Life sciences IP dealmaking during the pandemic and beyond

Great expectations for pharma and biotech transactions in 2020 have been deflated somewhat by the effects of the covid-19 pandemic. But the year is by no means a write-off for those seeking to monetise their life sciences intellectual property; venture capital continues to flow, major licensing deals are being struck and M&A is on the road to recovery after a disappointing six months. Indeed, several longer-term trends are evident from the past 12 months of commercialisation activity.

Following a record high in the value of industry M&A agreements in 2019 ($357 billion), analysts looked forward optimistically to the year ahead.

In EY’s September 2019 dealmaker survey, 94% of respondents expected no decrease in buyout activity over the next 12 months. Life sciences companies were sitting on over $1 trillion in cash, pointed out the professional services firm, whose algorithms anticipated as much as $300 billion changing hands. And a KPMG CEO survey in late 2019 found that an increased proportion of biopharma executives had a high appetite for M&A, while almost half saw third-party alliances as the single most important aspect of their growth strategies.

EY analysis also suggested that 78% of biopharma companies had acute growth gaps; in other words, the difference between their recent sales growth and the industry average revenue growth exceeded 10% of the company’s annual income. With in-sourced innovation known to provide better return on investment than organic R&D, businesses had every incentive to strike deals.

Drop-off in dealmaking due to covid-19

Then the covid-19 pandemic struck and it quickly became apparent that major aspects of life sciences dealmaking had been thrown off course.

Most striking was the nose-dive in the value of M&A transactions that occurred in the first half of the year. According to EvaluatePharma, only $7.46 billion worth of buyouts (including reverse mergers, business unit acquisitions and stake purchases) were agreed in the first three months of 2020 – a figure that pales in comparison to the $92.23 billion that changed hands in the same period last year or the $38 billion to $45 billion totals from the first quarters of 2018, 2017 and 2016. The $7.1 billion raised in the second quarter of 2020 was the lowest quarterly total since the second quarter of 2017 and significantly less than the $86.51 billion recorded in the second quarter of 2019.

The number of buyouts (also broadly defined) fell too. The opening quarter of 2020 produced 30 transactions, down year on year from 45 and 46 in the previous two years, which themselves had seen steep falls from the 71 and 51 deals struck in 2017 and 2016. This was the most arid quarter of dealmaking of any period since at least 2015, according to EvaluatePharma – that is, until the second quarter of 2020, which recorded only 26 agreements.

The first six months of 2020 also witnessed a wider decline in M&A value. PwC figures show that the average value of a transaction in the pharma space fell by 56% between the second half of 2019 and the first few months of 2020, while biotech M&A deals were on average 74% less valuable in the same period.

Indeed, buyouts worth more than $1 billion were in very short supply in the early half of this year. Gilead’s acquisition of cancer specialist Forty Seven for $4.9 billion was the largest deal of the first quarter by some distance. This brings Forty Seven’s worldwide portfolio of 187 patents under Gilead’s umbrella, including rights protecting the company’s promising leukaemia treatment acute myeloid magrolimab and anti-cKIT antibody FSI-189 until 2034. Aimed at a small patient population, Magrolimab also enjoys additional regulatory exclusivity arising from its orphan drug designation. Interestingly, one-third of Forty Seven’s current revenue also comes from IP licensing agreements.

Eli Lilly’s $1.1 billion purchase of Dermira was the only other transaction to exceed the billion-dollar threshold in the first half of this year. A specialist in dermatology, Dermira owns the rights to clinical eczema treatment lebrikizumab, which was the core focus of the acquisition. According to Anaqua’s Acclaim IP, the company has 43 granted patents and 35 applications, owning 23 granted US patents, six European issued rights, five in Australia, four in Japan, two in New Zealand and one in China. Their Cooperative Patent Classification (CPC) class codes are concentrated in the area of drugs for dermatological disorders, heterocyclic compounds and anti-inflammatory agents.

The next three most significant deals saw only $825 million, $259 million and $78 million change hands in transactions focused on generic and over-the-counter products, which were therefore unlikely to involve many patented assets.

The second quarter was similar. In June Novo Nordisk was behind the most valuable deal when it purchased Corvidia Therapeutics for $2.1 billion – although only $725 million of this is to be paid upfront – while May’s $1.4 billion acquisition of Portola Pharmaceuticals by Alexion

Pharmaceuticals was the only other pharma or biotech deal in excess of $1 billion. Portola has particular strength in hematology where it owns patent rights to approved Factor Xa inhibitor reversal agent Andexxa – the main focus of the acquisition – as well as thromboembolism drug Bevyxxa and Phase III Jak inhibitor cerdulatinib – all of which also have orphan drug status.

