How many big biotech acquisitions can you name that have occurred so far in 2017?
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Johnson & Johnson (NYSE: JNJ) spent $30 billion to buy Swiss biotech Actelion. That's one. Then there's... well, actually, that's it. J&J's acquisition of Actelion is the only truly big biotech buyout year to date, unless you also want to include Japanese drugmaker Takeda's $5.2 billion deal to buy Ariad in the first quarter.
Why has 2017 been such a horrible year so far for biotech acquisitions? Here's the answer -- and why next year could see a flood of deals.
Looking at the numbers
Just how bad has the acquisitions scene been this year? Look how 2017 compares with the past five years.
If the number of deals in the second half of 2017 matches the first half, this year will prove to have the lowest level of acquisitions activity among biotechs in recent memory. That's the number of deals, though. Let's examine the financial size of the biotech acquisitions so far this year.
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In terms of combined deal value, 2017 has already outpaced 2012. However, remember that the J&J acquisition of Actelion makes up nearly three-fifths of this year's total. It's still entirely possible that 2017 will have a lower combined deal value by the end of the year than any of the four previous years.
Why the slowdown?
In my view, there are two primary reasons there has been so little acquisitions activity thus far in 2017. I think that the biggest factor is the possibility of corporate tax reform.
Earlier this year, I analyzed the possible impact of the tax proposals laid out by the Trump administration for three big drugmakers. One component of the proposed changes particularly stands out as a cause behind big biopharmaceutical companies holding off on any big deals: repatriation of cash parked overseas.
Many big pharma companies have huge sums of their cash stockpiles parked overseas to avoid paying high U.S. taxes. If they could bring that money into the U.S. at lower tax rates, it could prime the pump in a major way for dealmaking.
President Trump wants a one-time discounted tax on money that companies bring from outside the U.S. into the country. While the administration didn't give a hard-and-fast number for this special tax rate, then-candidate Trump mentioned a 10% rate during the campaign.
Pfizer (NYSE: PFE) CEO Ian Read specifically mentioned the prospect for corporate tax reform as a reason the company wasn't looking at any significant deals during the company's first-quarter conference call in May. A few months earlier, Pfizer CFO Frank D'Amelio seemed especially interested in the possibility of repatriation of cash when he was questioned at the J.P. Morgan Healthcare Conference.
Another likely reason acquisition volume and size of deals has been down in 2017 is the political uncertainty in the U.S. about healthcare. Part of it could be that drugmakers want to wait and see what happens with the potential replacement of Obamacare. Although this possibility seems to be dead for now at least, that wasn't the case for much of the first half of the year. Another aspect of this uncertainty is President Trump's comments about going after pharmaceutical companies to lower drug prices (although this doesn't appear to be as worrisome of an issue now).
Just wait till next year
There's no question that several big companies need and want to make acquisitions. Gilead Sciences (NASDAQ: GILD) is a prime example. The big biotech's hepatitis C sales are tanking, its HIV products aren't growing enough to offset those hep-C declines, and Gilead's pipeline won't deliver quickly enough to turn things around. Gilead's executives have been stating since last year that they want to make one or more acquisitions.
I suspect Gilead will wait to see what happens with tax reform. Put Pfizer on the list as well. The company made several significant deals last year and wants to make more. I also think Amgen should be looking to spend some of its big cash hoard to boost its pipeline. And those are just a few of the big companies that could join the fray.
My prediction is that acquisitions activity will kick into overdrive in 2018. I suspect that will be the case whether corporate tax reform passes or not. If it passes, companies will be champing at the bit to bring money back into the U.S. and will no doubt spend a good chunk of it to buy smaller biotechs. If tax reform fizzles out, my hunch is the big players will figure they might as well move forward anyway.
If I'm right, it could mean great news for several relatively smaller biotechs with promising products and pipelines. Investors who own shares of Exelixis (NASDAQ: EXEL), Incyte (NASDAQ: INCY), and several other up-and-coming biotechs could have a lot to look forward to next year.
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Keith Speights owns shares of Gilead Sciences and Pfizer. The Motley Fool owns shares of and recommends Exelixis, Gilead Sciences, and Johnson & Johnson. The Motley Fool has the following options: short August 2017 $75 calls on Gilead Sciences. The Motley Fool has a disclosure policy.