Takeaways: Some of the trends for the year discussed last week are already apparent in events during the first weeks of 2015. Innovation is driving IP-centric M&A and divergent economic performances is showing where future stress points may appear.
Recent developments in the pharma sector highlight two important trends that can probably be applied across the board. The first is that rapid periods of innovation create a favourable buzz around a sector and, secondly, that innovation drives up M&A activity.
Last year was an 18-year high in terms of new drug approvals in the US , with a similar spike in recommendations in Europe. Of the new approvals, 40% are for treatment of rare diseases, which tend to be the major revenue generators for pharma companies.
The S&P Global BMI pharmaceuticals, biotechnology and life sciences subsector returned 14.8% over 2014, well outpacing the broader market. We also saw a staggering 52% increase in pharma related M&A over 2013, even excluding the two mega deals that failed to get over the line. This year has started well in pharma M&A, with deals announced by Shire PLC, Roche Holdings, Biogen IDEC, and Johnson & Johnson, all focused on the high-end IP-rich treatments mentioned above.
This is an industry in which the UK has always been a major player and it is good to see the Government trying to sustain that growth and innovation. The Innovative Medicines and Medical Technology Review, which is expected to report later this year, is a sign that attracting investment and highly paid jobs is a priority in an area in which we have a world class record.
While 2014 was a very good year for global M&A, with value up 30% and volume up 6.4% against the prior year, a deeper analysis of the numbers points to trends that will develop through 2015 and beyond.
One interesting data point was that while PE buy-side activity increased by 26.5% over 2013, it was in the US$1b-US$5b range that we saw the biggest increase in activity. It’s here that the number of deals increased by 68%, making up a fifth of all deals in that value range, which is similar to levels seen in the last PE led M&A boom. Conversely, deals in the US$5b-US$10b and US$10b+ ranges continue at the depressed levels seen since 2008.
The lack of action at the higher end is not simply down to availability of finance. Fund raising in 2014 was up 11% and PE dry powder now stands at US$465b. There would also have been strong take up of any debt funding, as we saw with the demand to subscribe other large corporate led deals last year.
One aspect that may have driven this is that the traditional PE model of acquiring assets and trimming the fat and disposing of underperforming or non-core operations to create an immediate value boost has been undermined. The largest companies have spent the last five years doing exactly this, driven in no small way by activist shareholders. This, coupled with the current elevated equity valuations, means that the deal rationale is no longer as strong for PE. Corporate buyers have the advantages that immediate savings or growth opportunities from synergies can bring and this is why the vast majority of the biggest deals in 2014 were done by them.
We would expect to see PE acquiring more assets at the lower level going forward, especially carve-outs from larger corporates. The value creation will be driven by using those assets as a platform to build a bigger, more profitable entity, combined with holding the acquired assets for longer periods.
However, if the right asset does come up for grabs, especially in sectors where competition restrictions make mega-mergers more problematic, PE can and will transact.
Nobody Expects the Spanish Acquisition
When news first surfaced that Banco Santander has raised €7.5b in an accelerated overnight placement the spotlight was immediately put on Italian lender Banca Monte dei Paschi di Siena. Speculation resurfaced that the Spanish giant might be looking to expand through taking out its smaller Italian counterpart, even though such speculation was categorically rebuffed in November.
This would not be the first brush between the two banks. During the ill-fated take out of ABN-AMRO in 2007, Santander carved out Antonveneta for itself, and did magic with it. Within days of acquiring ABN’s Italian subsidiary for €5.6b, Santander managed to sell it to Monte dei Paschi for €9b.
This latest fund raising was simply to boost capital levels and meet the new ratio requirements set by the ECB. Banks have until the end of this week to appeal against the ECB’s view. While the ratios were not disclosed many institutions decided to make theirs public.
We can expect to see more fund raising in the sector this year but it is doubtful we will see any major mergers.
It was encouraging to see the recent news of a record fall in unemployment in Spain, with the year-on-year number of people registered falling 5.39% in December. While the overall number seeking work is still depressingly high at 23.7%, second only to Greece in the Eurozone, it is still a move in the right direction. The labour market reforms and other initiatives pushed through since 2012 have helped turn the economy around and we can expect to see stronger growth in Spain this year than the rest of the Eurozone. The country is not out of the woods yet. There are both political and economic issues to be faced in the next 12 months. My guess is that we will hear less about Spain’s economic woes through 2015, just as we no longer hear as much about Ireland or Portugal. It may turn out to be that we have moved from PIGS to FIGs, with France and Italy joining Greece as the focal points of the Eurozone’s headaches.