Pharma M&A Activity Expected to Rise

Investment grade pharmaceutical companies continue to display a high capacity for M&A activity, according to a new Moody's report.

Pharmaceutical mergers and acquisitions (M&A) activity is expected to rise across the industry thanks in part to high cash levels and moderate EBITDA, according to a Moody's report released Thursday morning.

The primary drivers for pharmaceutical M&A is reduced pricing flexibility, regulatory challenges that could erode pricing, and patent cliffs between 2023 and 2026. Additionally, Moody's cites the 2017 tax reform bill as providing more tax-friendly access to capital, which will drive M&A activity in the future.

Globally, more than 20 large pharmaceutical companies account for $195 billion in cash holdings as well as a median EBITDA of 2.8x, according to Moody's.

This report is another indication that M&A activity continues to be a dynamic force in the healthcare industry, whether among payers, providers, or drug manufacturers.

Related: Healthcare Industry Most Focused on Consolidation, Consumerism in 2019

Despite the mostly positive metrics across the board for drugmakers, Moody's broke down which companies remain in the best position regarding acquisition capacity and which ones have more limited options.

Highest capacity drugmakers:

• Amgen Inc.
• Biogen Inc.
• Gilead Sciences, Inc.
• Novo Nodisk A/S

An exception to the list was Bristol-Myers Squibb, as Moody's noted that the company performs well on its own but that is expected to change following its $74 billion acquisition of Celgene.

Limited capacity drugmakers:

• Allergen
• AstraZeneca
• GlaxoSmithKline
• Mylan N.V.
• Takeda Pharmaceutical Company

A major factor expected to drive M&A activity in the future is the expiration of patents between 2023 and 2026.

Moody's attributes this to pharmaceutical companies seeking opportunities to acquire "new growth drivers" for the product portfolio while diversifying the business beyond "blockbuster drugs" with expiring patents.

The report found that Bristol-Myers Squibb, Celgene, AbbVie, Merck, and Biogen all have significant revenue concentration for similar patented products that will expire between 2022 and 2028.

Related: 4 Takeaways From Pharma Testimony at Senate Drug Pricing Hearing

The pharmaceutical industry is slated for another robust year, according to a recent Fitch Ratings report, that estimated spending would top $370 billion this year.

Additionally, Fitch predicts that pharmaceutical sales will top $420 billion, and account for nearly 1.7% of the national GDP as well as 9.7% of overall health expenditures by 2023.

Related: Pharmaceutical Spending to Top $370B in 2019

The Moody's report also noted that biotechnology valuations have sunk below peak equit value, which could foster additional M&A activity in that sector.