Where do big-cap biopharmas stand on the M&A matrix?

The $62 billion Takeda-Shire deal surprised everyone—and worries some—as Takeda is borrowing an enormous $31 billion to help pay for the purchase. Does it refresh the industry’s understanding of M&A affordability and open up more possibilities for future deals? Leerink’s analysts crunched the numbers.

"The recent surprise of Takeda’s acquisition of Shire and available financing provide further evidence that almost any such potential transaction could be possible," wrote Leerink’s Geoffrey Porges in a recent report.

After going through the balance sheets of 20 biopharma companies with the largest market caps, Porges and colleagues found that, at peak leverage ratios, the group could collectively borrow $460 billion in M&A war chests even without counting leverage capacity of target or potential synergies. Translation: "there is sufficient capacity for many more large transactions such as Takeda-Shire," wrote Porges.

Not surprisingly, the top three companies with the most options for takeovers coincide with the top three with the highest 2017 revenues. Johnson & Johnson, Roche and Pfizer have $65 billion, $55 billion and $41 billion leverage capacity, respectively—cash and debt—while Novartis, Merck & Co. and Gilead also have midlevel options, according to Leerink’s report.

Among them, Pfizer is of course one who may be in most need of an acquisition after its failed attempts at AstraZeneca and Allergan. While rumors of a potential megadeal for Bristol-Myers Squibb aren’t entirely out of the picture, the $24 billion in overseas cash Pfizer looks to bring back for potential dealmaking thanks to the U.S. tax reform has once again put it on some analysts’ M&A radar.

During the company's fourth-quarter earnings call, CEO Ian Read said he didn’t feel under pressure to make big purchases, but he did say the company "would be at the forefront" of M&A if such opportunities emerge.

On the target end, Astellas has the most potential buyers among those 20 firms in terms of affordability, with 10 companies capable of snatching it up at a premium of 25% or above, Leerink found. 

The Japanese pharma had its own share of M&A activity recently, having acquired German cancer player Ganymed Pharmaceuticals for up to $1.4 billion late 2016 and just recently scooping up GPCR specialist Ogeda for €500 million ($534 million) upfront. But those deals pale in comparison to compatriot Takeda’s $62 billion for Shire. In fact, if it weren’t for the Shire buyout, Takeda would itself be a hot possible target.

Astellas just recently promoted Kenji Yasukawa to president and CEO. Soon after the inauguration, Yasukawa rolled out a strategic plan that’s to some extent consistent with his predecessor’s, focusing the company on such R&D therapeutic areas as ophthalmology, muscle diseases, immunology and oncology. As part of the restructuring, Astellas will cull 600 jobs and shut down two subsidiaries focused on R&D and sales and marketing.

There is one much-rumored target that Leerink analysts, surprisingly, found isn’t actually an easy one. AstraZeneca has previously stiff-armed Pfizer’s gigantic $118 billion offer in 2014. A window for a potential new bid opened last year when Imfinzi’s Mystic trial flop sank shares. However, Porges argued that the British pharma’s stock price is at a relatively high point recently, and its low EBITDA also makes it difficult to be levered as a target.

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