSE: AGN) is featured as having a strong balance sheet. It believes that Allergan is constantly looking at various deals, also including licenses and collaborations, to put its balance sheet to work. The perceived focus here is on franchises that have growth potential. Allergan is worth some $34 billion and was shown to have completed 4 deals over the last decade.
Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) was listed as another acquirer. The generic and branded company has been somewhat lost despite a strong balance sheet. The company is called as being committed to expanding in emerging markets by making acquisitions of local companies in markets where the company does not have the right presence or critical mass. For generics, Merrill Lynch thinks it will seek opportunities to expand its global footprint in emerging markets — including Brazil and China – but these deals could also include licensing transactions. Teva was shown to have closed some 18 deals in the past 10 years worth some $32 billion. Teva’s market cap is now only almost $37 billion, but this stock has lost one-third of its value from its peak in 2010.
Mylan Inc. (NASDAQ: MYL) is also in generics and projected to be a considering a broad range of assets and deals. The note here is that a transaction needs to have a strategic rationale, and not solely for tax or cost synergy reasons. The company wants to make sure that it must maintain its investment grade credit rating and that any deal needs to be accretive to earnings. Potential transactions are benchmarked against repurchasing securities here. Mylan was shown to have done four deals in the past decade worth almost $10 billion, and its current market cap is almost $17 billion.
If you are looking for a list of potential biotech buyouts, several fresh lists have been put out there for review from competing calls. UBS recently issued nine biotech buyout candidates. We also have big upside projections from Piper Jaffray as well as big biotech upside candidates from Cowen & Co. Not all are buyout candidates of course, but these should give handy examples of what to look for.