Now that the year is underway and a new presidential administration is in place in Washington, let’s consider the environment for mergers and acquisitions (M&A) in the pharmaceutical industry.
The big pharmaceutical companies are doing very well in piling up wealth, which makes acquisitions a lot easier.
Consider two examples. Johnson & Johnson JNJ has about $23 billion in cash alone to support its AAA Standard & Poor’s rating. Eli Lilly LLY has only about $3 billion in cash, but its market capitalization stands at $706 billion.
Johnson & Johnson is beginning the process to acquire Intra-Cellular Therapies ITCI , a transaction expected to come in at $14.6 billion. A near New Jersey neighbor of J&J, the company develops small molecule drugs for the treatment of neuropsychiatric and neurologic disorders within the central nervous system.
Its top prospect, ITI-007, is in phase III clinical development. Its purpose is to treat schizophrenia, dementia, bipolar disorder, depression, and other neuropsychiatric and neurological disorders. Previous entries have looked into this general pharmaceutical specialty.
Eli Lilly is working on an acquisition of Acquire Scorpion Therapeutics for about $2.5 billion. Acquire’s main target is cancer treatments, which fits into the overall industry focus on oncology.
Stryker SYK , a medical technology player, is in the process of acquiring Inari Medical NARI , which deals with vascular disease treatments. The deal is expected to come in at $4.9 billion. The medical device area is quite attractive.
Falling interest rates
Interest rates are likely to fall as the new administration grabs the reins. If rates fall 1% or more, acquisitions become more attractive.
A major political reason for rates to come down is that mortgage rates are high. This bothers voters and was an issue in the recent presidential election. As of the date of writing, according to Zillow, “the average 30-year fixed interest rate stands at 6.74%, and the 15-year fixed rate is 6.03%.”
For corporations looking to borrow, the interest rate depends on a number of factors including their Standard & Poor’s rating and debt history. Let’s say the rate is in the 4.5% to 5.3% range.
For the pharmaceutical industry, this opens two questions. First, how much lower should rates go to make borrowing really attractive? Second, how much cash should be used to lower the debt burden?
This aspect of the market remains in a “wait and see” period while companies watch the actions of the federal government and the Federal Reserve.
Everything considered, it is likely that mergers and acquisitions will begin to pop before long.
Developing superior products
The ability to develop superior products internationally is increasing. This means that acquiring a company based outside the US and the other pharmaceutical-leading countries is widening.
For example, in creating ivermectin, Merck & Co. Inc. MRK played a role as well as the Kitasato Institute in Tokyo. We can expect more of this type of collaboration and some will lead to mergers and acquisitions.
Valo Therapeutics, a privately-held company with headquarters in Helsinki, Finland might prove an interesting opportunity. The company creates immunotherapies to treat cancer and infectious disease. This may put it in the range of targets for acquisition-minded pharmaceutical companies.
Is Pfizer taking a giant siesta?
Investors are down on mighty Pfizer because of dropping revenues and patent expirations. In fact, the company’s market capitalization is at roughly $150 billion, well below where it was a year ago. However, total assets are rising and the company is moving into attractive areas.
Loaded with $43 billion in assets, Pfizer is moving ahead not only with a “new” Covid-19 vaccine but with other vaccines including Lyme disease. This is a time when the general population is largely OK with vaccines.
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