This drop-off in high-value acquisitions of patent-rich companies probably reflects the financial and regulatory uncertainties caused by the pandemic. With the economic outlook suddenly becoming dramatically worse and clinic trials facing significant disruptions, it became difficult in the short term to reliably place a value on companies and to justify large-scale investments. Dealmakers also faced short-term inconveniences, such as not being able to travel to meet face to face with potential partners.

But no disaster for biopharma patent owners

However, 2020 has not been as much of a catastrophe for companies seeking to monetise their intellectual property as the slump in M&A activity may suggest.

The deal numbers cited above include business unit buyouts, reverse mergers and minority and majority stake purchases. But if we limit our analysis to regular company takeovers, the 22 deals struck in the first and second quarters of this year are only slightly lower than the quarterly average of 27 transaction since 2016. Only 22 of this kind of M&A deal were carried out in each of the first two quarters of 2019. Further, PwC statistics suggest that between the latter half of 2019 and the first half of 2020, there was no decrease in buyouts relating specifically to pharma (and excluding biotech), totalling 41 in each period.

Even the fall in M&A deal value seems somewhat less dramatic when it is realised that much of this drop is accounted for by the absence of mega-mergers, a small number of which have pushed up the total spend in recent years. In January 2019 it was Bristol-Myers Squibb’s $74 billion acquisition of Celgene – then the fourth largest in the industry’s history – that accounted for most of the first quarter of that year’s sky-high deal value. The figures in the second quarter of 2019 were even further inflated by AbbVie’s $63 billion agreement to buy Allergan.

Although some companies seeking a high-price buyout may have been frustrated early in the year, biotech innovators have continued to receive high levels of IP-backed venture capital investment. The first quarter of 2020 saw 202 venture capital deals, only slightly down year on year from 215. Indeed, the second quarter reached record levels, with more than $5.4 billion changing hands – more than ever before – an unprecedented $3 billion of which was invested in deals worth more than $100 million.

A revival in the second half

More significantly, dealmaking between innovative life sciences companies seems to have bounced back in the second half of the year, first with a string of high-value licensing and R&D partnerships and more recently with a spate of large of M&A deals

In June AbbVie agreed to pay $750 million upfront for a licence to Genmab’s epcoritamab, a potential treatment for several forms of cancer. As much as $3.2 billion extra could change hands as part of the deal.

Similarly, in July AstraZeneca announced a partnership with Daiichi Sankyo worth a potential $6 billion. The deal, which sees $1 billion paid upfront, concerns the development and commercialisation of anti-TROP-2 antibody-drug conjugate DS-1062, which has the potential to treat a variety of tumours.

This followed a licensing agreement between Roche and Blueprint Medicines relating to clinical cancer treatment pralsetinib. Under this, $775 will be paid immediately, with another $927 million dependent on the achievement of milestones.

From August onwards multi-billion-dollar M&A deals began to reappear in a dramatic fashion, with four of the five most valuable buyouts of the year being struck within a month. Sanofi splashed out $3.7 billion on Principia Biopharma, owner of several next-generation candidate tyrosine kinase inhibitors, which contribute to Sanofi’s existing efforts to create next-generation autoimmune treatments. PatentSight data suggest that Principia has a relatively small patent portfolio compared to recent Sanofi purchases Ablynx and Bioverativ. However, its rights – concentrated in the organic pharma, chromatography and organic catalyst technology fields – have a higher quality according to PatentSight’s competitive impact rating than Sanofi’s existing patent holdings.

Johnson & Johnson then beat the year’s high watermark with a $6.5 billion agreement to buy Momenta Pharmaceuticals in a deal focused chiefly on attaining nipocalimab – a versatile anti-FcRN asset that may prove effective in treating a range of illnesses. With this, suggests Anaqua’s Acclaim IP, Johnson & Johnson acquires a large global portfolio of 320 granted patents and applications. These are focused on the area of immunoglobins, drugs for immunological disorders and anti-inflammatory agents. It has 98 granted rights in the United States, 29 in Europe, 12 in China, 11 Australia and eight in Japan.

This was followed by a $2.6 billion acquisition of Aimmune Therapeutics – which holds five granted US patent rights to the only approved peanut allergy treatment Palforzia – by Nestlé. Aimmune also owns four granted patents for Palforzia manufacturing methods in other jurisdictions, while its applications have expiration dates between 2034 and 2040.

