Winners and Losers in Pharma / Biotech Mergers and Acquisitions: Biogen Shines Again

Pharma / Biotech is one of the most M&A intensive industries. Over a period of approximately 20 years, the industry has spent over USD 1.4 trillion in pharma / biotech acquisitions (excl. generics, OTC, Animal Health, CROs and CMOs acquisitions).

The aim of this analysis is to assess which of the acquirers have really gained from those deals based on a simplified DCF analysis of the acquired R&D and marketed products (i.e. this excludes acquisitions of technology platforms that can enhance future drug discovery efforts, as this is extremely hard to assess).

I have outlined below the steps and criteria in my analysis:

– Identified M&A deals performed by big Pharma and Biotech between 1994 and 2012. Brought forward (future value) of M&A expenditure prior to 2015 to 2015 (Valuation was done as of 31/12/2015) using an estimated WACC on a firm-by-firm basis. M&A deals post-2012 were excluded from the analysis because it was assumed that those deals cannot have an immediate or visible effect 3 years later.

– Identified the marketed products acquired as well as the products that were still under the R&D phase at the time of acquisition.

– Found the historical sales of marketed products (as well as forecasts if they are still under patent protection).

– In regards to R&D products, if those products entered the market the historical and forecasted sales of these products were used.

– Multiplied the 6-year (2010 – 2015) average Free Cash Flow (FCF) to Sales ratio of each firm by the sales of products to find FCF of each product. It should be noted that the R&D expenditure was added back prior to calculating each firm’s FCF to Sales ratio. The assumption is that, in the future, there will be no R&D expense on acquired marketed products (unless the acquirer decides to spend cash on R&D to assess if these marketed products can benefit other patient populations or be used in other indications). In the calculation of FCF for acquired R&D products, R&D expense was again added back to FCF. R&D expenses of an acquired R&D product were estimated based on three parameters: therapeutic category of each product, probability of success by phase, risk of the R&D project and time. Then the value of R&D expense was subtracted from the overall DCF value of each product.

– Brought forward (future value) the calculated FCF of the products prior to 2015 to 2015 and discounted the calculated FCF sales post-2015 to 2015 (this was done by multiplying the forecasted sales by the FCF to Sales ratio using the same WACC used to bring forward the M&A expenditure).

– Divided the total DCF value (acquired marketed + acquired R&D) by the total M&A Expenditure (by firm) resulting in the M&A ROI ratio.

The acquirers included in the analysis were: Pfizer, Roche, Sanofi, Merck & Co, Gilead Sciences, Amgen, Bristol Myers Squibb, Shire, Biogen, Takeda, Merck KGaA, Eli Lilly, Celgene, Novartis, AstraZeneca, GlaxoSmithKline and Abbott Laboratories.

The results of these analyses are presented below:


Figure 1: DCF Value of Acquired R&D and Marketed Products by Company (As of 31/12/2015)



Figure 2: Total, Time-Adjusted M&A Expenditure by Company (As of 31/12/2015)



Figure 3: Ratio of DCF Value to Total, Time-Adjusted M&A Expenditure by Company (As of 31/12/2015)


The clear winner is Biogen. Biogen is the lowest spender (USD 2.8 bn.) and the value generated by its acquired product is USD 26.2 bn. resulting in an M&A Effectiveness Ratio of 9.28. What is really impressive is the fact that 98% of that value is attributed to acquired R&D products. This implies that Biogen has the ability to spot the “hottest” products that fit to the company’s existing R&D strategy and product portfolio. It also means that Biogen acquires biotech companies with potentially successful R&D projects in their pipelines ensuring the company’s long-term growth.

Gilead and BMS have a much lower M&A effectiveness ratio than Biogen, but still relativey high considering the huge risk of R&D focused acquisitions. Both Gilead’s and BMS’s high ratio are attributed to the DCF value of acquired R&D products.

