Big Pharma's M&A Outlook at J.P. Morgan Healthcare Conference 2019: Perspectives from Celgene, Novartis, Pfizer, Gilead, and Merck

Once-in-a-Lifetime Encounter. In January 2019, the J.P. Morgan Healthcare Conference was held as scheduled in San Francisco. At this event, dubbed the “Super Bowl of Biomedicine,” massive biopharmaceutical technology deals can be struck amidst clinking glasses and a few handshakes and conversations.

The announcement of two major deals by BMS and Lilly in succession heightened the atmosphere at the conference. On the first day, in addition to Celgene, which had just been announced as an acquisition target, executives from pharmaceutical giants such as Novartis, Pfizer, Gilead, and Merck & Co. shared their perspectives on M&A transactions and their strategic plans for 2019.

VCBeat (WeChat ID: vcbeat) has compiled the following highlights from these industry luminaries’ insightful perspectives:

BMS’s acquisition of Celgene ignited the first bombshell at J.P. Morgan, with the deal valued at a staggering $74 billion.

Why Did BMS Acquire Celgene? As is well known, BMS’s future earnings growth relies heavily on a single drug, Opdivo. While BMS has long been a leader in cancer immunotherapy, the field faces strong competition from companies such as Merck & Co.

In fact, Opdivo generated $4.9 billion in sales over three quarters of 2018, accounting for approximately 30% of the company’s total revenue. This proportion is projected to rise in the coming years. Furthermore, Opdivo has experienced multiple clinical trial failures in recent years, prompting analysts to lower their peak sales forecasts for the drug. The company needs to diversify its portfolio, but it currently has only a few compounds available, such as TKY2 and NKTR-214.

Looking at Celgene, its blockbuster blood cancer drug Revlimid has performed well, with estimated sales exceeding $9 billion in 2018. Analysts project that sales will surpass $15 billion by 2022. However, Revlimid is set to lose its patent protection by then.

In addition to Revlimid, Pomalyst also achieved annual sales of $2 billion. More importantly, Celgene’s late-stage R&D pipeline is highly competitive, featuring products such as ozanimod for immunology and inflammation, and hematologic agents including luspatercept, liso-cel (JCAR017), bb2121, and fedratinib. The company projects that the peak sales potential of its new drugs will exceed $15 billion.

Of course, the more significant aspect lies in the promising prospects of CAR-T therapy. In 2018, Celgene acquired Juno Therapeutics, a leader in CAR-T therapy, for $9 billion. CAR-T cell therapy demonstrates higher efficacy compared to other cancer treatments and is poised to become a substantial market in the coming years. Following regulatory approval, Bristol Myers Squibb (BMS) will gain market access through bb2121.

Overall, Celgene will help BMS secure more combination therapies beyond Opdivo and Eliquis. The merged entity will have nine drugs each generating over $1 billion in annual sales, with its pipeline potentially yielding up to $15 billion in future sales.

Novartis CEO Vas Narasimhan stated in an interview with foreign media that the company is shifting its business focus toward next-generation therapies and promising treatment options.

Narasimhan, formerly Novartis’ Chief Medical Officer, has stated that the ultimate measure of a company’s value will be its ability to develop products with genuine curative effects, rather than those offering only chronic management or symptomatic relief.

At the J.P. Morgan Healthcare Conference, he stated that Novartis might need to shift away from its focus on profitable drugs. While these medications are indeed lucrative, they tend to prioritize chronic disease management rather than offering cures, and require frequent administration. Under the current logic of drug development, chronic disease treatments are often (commercially) successful.

In an interview in February 2018, Narasimhan also revealed that Novartis was preparing gene and cell therapies, seeking solutions capable of curing patients. “I believe these technologies can address many issues,” he stated. “This is what society expects.” This brings to mind Novartis’s CAR-T product, although reimbursement currently poses a significant challenge. “We are confident that we can identify viable payment models, and ultimately, these challenges can be resolved,” he affirmed.

Novartis, headquartered in Switzerland, has a market capitalization of $216 billion. The company has been engaging in portfolio optimization by divesting non-core assets, such as its generics business. Reportedly, the generics division is set to become part of its subsidiary Alcon, which focuses primarily on eye care.

Novartis’ most recent acquisition occurred in October 2018, when it purchased Endocyte, a company focused on developing targeted therapies for cancer, for $2.1 billion. Another significant transaction related to cancer treatment took place in 2017, when Novartis acquired Advanced Accelerator Applications (hereinafter referred to as “AAA”), a French leader in radiopharmaceuticals, for $3.9 billion.

“These acquisitions are all aimed at technology platforms,” Narasimhan pointed out. Novartis is shifting towards cell therapy and gene therapy businesses. After acquiring AAA, Novartis gained a new technology platform called radioligand therapy. In comparison, Endocyte appears relatively ordinary. However, Narasimhan stated, “For Novartis, their experience is difficult to replicate in practice.”

“We hope to develop a truly disruptive drug by combining it with radioactive particles. These radioactive particles are strictly controlled; we deliver them directly to the tumor site to eradicate the tumor.” Narasimhan stated, “I believe it is effective against many solid tumors.” This approach has demonstrated significant efficacy in neuroendocrine tumors, and Novartis believes it can also be used to treat prostate cancer.