Gilead subsequently put all of the year’s previous buyouts into the shade with its September agreement to spend $21 billion on Immunomedics. The acquired company boasts a number of assets, but the deal is principally focused on attaining Trodelvy, another anti-TROP-2 antibody-drug conjugate, which was approved in April for the treatment of third-line mestastatic triple-negative breast cancer.

According to Anaqua’s Acclaim IP, Immunomedics owns 590 active patents worldwide, including 370 granted rights, 216 of which are in the United States. The CPC classes for these patents suggest a focus on targeting or modifying agents, immunoglobins, antineoplastic agents and drugs for allergic or immunological disorders.

Other highlights from September include another major licensing deal in which Merck agreed to pay Seattle Genetics a $600 million fee plus a further $1 billion investment in the company in return for rights to jointly develop yet another antibody-drug conjugate breast cancer treatment, ladiratuzumab vedotin.

The trends shaping pharma and biotech dealmaking in 2020

While in some respects 2020 has been an abnormal year for patent-rich transactions, it has been by no means a write-off, and there has been a continuation of certain broader trends in IP dealmaking.

The drive towards specialisation continues

According to EY, 20 of the 25 announced M&A deals in 2019 had high overlap with the buyer’s existing portfolio in terms of therapeutic area and almost every transaction increased the purchaser’s degree of therapeutic focus. This year has seen strong continuity in this respect, with buyouts and licensing deals used largely as a means of consolidating a company’s innovation in lucrative, high-priority treatment areas. This is hardly surprising given that research by Deloitte and others has shown that specialisation produces a greater return on investment for biopharma innovators.

Not only have most agreements seen an overlap in terms of therapeutic area, but many have been motivated by overlays in particular treatment sub-sectors and by highly specific synergies. For instance, the Seattle Genetics deal was not only motivated by a desire to further build Merck’s holding in the cancer space, but by the prospect that ladiratuzumab vedotin could serve as a combination therapy with Merck’s anti-PD-1 drug Keytruda. A similar rationale lay behind Bristol-Myers Squibb’s recent acquisition of Forbius, which owns technologies that could enhance the effectiveness of its immunotherapy, Opdivo.

Conversely, Big Pharma has continued to pursue a strategy of selling off non-core business units in order to achieve greater focus. In late August, for example, Takeda followed in the footsteps of companies such as Novartis, Eli Lilly and Pfizer by divesting its consumer health unit to Blackstone Group for $2.3 billion (although the IP value in such deals resides mainly in brand rights, rather than patents).

Oncology is king

The highly lucrative and innovative cancer research area has maintained its dominant position in life sciences dealmaking in 2020. Indeed, cutting-edge immuno-therapies and targeted cancer treatments have attracted much of the year’s investment.

As noted above, Gilead’s purchase of Immunomedics was aimed at the acquisition of an antibody-drug conjugate, Trodelvy – as were Astrazeneca’s licensing agreement with Daiichi Sankyo, AbbVie’s Genmab collaboration and Merck’s Seattle Genetics tie-up. A monoclonal antibody, magrolimab, for the treatment of several cancers, was at the heart Gilead’s takeout of Forty Seven; its purchase of 49.9% equity in

Tizona for $300 million centred on Phase I immunotherapy, TTX-080. And immuno-oncology prospect pralsetinib was the subject of Roche and Blueprint Medicines’ recent partnership.

This is not surprising given that oncology sales are expected to comprise 21.7% of all industry revenue by 2026, reaching a total of $311 billion (compared to $157 billion today), while immuno-oncology sales specifically are forecast to grow by over 20% per year between now and then (compared to 7.4% across all therapeutic areas), rising to $94.7 billion in revenue.

Indeed, this year’s transactions follow a well-established trend: between 2013 and 2018, 32 out of 35 multi-billion-dollar deals revolved around immuno-oncology assets, according to Clarivate Analytics. There is no sign yet that this area is becoming perceived to be overcrowded.

Orphan drugs are increasingly important targets

The treatment of rare diseases is a growing focus for pharma and biotech. As such, orphan drugs and related innovations have become attractive assets for buyers and licensees.

