The 2017 outlook for life sciences
Arda Ural, PhD
The year 2017 kicked off with several unique dynamics in play, including recent pipeline failures, continued pressure on pricing and reimbursement, policy uncertainty due to then-President-elect Trump’s and Republicans’ proposed changes in US policy, macroeconomic shifts amid a strengthening US dollar and potential tax relief in the US to help repatriate offshore cash. The takeaway was a positive outlook for M&A for 2017, a view supported by the EY 2017 M&A Outlook and Firepower Report.
Pressure on pricing in key markets
The overall increase in drug spending — with some notable products singled out this past year in the news for their exorbitant increases — has led to more episodes of pricing and reimbursement discourse. PhRMA, the industry’s lobbying association in the US, has been trying to counter negative pricing stories with its own research, such as the fact that the ratio of medication cost to total health care spend has remained at around 10%–12% over the last few years. They’ve also just launched a new media campaign.
Advocates for the industry have also been trying to shift focus away from pricing by demonstrating the value of new treatments — such as the potential to eradicate the hepatitis C virus or extend the stage of disease-free progression for certain cancers. There is also more emphasis on gross-to-net (GTN) ratios underscoring patient assistance programs and rebates to prescription benefit managers (PBMs) in the US and to governments outside of the US.
However, this has not been enough so far to counteract statements by influential leaders, such as those made by then-US President-elect Trump at a pre-inauguration press conference, or recent actions by powerful organizations, such as the UK’s National Institute for Health and Care Excellence (NICE) in refusing to approve certain new high-priced oncology and hepatitis C treatments due to what was, in their opinion, questionable value versus price. Biosimilars pricing in Europe, where adoption is ahead of the US, is also being watched closely to help calibrate sales forecasts for the US. Additionally, a strong dollar is creating a dilutive effect on sales revenue for US-based companies for their sales outside of the US.
Policy uncertainty creating volatility
The health care industry is entering an era of new and uncharted policy debate in key markets around the world, and the debate will likely cause volatility across the industry through the first half of 2017.
Perhaps most notably, President Trump has vowed to repeal the US Affordable Care Act (ACA), which currently insures more than 20 million Americans. Details are unclear on a replacement plan, if there is to be one; however, if a significant proportion of those 20 million do not find substitute coverage, one of the consequences will be a drop in pharma sales. A proposal that offers a compromise to repealing the ACA has been presented by US House Speaker Paul Ryan (the political and parliamentary leader of the US House of Representatives), but what lies ahead is still uncertain.
Also worth noting are the implications of numerous elections in other parts of the world — including presidential elections in France, Iran and South Korea and general elections in the Netherlands, Thailand and Germany — as well as the consequences of Britain’s recently announced “hard exit” from the European Union.
The rise of the US dollar — fueled by President Trump’s protectionist statements — along with US Federal Reserve Chair Janet Yellen’s intent to gradually raise the interest rates in 2017 will likely result in an inflationary outlook. This will reduce foreign direct investment in emerging markets where growth is already subdued by lower commodity prices, instances of corruption and geopolitical risk.
US-domiciled pharma companies will be more cautious about investing in emerging markets since the unfavorable exchange rate will be dilutive to operating earnings, at least for the foreseeable future. In fact, Takeda’s acquisition of Ariad, announced last month, exemplifies how US assets remain attractive for non-US companies, even at high valuations.
China is also a country to watch. Chinese investors have made investments in US real estate and Treasuries. However, if these assets lose attractiveness due to an inflationary environment, Chinese investors may explore US pharmaceutical assets such as was the case with Sanpower’s recent acquisition of Dendreon, which was divested by Valeant.
Expectations for tax relief in US to boost the M&A sentiment
The hope for a tax provision that would allow companies domiciled in the US to repatriate offshore assets would be viewed favorably by US pharma and big biotech executives. Currently, it is estimated that on average more than 60% of total cash held by the top 20 life sciences companies is offshore. On the other side, for pharma companies domiciled outside of the US, there still is a limited window to use their lower tax base as a competitive advantage in order to trigger strategically viable acquisitions.
At the same time, the industry is also facing a growth gap. As payers continue to push back on price increases for older drugs, they have also dampened the growth trajectory of newer therapies, especially in increasingly crowded disease areas. As a result, big pharma and biotech’s race for inorganic growth has intensified. So, it is fair to expect that the annual transaction volume that has averaged more than US$200b over the last three years will continue, and should the tax holiday be enacted, would likely add more tailwinds to deal volume in the second half of the year.