Morgan Stanley
  • Research
  • Jan 11, 2017

M&A Deals May Pick Up for BioPharma in 2017

Biotech-pharmaceutical companies with plenty of cash on hand may seek to remedy the slowdown in their revenue growth by going shopping.

Slower growth in global biotech pharmaceutical companies, combined with U.S. BioPharma companies’ record $75 billion in cash on hand, has set the stage for more mergers and acquisitions in 2017.

In fact, growth through M&A could be a prevalent theme over the next several years, as management teams look to maintain their 5% annual growth targets.

“Revenue-generating small-cap and mid-cap biotech are best positioned to benefit from increasing M&A, but even large-cap biotech is in play, says Matthew Harrison, who covers large-cap biotech at Morgan Stanley. In a recent report, Harrison and his research colleagues explain why they think M&As will be a driving force for the sector in 2017, and what this means for investors.

Global BioPharma needs an estimated $60 billion in additional sales by 2020 to maintain steady growth.

Slower Growth

In the past few decades, BioPharma companies, which focus essentially on applying genetic advances (vs. traditional pharmaceuticals’ chemical approach) to create drugs and treatments for various diseases and conditions, have evolved into an industry staple. Biologics now account for more than a third of all new drugs in clinical trials or awaiting U.S. Federal Drug Administration approval.

The side effect of growing revenue, however, is that incremental expansion becomes more difficult. For larger companies in the sector, revenue growth has slowed to the low single digits in recent years.

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Promising product pipelines alone aren't a remedy for tepid growth. Assuming Morgan Stanley's modeled pipeline estimates, global BioPharma, which includes U.S. large pharma and biotech, and Japan and Europe large pharma, needs an estimated $60 billion in additional sales by 2020 to maintain steady growth. Without pipeline success, that additional sales figure more than doubles to $125 billion.

Sizing Up the M&A Field

Over the past two years, large companies seeking to sustain and grow their revenue and product pipelines have snapped up small and midsize BioPharma companies with revenue-generating assets. Harrison believes the trend will continue, with nearly 100 small and midsize companies fitting the profile.

Large-cap BioPharma companies could also be in play this year. Out of dozen BioPharma deals in 2016, just two were large-cap, and three came in above $5 billion. Compare that to 20 deals in 2015, of which six were large-cap and 10 were greater than $5 billion.

“With a large gap remaining between large BioPharma's actual and desired revenues, and historically high amounts of cash on hand, look for an uptick of larger acquisition targets," says David Risinger, who covers big pharma for Morgan Stanley. “This is particularly true of the U.S. BioPharma industry, where the amount of cash on hand is greater and intentions more focused."

A number of BioPharma chief executives have publicly stated that size wouldn’t limit their M&A range. “Larger deals would be more challenging to consummate," Risinger adds, “but they would provide greater amounts of revenue and growth."

For more Morgan Stanley Research on BioPharma M&A trends, ask your Morgan Stanley representative or Financial Advisor for the full report, “BioPharma M&A Likely to Be Key 2017+ Theme" (Dec. 1, 2016). Plus, more Ideas.