Instead, Merck and Roche have generated value mostly through targeting companies with marketed products. These buyers will potentially face pipeline gaps in the future when the patents of the marketed products acquired expire. As a result, they would need either to keep making acquisitions of firms with established products in the market or focus on building a stronger internal R&D capabilities.

Eli Lilly and Sanofi are breakeven, which means (at least in theory), M&A does not make any difference for them in terms of generating value.

The clear loser is Pfizer, which is the biggest spender (over USD 500 bn.) while the value of its M&A product portfolio is close to USD 300 bn., meaning it has “lost” USD 200 bn.

It should be noted that the analysis above has the following limitations:

– WACC of the acquirer at the time of acquisition and after the acquisition changes. Also, the discount rate used in discounting FCF of a specific product (project) might differ from the discount rate of the business. In this case, WACC has been assumed constant and equal to the discount rate used to discount the FCF of each product.

– A similar reasoning applies to the FCF / Sales ratio (which might differ between the products and companies), but for the purpose of this analysis it has been assumed that the ratio is the same across all products (under the same firm).

– Sales were projected up to patent expiry. After the patent expiry, sales were assumed to be equal to zero, which might not be the case in real life. Usually there is a sharp drop due to pressure from generics / biosimilars, however the present value of the FCF during that period is likely to be very low.

– R&D expenses of R&D products were estimated based on documented success rates by therapeutic category (see here) and out-of-pocket R&D expenditure as well as clinical development time frames (see here). The discount rate (or forward rate) used to account for time value of money was the firm-specific WACC except that the beta was changed each time a product entered to the next phase. It has been assumed that a beta of 2.5 is relevant for a research project, which was reduced by 0.25 for each of the next phases, reaching a beta of 1.25 when the product hits the market.

Brand Valuation of OTC Pharmaceutical Businesses

Brand valuation is a major part of business valuation in certain industries such as food & beverage and consumer home products. For example, Coca-Cola’s brand value is estimated at USD 73 bn. (see here), accounting for 40% of Coca-Cola’s current market capitalization.

But how does brand valuation apply in the context of pharmaceuticals? In theory, a pharmaceutical company’s brand has minimal value when it comes to generating revenue. That is because (again, in theory) doctors seek to prescribe drugs with high efficacy, safety and cost-effectiveness and thus, brand name does not (or at least, should not) affect doctors’ decisions.

Therefore, it is interesting to investigate brand value in the context of OTC (i.e. drugs that can be bought without a prescription from a doctor, e.g. aspirin).

Through my analysis I will attempt to value Bayer’s consumer care division and estimate the amount of value that is attributed to “brand name”. The reason I chose Bayer is that it generates significant OTC revenues and financial information on its OTC business unit is publicly available.

The following steps will be followed to estimate the brand value of Bayer’s OTC business:

Step 1: Estimate Market Value of OTC business.

This will be achieved by using the EV / EBITDA and EV / EBIT multiples of Bayer and apply them to OTC business’s financials.

  • Cash for the OTC business will be estimated by using an analogy of OTC EBITDA or EBIT to Total EBITDA or Total EBIT (depending on the multiple used to estimate market value of equity).
  • Debt for the OTC business will be calculated based on the cash estimated as described in the bullet point above.

A brief DCF model will be also used to validate the estimate market value of equity using the multiple approach.

  • EBIT*(1-T) of OTC business will be assumed equal to Free Cash Flow (i.e. change in working capital is assumed negligible and capex is assumed to be equal to D&A.)This assumption is completely rational. When calculating terminal value in perpetuity Capex is equal to D&A in all DCF models. Terminal value is ~60% of the overall DCF value. Therefore, the potential effect of D&A not being equal to CAPEX (during the forecast period) on the DCF-derived market value of equity will be very small. The second assumption that can obviously be challenged is that change in working capital is assumed to be 0 which may not be the case. But since this is a “brief” DCF model, change in WC will be indeed assumed to be 0.
  • Tax rate = 25%
  • Forecast period growth rate = compound annual growth rate in previous years (2007 – 2014) = 6.7%, a rational assumption for the sales forecast part of a simple DCF model.
  • Growth to perpetuity = 2%
  • WACC of OTC business = WACC of Bayer = 9.29% This assumption can indeed be challenged since the risk profile of the OTC business is possibly lower than, for example, Bayer’s pharmaceutical business (OTC business’s WACC could be in the range between 6% – 8%). But again, for the sake of this exercise, it is assumed that OTC WACC is equal to overall WACC.

