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- Despite a downturn, biotechs have yet to reset M&A expectations, Merck’s finance chief said.
- The pharma giant “can do M&A of all sizes” with its balance sheet, CFO Caroline Litchfield said.
- Merck is reportedly in talks to buy the biotech Seagen for about $40 billion.
Despite a prolonged downturn in the biotech market, Merck’s finance chief told Insider there still hasn’t been a major reset in seller expectations, where biotechs readjust what valuation may be acceptable for a buyout.
For months, industry analysts and investors have hoped to see Big Pharma go on an M&A shopping spree. Many large drugmakers have strong balance sheets, with one analyst projecting Big Pharma will have over $500 billion in cash by year’s end to spend on deals.
Meanwhile, a leading biotech stock index that tracks the industry has fallen 29% in 2022 and is down 50% since peaking in February 2021 — resulting in companies becoming much cheaper to buy. But despite the downturn, 2022 has brought only a handful of big acquisitions, wth five M&A deals paying more than $1 billion and only one deal — Pfizer buying Biohaven Pharmaceutical —worth more than $10 billion, according to BioPharma Dive’s acquisition tracker.
Merck Chief Financial Officer Caroline Litchfield told Insider she hasn’t seen a dramatic change in the expectations of potential sellers. Companies are still hoping to be acquired for much more than they’re currently worth given the market downturn.
“What we are watching for, especially in those smaller companies, is what the cash situation is for those companies and there we see that there is likely to be more incentive to look at selling and selling at a pricepoint that will be appropriate for both companies,” Litchfield said to Insider.
Merck can ‘do M&A of all sizes,’ CFO says
Merck could eventually make a big splash in deal-making. Litchfield said the company’s balance sheet, which includes $8.6 billion in cash and equivalents at the end of March, allows the New Jersey pharma to “do M&A of all sizes.”
Earlier this month, the Wall Street Journal reported Merck is in “advanced talks” to buy the cancer biotech Seagen. The deal could be worth $40 billion or more, the Journal reported. Deal talks remain on track, adding in a July 15 report that the two sides may be waiting for upcoming study results and the outcome of litigation over royalties. Litchfield declined to comment on the report of the discussions.
If a deal is announced, the chances it ultimately passes through potential antitrust challenges is just over 50%, Lawrence Frankel, a former lawyer in the Justice Department’s antitrust division, told Needham analyst Ami Fadia on July 27.
The Federal Trade Commission and Justice Department have ramped up their scrutiny of the drug industry, recently hosting a workshop on antitrust enforcement, for instance.
FTC approval would be “the biggest hurdle to getting a deal done,” Fadia concluded in a July 27 research note. Today’s regulatory environment make massive deals “unlikely but not impossible” to come together in the next six to 12 months, former Pfizer CFO Frank D’Amelio recently told Insider.
Litchfield said the FTC and regulatory environment hasn’t changed Merck’s deal-making strategy.
“We will continue to explore business development in this environment in the same way as we did in the environment last year, the year before, and the year before that,” she said.
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