Healthcare has been a very healthy investment opportunity this year.  Signs of investor confidence are everywhere. For the first time in years, we are seeing more initial public offerings (IPOs) in healthcare. In addition, the first major deal of 2014 was larger than any from the previous year. Interestingly, it involved, not a Big Pharma company, but a generics company.

Investors are extremely pragmatic and only grow a business if they can realize a return on the capital they’ve invested in it. 
Traditionally, they do this by selling shares in the company, either to a strategic investor or to the general public, in an IPO.
For many years, there had been very few healthcare IPO’s, and very little interest in this sector from professional or general investors.  However, in 2013, U.S. biotech stocks became a hot investment area. Double-digit growth became the norm, and investor money seemed to pour into the sector¹.

According to Evaluate Pharma, the NASDAQ Biotechnology index grew by 66% in 2013.  Meanwhile, the market for IPOs opened in the U.S. and the trend later moved to London, which recently saw two high-profile healthcare IPO’s:

• Circassia, which raised £200M (valuing Circassia at over £500M) to continue the development of its portfolio of anti-allergy treatments
• Horizon Discovery, which provides proprietary cell lines for research, and raised £68.6M shortly afterwards. 

2013 was a strong year for pharma and biotech licensing deals, according to Thomson Reuters, with 998 merger and acquisition (M&A), joint venture and licensing deals worth $132 billion in aggregate, up from 2012 with 696 deals and an aggregate value of $90 billion². 

While pharma remained very active in licensing, 2013 M&A’s reflected little activity from Big Pharma or Big Biotech.  Only Amgen’s acquisition of Onyx Pharmaceuticals made the top five acquisitions by value.  Three of the remaining four places were taken by generics companies: Valeant, Actavis and Perrigo. Thermo Fisher’s $13.6-billion acquisition of Life Technologies was the biggest healthcare deal of 2013.

In 2014, M&A and other investment activity will likely top these summary figures. This year’s first big deal, Actavis’ $25-billion cash and equity bid for Forest Laboratories, topped any deal closed in healthcare last year.

Innovative Generics: No Longer an Oxymoron
This latest deal is an example of a generic pharmaceuticals company acquiring an innovative drug discovery, development and marketing company. Traditionally, innovator and generics business models and operational cultures have been considered mutually incompatible. However, companies such as Teva are active in both innovation and generics. Other firms operate in both name-brand and generics spheres (Novartis and Sandoz, for instance, or Sanofi and Zentiva, although it is not clear whether these activities will remain separate or be integrated operations).

Actavis, led by CEO Paul Bisaro, has a well-tested formula for executing these acquisitions. The company honed this formula when Watson bought it in 2012.

The following year, Actavis acquired Warner Chilcott for $8.5 billion and has now followed this with the acquisition of Forest. This latest move represents an attempt to cut costs, maximize tax benefits (the company is based in Ireland, which has a 12.5% corporate tax rate), and reduce combined R&D spending.

The way is now clear for other generics companies, such as Valeant Pharmaceuticals, to take center stage in healthcare investment. Will more companies follow suit? Will a Big Pharma merger materialize to dwarf all these deals?

Only time will tell.  At some point, no doubt, the healthcare investment bubble will burst. For now, though, we can continue to expect healthy investment for the rest of this year. 

References

1. U.S. Biotech Stocks Soar to a New Record High, The Financial Times, February 12, 2014
2. http://www.ft.com/cms/s/0/8aa0c33e-93b9-11e3-a0e1-00144feab7de.html#axzz2xWjkJTIp

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Kevin Bottomley
Results Healthcare

Kevin Bottomley has over 30 years of experience in pharmaceutical, biotechnology and business advisory companies, involving senior positions in research, business development and transactions. He has previously worked for Pharmaventures, Merck, UCB, Sanofi, Roche Qunitiles and Inpharmatica.