Rilzabrutinib, the Phase III drug at the centre of Sanofi’s $3.7 billion Principia Biopharma purchase, is being tested for the treatment of rare disease pemphigus. (Along with oncology, rare diseases have been highlighted as a priority by Sanofi’s CEO, Paul Hudson.) Momenta is a specialist in developing new therapies for patients with rare diseases; its leading asset nipocalimab is already approved for myasthenia. As noted, Andexxa, the drug at the centre of Alexion’s purchase of Portola, has been designated orphan drug status; indeed, all of Alexion’s current revenue is derived from rare disease treatments.

The orphan drug market is forecasted by EvaluatePharma to almost double from $127 billion in 2019 to $255 billion in 2026, achieving 10.3% annual growth in that period (compared to 7.4% across all drug types). Already, the number of addressable patients for each drug approved by the US Food and Drug Administration fell by 15% between 2010 and 2018, reports Clarivate Analytics, and requests for orphan drug designations has risen from 250 in 2009 – at that point the highest number ever – to over 500 in 2016, 2017 and 2018. Only $69 billion in sales were generated by drugs for rare diseases in 2012.

Companies owning rare disease treatments proved attractive targets in previous years too. Notably, Johnson & Johnson spent over $30 billion on rare disease specialist Actelion – the biggest deal in its history – in 2017, and towards the end of 2018, Shire was snapped up for a massive $62 billion.

At BIO 2020, Robert Iannone, executive vice president of R&D at Jazz Pharmaceuticals, said that he believed that the rare disease space could even benefit from increased focus on rapid innovation arising from the pandemic. Outside M&A, he expects to see greater emphasis on ongoing partnerships than on straightforward licensing agreements.

Highly targeted deals with pre-existing collaborators

In fact, heavily tailored licensing and R&D partnerships – especially with existing collaborators – have been increasingly significant in dealmaking of recent years. This may have become even more important this year, as some companies seek to limit the size of their upfront payments amid economic uncertainties.

Not only is the bulk of the overall value of the AstraZeneca/Daiichi Sankyo deal dependent on the achievement of various milestones, the agreement also follows on from a previous partnership between the two over the same drug conjugate platform. Similarly, Roche and Blueprint Medicines have an extensive track record of working together on immuno-oncology projects.

A classic example of this kind of deal is the 2019 $5.1 billion collaboration between Gilead and Galapagos NV. Featuring a $3.95 billion upfront payment for a range of licensing and option rights to 26 clinical and preclinical pipeline assets, the creative deal also involved a $1.1 billion investment in 10% of the company’s stocks (boosting its existing 12% shareholding) and the option to make further payments for rights to other clinical programmes. The two businesses were already partnered on the development of filgotinib.

M&A has also become more targeted in recent years in the sense that many companies are seeking out small and medium-sized deals – rather than mega-mergers – which they believe to be more conducive to innovation. Following the Galapagos deal, Daniel O’Day, CEO of Gilead, commented that: “Mega-mergers can often distract the organisation from pursuing the science and following the innovation.” He favours creative, mid-sized deals, while Eli Lilly’s chief financial officer, Joshua Smiley, has expressed a preference for deals in the $1 billion to $5 billion range. So this year’s lack of mega-deals is not heavily against the grain of longer-term trends.

Versatile assets are highly sought after

Unsurprisingly, assets with several known potential clinical uses are also much prized by buyers and licensees. Epcoritamab, the bispecific antibody at the centre of AbbVie’s recent agreement with Genmab, is thought to have promise for many cancer indications, while Daiichi Sankyo’s DS-1062 is promising for the treatment of several tumour types. In addition, Momenta’s nipocalimab could be used for a wide-range of illnesses, including rheumatological and dermatological conditions, Maternal-foetal disorders and neuro-inflammatory diseases.

Looking to the future

While the early months of 2020 saw considerable disruption to patent-rich dealmaking in pharma and biotech, the year has also seen a considerable degree of continuity in the kinds of assets being sought and the forms of agreement being struck.

There has also been a noticeable uptick in collaborations and transactions from mid-2020. This is not altogether surprising, given that April 2020 saw the number of Phase III novel drugs in the pipelines of the world’s largest 11 pharma businesses drop to 49 – the lowest figure in a decade, down from 60 last year, 66 in 2018 and 82 in 2016.

Taking into account the ongoing patent cliff that is thought to have put $194 billion worth of drug sales at risk between 2017 and 2022 and the increasing costs of bringing products to market organically, we could see a release of pent-up demand leading to a boom in dealmaking in the coming months. Indeed, additional pressures on large life sciences companies could even exacerbate existing trends towards specialisation, certain booming technology sectors and highly structured partnerships.