WSJ reported that FTC (Fair Trade Commission) seeks to challenge Illumina’s $7.1bn acquisition of Grail – a prominent liquid biopsy firm.
While one may view that this is a diagnostics acquisition with no meaningful read-through to biotech, I think that this is HIGHLY MEANINGFUL FOR BIOTECH VALUATION, particularly given below announcement from FTC early this month (March 2021).
FTC just announced that they formed a working group that is specifically formed to build a NEW APPROACH TO PHARMACEUTICAL MERGERS.
Press release talks about taking a “fresh” approach to evaluation of anti-competitive mergers – a new paradigm means MORE AND NEW UNCERTAINTY for buyers of biotech assets – the large cap pharmaceutical companies have been provider of VERY STRONG EXIT for smid-cap biotech companies.
So far, most deals did not face much issue on anti-trust ground – big break-up was Pfizer’s acquisition of Allergan, but it was broken up because the tax loophole, which was the primary driver of value for the deal, was closed by US Treasury because US Treasury wanted to close the tax loop hole. Allergan had an Irish domicile that Pfizer wanted to leverage in order to reduce its tax rate.
Otherwise, most deals went through on the ground that they do not lead to competition at the moment – most of the deals have been pipeline acquisitions to extend the durability of a specific franchise, but did not harm the competition level concurrently.
While acquired pipeline assets could become anti-competitive later on, there is risk that trials / programs would not work out. A transaction that was delayed recently was Roche’s acquisition of Spark. Roche had to push back Spark tender THREE TIMES because of FTC review.
If you are curious about Roche/Spark transaction, you can read more in below link
As we all know, biotech valuation ($XBI) has significant of component from hope / dream / expectation that some of these companies would be acquired by large cap pharma at amazing premium.
FTC’s action indicates that the M&A premium in biotech sector should probably come out for the time being while large cap pharmas become comfortable with new paradigm for evaluating M&A targets. In a hugely political arena of large cap pharma, certainty of closing is very important, and it will be very difficult for an internal stakeholder/sponsor to push for a deal if there is just an enormous uncertainty from government (i.e. blackbox is NEVER GOOD).
Sector Has Been Tough – Are You Saying It’s Getting Worse?
Sadly, that is my view (but obviously not investment advice). I plan to adjust my position accordingly, but this may be supportive of owning large platform companies – which happens to be my largest allocation within biotech. I discussed more on this below.
Biotech is a heavily regulated industry – so we should ALWAYS listen to what government is telling us.
Next time I plan to discuss recent actions of FDA as well.
Do you agree with my view? Are you more bullish on biotech M&A? Please share your thoughts below!
