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Can Drug/Biotech M&A Rebound Next Year After Bleak 2017?


Quite a few pharmaceutical industry mergers may be in the cards in 2018 if the proposed tax reforms are finally approved. The U.S. Senate passed an amended tax reform bill last week, thereby successfully passing the second stage. The bill will now be presented to a conference committee where representatives from the House and Senate will come together to draft the final bill.

The tax reforms propose to cut the tax rate for corporates from 35% to 20%, which can boost profits of large drug/biotech companies. Meanwhile, the change in tax code will also allow companies to bring back huge cash held overseas at a one-time tax rate of 10%.

These changes should definitely leave more cash in the hands of drug/biotech companies. The cash can be invested for mergers/acquisitions, which have been few in 2017 compared to 2016. Contrary to expectations of increased pharma and biotech mergers and acquisitions (M&A) in 2017, the focus was mostly on small bolt-on acquisitions and licensing deals and agreements.

Gilead’s GILD nearly $12 billion acquisition of Kite Pharma and Johnson & Johnson’s JNJ $30 billion acquisition of Swiss biotech Actelion were the only two noteworthy deals of this year.

With rising investor expectation that Trump's action on drug prices may not be as onerous as previously feared, there is a lot of chatter about a possible increase in M&As.

Meanwhile, the major drug/biotech players struggling with organic growth need an infusion of new growth drivers in their pipeline/product portfolios — either from internal development or from buying assets. Strategic M&A and licensing deals are therefore inevitable for innovation starved drug/biotech companies looking for growth in a highly competitive and global marketplace.

Drug/biotech companies have regularly tried to merge or acquire competitors in mega-merger deals to achieve critical mass both in R&D and sales and marketing. Meanwhile, smaller biotech research firms investigating new therapies or interesting pipeline candidates have also attracted the attention of larger counterparts in the last few years.

With focus on drug pricing taking a backseat and possibility of repatriation of funds, hopes are high that M&A activity will pick up. Companies like Pfizer PFE, Merck MRK, and J&J are expected to take the lead supported by their robust cash flow and balance sheet.

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