Historically low lending rates are fueling record merger and acquisition activity in the pharmaceutical and biotech sectors. According to The Pharma Letter, access to cheap and plentiful capital pushed cumulative M&A deal values among pharma/biotech to more than $300 billion in 2015, which followed approximately $250 billion in M&A activity in 2014. We also witnessed the number of $1 billion-plus deals increase in 2015 to 30 from 26 in 2014.
Thus, it may come as no surprise that biotech blue-chip Biogen (NASDAQ:BIIB) is the latest company drawing supposed buyout interest.
It was reported earlier this week by The Wall Street Journal, which cited unnamed sources, that drugmaking giants Merck (NYSE:MRK) and Allergan (NYSE:AGN) could be interested in acquiring Biogen. If you recall, last month Biogen's CEO George Scangos, who's held the reins since 2010, announced he would be stepping down as chief once a successor was found. Biogen's sales have stalled in recent years, and his imminent departure comes as investors have made calls for change in management. With Scangos on his way out, some on Wall Street have conjectured that this is the perfect interlude for this $70 billion market cap company to put itself up for auction.
But Merck and Allergan as the suitors? I'd suggest you keep dreaming.
Allergan doesn't have deep enough pockets to purchase Biogen
Allergan wasn't even supposed to be in this position considering that it and Pfizer (NYSE:PFE) had worked out a deal to merge last year.
The terms of the deal that would have created "PfizerGan" were structured to allow the smaller company (Allergan) to buy the larger (Pfizer), with 11.3 shares of Pfizer being exchanged for each share that Allergan shareholders owned. While pipeline diversity and growth prospects were touted by both sides of this purported deal, it was the $2 billion in annual cost savings from their combination that really stood out. Pfizer was planning to redomicile its headquarters to Ireland, where Allergan is based, in order to take advantage of Ireland's substantially lower corporate income tax rates.
However, earlier this year the Treasury Department passed new regulations surrounding these so-called tax inversion deals, which ultimately killed the Pfizer-Allergan merger.
Though the termination of the Pfizer merger meant Allergan was free to start shopping around again, a deal of Biogen's size would seem incredibly unlikely. Wall Street had already been leery of Allergan's roughly $40 billion in net debt prior to selling over 300 generic drugs to Teva Pharmaceutical (NYSE:TEVA) for roughly $40 billion in a cash and stock deal. Acquiring Biogen would probably require Allergan to go even deeper into debt than it was before, and investors have seemed none too happy about its $40 billion in net debt as of Q1 2016 given the troubles serial acquirer Valeant Pharmaceuticals has gotten itself into with even less debt on its balance sheet.
Even if there was somehow interest in this deal, I don't see how Allergan makes it work with its current balance sheet.
Trying to overlap an apple and an orange
Unlike Allergan, Merck probably has the financial capacity to make a Biogen buyout happen. Additionally, Merck has made no qualms about the fact that it's been looking for M&A opportunities to bolster its pipeline and product portfolio.
But there are two not-so-tiny problems.
First, Merck's M&A thesis is built around the bolt-on acquisition. Merck's M&A activity is generally built around small- and mid-cap purchases that complement existing products and areas of focus. Purchasing Biogen, which ended Wednesday with a market cap of $70 billion, really wouldn't fit with Merck's inorganic growth strategy as laid out by its management team.
Perhaps more importantly, the second point is that combining Biogen with Merck would be like trying to shove an apple and an orange together. Biogen's primary focus is multiple sclerosis therapies, with a secondary focus on its hemophilia business, which the company announced in May it'll spin off into a separate, fast-growing entity. Merck has exactly zero experience when it comes to selling and developing drugs to treat MS. Instead, Merck's core areas of focus revolve around diabetes, infectious diseases, oncology, vaccines, and animal health. There's minimal synergistic overlap between the two businesses that would make a deal worthwhile for Merck.
Biogen's risky pipeline and one-sided portfolio could be a deal-killer
Beyond just Merck and Allergan, Biogen's risky pipeline and MS-focused portfolio could wind up pushing away most, if not all, possible suitors for the company, despite its healthy profits.
The two biggest cogs in Biogen's portfolio are Anti-LINGO-1 and aducanumab. Unfortunately, Anti-LINGO-1, which was designed to reverse underlying nerve damage suffered by MS patients, failed a pivotal midstage study in June. This came after the drug offered evidence of biological repair of the visual system in an acute optic neuritis study known as RENEW in Jan. 2015. Long story short, anti-LINGO's future is extremely uncertain.
On the other hand, aducanumab, an experimental treatment for Alzheimer's disease, has been largely successful, albeit in early stage studies. Although the mid-range dose flopped in clinical studies, the 3 mg dose and 10 mg dose demonstrated positive results, pushing Biogen into later-stage studies with the drug. Data from this late-stage study is expected by 2018. If approved, aducanumab could easily hit $5 billion to $10 billion in sales depending on its efficacy.
But the concern is that Alzheimer's drugs fail with regularity in clinical trials. We've witnessed more than a handful of promising drugs in early stage clinical studies that've conked out in late-stage trials. The blood-brain barrier is tricky, and paying too much for Biogen based on unconfirmed late-stage data could prove too risky for potential suitors.
Likewise, Biogen's nearly honed-in focus on MS could leave it exposed to growing competition in the space.
Last year, Celgene acquired Receptos for $7.2 billion in order to get its hands on ozanimod, a next-generation MS drug. Currently in late-stage trials with top-line data expected next year, ozanimod has shown plenty of clinical promise. Its phase 3 study is a head-to-head against Biogen's Avonex, and if it outperforms, Avonex's roughly $2.4 billion in sales could be chipped away quickly.
Roche's MS drug, Ocrevus, which is currently under priority review from the Food and Drug Administration, looks to be on its way to approval for primary progressive multiple sclerosis, a form of the disease that has no approved medications and targets 10%-15% of the MS population. However, Ocrevus is also being pointed at relapsing MS, which could put it in direct competition with Biogen.
In short, a Biogen buyer would have to accept that its stranglehold on MS could be waning, and that its pipeline is growing riskier than ever. Not exactly a great formula if you're looking to sell.
It's unclear what direction Biogen will take with Scangos looking to step aside, but I'd surmise that Biogen putting itself on the auction block seems like something that's unlikely to happen.