Published February 1, 2021 | 2 min read
Key Points
- The “loss of exclusivity” debate is expected to intensify in 2021
- Biotech may provide an ample pipeline for M&A deals
- Both private investment and COVID-19 have helped digital health reach an inflection point
- A resurgence in M&A activity could represent a new exit opportunity for some pharma small-caps
- European drug market pricing pressures may escalate under pandemic-related economic challenges
- A Democratic-led Congress will likely advance drug pricing control efforts
The coronavirus pandemic may have dampened M&A deal activity, but new vaccines and treatments, higher profitability, and stable U.S. drug pricing gave pharmaceutical investors plenty of reasons for optimism last year.
This year, further developments in vaccines, biotech, and therapeutics suggests the sector still has plenty of bounce in its step. Against macro concerns such as regulation and losses of exclusivity, we believe large pharma will bring new signs of life to deal making, as it searches for growth opportunities to drive scale and innovation.
The “loss of exclusivity” debate goes on
Losses of exclusivity (LOE) are part of the normal chatter in the pharmaceutical community. But we believe those conversations will intensify throughout 2021. Expect large pharma to keep up its ongoing debate on how to best to address them—whether through large-scale M&A, internal pipeline development, or lifecycle management.
“The large cap pharmas have a lot of M&A firepower to deploy in 2021, with many expected to pursue smaller, “innovative” transactions--that is, before raising debt capital off arguably under-levered balance sheets.”
- Randall Stanicky, Managing Director and Specialty and Generic Pharmaceuticals Research Analyst, RBC Capital Markets
M&A may be poised for a rebound
The large cap pharmas have a lot of M&A firepower to deploy in 2021, with many expected to pursue smaller, “innovative” transactions--that is, before raising debt capital off arguably under-levered balance sheets.
This renewed activity should add a material tailwind to the smaller biotech/therapeutics companies; as LOEs increase, so should the need to raise a pipeline.
Digital health is ready for a breakout year
Digital health isn’t new. But both private investments and COVID-19-led behavioral changes have created an inflection point for this segment that will accelerate adoption, and possibly lead to disruption.
We expect the market to increase to $27B with 28% growth CAGR to $92B by 2025. Nearly every aspect of healthcare will impact our broader pharma coverage, from discovery and drug development through digital therapeutics.
“We expect the market to increase to $27B with 28% growth CAGR to $92B by 2025. Nearly every aspect of healthcare will impact our broader pharma coverage, from discovery and drug development through digital therapeutics.”
- Randall Stanicky, Managing Director and Specialty and Generic Pharmaceuticals Research Analyst, RBC Capital Markets
Small caps may get a boost from the new “consolidators”
After a challenging year where the <$1B market cap coverage dropped -27% on average, we could see somewhat of a comeback for small caps. We believe a healthy M&A environment could represent a new exit opportunity for many small-cap specialty pharma players.
Investors may underestimate European drug pricing risks
Although we believe the focus should be on U.S. drug pricing, the European drug market represents additional risks for investors. In fact, we believe we will see heightened price pressures across Europe due to lingering pandemic-related economic concerns. Investors will likely underestimate the potential for this risk over the next several years, just as they did after the 2008 financial crisis.
Regulatory policies under Biden come into focus
We believe a Democratic-controlled White House and Congress presents the greatest risk to our coverage due to more aggressive drug pricing initiatives, as well as its efforts to increase the corporate tax rate.
These initiatives include capping price increases to other developed countries, or providing Medicare legal authority to directly negotiate pricing with drug manufacturers. The Biden Administration has also expressed interest in eliminating tax breaks on drug advertisements, and giving consumers the option to import drugs from other countries as one way to bring down costs.
Randall Stanicky authored the research report “Pharmaceuticals: 2021 Outlook and Top 10 Themes” published on January 6, 2021. For more information about the full report, please contact your RBC representative.