Eli Lilly has successfully entered the oncology space through acquisitions, yet Narasimhan remains highly confident. He noted that securing radioligand solutions is no easy feat: “It requires nuclear materials and a complex supply chain, both of which demand long-term operational expertise. Through two acquisitions, we have acquired this capability.”

In its third-quarter earnings report, Novartis mentioned that management raised its full-year sales forecast and highlighted the strong performance of its psoriasis drug Cosentyx and its heart failure drug Entresto.

In 2018, Pfizer underwent a leadership transition as former CEO Ian Read stepped down and handed the reins to Albert Bourla, an experienced internal executive who was seen as inheriting the most powerful pharmaceutical company in years. With 15 products possessing blockbuster potential, Pfizer also faces challenges, particularly the ongoing negative impact from drugs that have lost or are set to lose their exclusivity.

At the J.P. Morgan Healthcare Conference, Bourla stated that when Ian Read took over in 2010, Pfizer was facing the largest challenges in the industry’s history and a crisis of losing exclusivity. Pfizer’s revenue was $62 billion in 2010, but five years later, this figure had dropped to $50 billion. Meanwhile, the R&D department’s productivity during the first decade of the millennium was not strong enough, resulting in benefits that were insufficient to offset the negatives. Consequently, Pfizer’s compound annual growth rate declined significantly.

In 2018, when Bourla took over, the situation was exactly the opposite. Bourla stated that they would face their final crisis of losing exclusivity. The next six months would be the period of Lyrica’s exclusivity crisis.

“Lyrica will affect Pfizer’s sales growth this year. Compared with 2018, Lyrica will lose exclusivity for half a year; the same impact will occur in 2020,” Bourla pointed out.

However, he also emphasized that Pfizer achieved remarkable R&D productivity during the second decade of the millennium, and its current R&D pipeline is among the strongest in its history. He believes that the combination of these factors will enable Pfizer to become a powerful, top-tier growth company.

“I do not underestimate the adverse challenges facing the entire industry, such as pricing pressures. However, I believe that in this new environment characterized by significant pricing pressure, companies capable of delivering breakthrough therapies will continue to thrive,” he said.

"Given this year, Pfizer's strategy for the coming years will be top-line growth. He emphasized that in an industry with return on capital, top-line growth can only mean bottom-line growth, i.e., leverage."

Pfizer has been actively engaged in business development over the past few years, during which it executed several major deals, including the acquisitions of Hospira and Medivation. In 2016, Pfizer also attempted to acquire Allergan, but the deal was abandoned after the U.S. Department of the Treasury eliminated the tax benefits associated with the transaction.

However, over the past two years, the company has not announced any major acquisitions. Bourla stated that Pfizer will continue to monitor investment opportunities. “We certainly have the capacity, as our balance sheet is strong enough to pursue virtually any transaction imaginable in this industry,” Bourla said at the conference.

However, he added that he did not want to be distracted. Instead, Pfizer will focus on incorporating Phase II and Phase III clinical candidates into its pipeline, targeting the therapeutic areas currently prioritized by the company.

After a challenging year, Gilead unveiled an ambitious plan in 2019. Its HIV product, Biktarvy, made its debut, with new commercial head Laura Hamill hailing it as the “most successful” HIV treatment product in history. Of course, the company still places high hopes on its hepatitis C products, despite having suffered significant financial setbacks in this market.

In 2017, Gilead Sciences acquired Kite Pharma, a leading company in CAR-T therapies, propelling itself to the forefront of the cell therapy industry. However, due to an underdeveloped reimbursement system, sales of Yescarta fell short of expectations. Nevertheless, Gilead remains committed to further investing in cell therapy.

“We are focused on M&A,” Gilead CEO Robin L. Washington stated at the J.P. Morgan Conference. Washington noted that the company could also repay some debt and consider share buybacks, but biotechnology firms would remain the focus.

In 2018, Merck & Co. achieved significant success, delivering strong performance across its oncology, animal health, hospital pharmaceuticals, and vaccine divisions.

Merck & Co. CEO Ken Frazier pointed out that, given the evolving healthcare landscape, having differentiated products is becoming increasingly important. The company believes that its current product portfolio and pipeline position Merck at its best phase of development.

Keytruda is Merck’s most successful commercial product in its history. In the third quarter, 40% of the drug’s profit came from markets outside the United States.

In September 2018, the European Union approved Merck’s KEYNOTE-189 trial. Shortly before that, the KEYNOTE-407 trial was also approved in Japan. Merck recognized the substantial market potential outside the United States. The KEYNOTE-189 trial alone tripled its market capacity in the EU region. In 2019, Merck began to enter the melanoma market in China, which also presented significant opportunities.

Market access and substantive commercial growth in overseas markets are lagging, and Keytruda is no exception. Frazier believes this is an inevitable process. “It will be faster in countries like Germany, but it may take longer in others—12 months, 16 months, or even 18 months. It all depends on the market.” He stated, “However, our data are very impressive, so we also hope to streamline the process.”

Mergers and acquisitions are commonplace among large pharmaceutical companies, and Merck & Co. is no exception. Frazier stated that Merck is attempting to close some deals but has not yet found suitable sellers, noting that competition for assets is intense: “I believe that declining valuations may create more opportunities.”