Step 2: Estimate Brand Value as % of Total Vale

The royalty relief method will be used to estimate the brand value of the Bayer’s OTC business. Across 26 comparable out-licensing deals that took place during the period 2000 – 2015, the average royalty rate for pharmaceuticals was close to 10%. It should be noted that due to lack of data available (or lack of deal-making) on OTC products, the sample of deals includes mainly prescription drugs.

Based on the forecast period growth rate, the WACC and the growth rate to perpetuity, the brand value of the OTC business was estimated using the DCF method.


  1. Estimating Market Value of Equity of OTC Business

A/ Multiples Approach

Bayer’s breakdown of financials by business unit for FY 2015 is presented below:


Based on the 2015 average market capitalization, the Enterprise Value of Bayer was calculated:


The Market value of equity of the consumer care (OTC) business was estimated using both the EV / EBITDA and EV / EBIT method. EV that was estimated to stand at USD 100.6 bn. was divided by the company’s EBITDA and EBIT, arriving at an EV / EBITDA multiple of 9.8 and EV / EBIT multiple of 14.2. By applying those multiples on OTC business EBITDA and EBIT, we arrive at an EV of the OTC business of USD 14.3 bn.

As mentioned previously, cash was calculated using the % of EBITDA of Bayer that is attributed to the OTC business (i.e. 14.2%) multiplied by Bayer’s total cash (USD 1,859 mn.). Instead, debt was calculated based on the % of cash that is attributed to the OTC business multiplied by Total debt. Both methods result in the same value, i.e. USD 11.7 bn.


B / DCF Approach

WACC was calculated as follows (bond values and coupon rates were taken from Bayer’s 2015 financial statements). Cost of equity was calculated using the Capital Asset Pricing Model: risk free rate + beta*market risk premium, where risk free rate = 10 year U.S. government bond as of 31.12.2015 = 2.2%, Bayer’s beta = 1.34 (as referenced in NASDAQ) and market risk premium = 6.7% (Ibbotson).


Free cash flow was calculated as follows: EBIT*(1-T)*(1+CAGR)^n + (EBITDA – EBIT), where n = year 1, 2, 3… and EBITDA less EBIT = D&A (added back since it is a non-cash item). Also, CAGR = 6.68% and T = 25% as indicated in Step 1.


Using the DCF approach, the Market value of equity of the OTC business is estimated at USD 10.0 bn.

C / Final Market Value of Equity of OTC business

A 25% weight was assigned to the EV / EBITDA and EV / EBIT method (i.e. a total weight of 50% for the multiples approach) and a 50% to the DCF method. The weighted average market value of equity of the OTC business was calculated as USD 10.9 bn.


2. Estimating Brand Value using the Royalty Relief Method

Using a royalty rate of 9.72% and the same CAGR and WACC as in previous steps, the brand value of the OTC business is estimated at USD 7.5 bn.:



The results show that the market value of equity of Bayer’s consumer care business is approximately USD 10.9 bn. and its brand value is USD 7.5 bn. This implies that close to 70% of the value of Bayer’s consumer care business is attributed to its brand.

The key takeaway from this analysis is that brand value of pharmaceutical firms strongly correlates with OTC revenue and hence total value. Investing in marketing and brand promotion can boost the value of an OTC business and as a result, increase cash gained in deal-making. Companies that operate in various healthcare related sectors can be strongly benefited from their brand , since consumer awareness of those firms is amplified (e.g. Johnson & Johnson).  As a result, the price premium put on a potential sale of the business can also be higher.