There were 339 completed pharmaceutical deals in HY1 2016, an 11.5% increase compared to HY1 2015. Big pharma players were especially keen to strengthen their drug pipeline through the acquisition of biotech assets. The focus on smaller targets triggered a decline in the industry’s total deal value to $84 billion in HY1 2016 from a record-breaking $221 billion in HY 2015, as evident from a KPMG analysis based on figures released by Thomson Reuters.

The decline in mega deals was due to several reasons. Volatile stock markets at the beginning of the year increased risks and led companies to be more cautious. In addition, new US regulatory tax rules hampered cross-border acquisitions and struck down the $160 billion Pfizer-Allergan merger which was earmarked to become the largest transaction in the industry’s history.

Shire Leads the Way with Landmark Biotech Acquisition

In light of these developments, Pharma players turned their focus to aspiring biotech companies offering a rich pipeline with blockbuster potential. Almost 30% of pharmaceutical deals in H1 2016 targeted biotech companies, a 5% increase from H1 2015.

Amongst the top deals for H1 2016 was the landmark acquisition of Baxalta by Shire for $32.0 billion, ranked as the second largest deal year to date. Baxalta has placed a strategic priority on its cancer drug business alongside its distinctive portfolio of treatments for rare diseases. After deal completion, cost synergies between both firms are expected to reach $0.7 billion, a 40% increase over previous estimates. Shire, as the world leader in rare diseases, hopes to generate $20 billion in sales by 2020 with its drug pipeline of 40 products.

Prior to the Baxalta acquisition, Shire acquired rare disease specialist, Dyax, for $6.5 billion, securing its hereditary angioedema portfolio. Dyax’s lead fast track, breakthrough therapy and orphan drug-designated phase three-ready product, DX-290, is considered to have blockbuster potential.

Biotechs in Oncology Particularly Targeted

The acquisition of oncology-focused biotechs was one of the major deal trends in the first half of the year. The oncology market is projected to more than double in size from $83 billion in global revenues in 2015 to $187 billion by 2022.

AbbVie is expanding its oncology business through the acquisition of Stemcentrx, a Silicon Valley biotech. Its main asset is Rova-T, a late-stage lung cancer drug, submitted to the FDA for breakthrough therapy designation. The deal is worth up to $9.8 billion and is one of the five largest acquisitions ever of a venture capital-backed company.

AbbVie substantially entered into the oncology business through the acquisition of Pharmacyclics for $21 billion, one of last year’s blockbuster deals. Through both deals, the US-based company decreases its reliance on Humira, the world’s best-selling drug for rheumatoid arthritis which accounted for about 60% of AbbVie’s sales in 2015.

After walking away from the Allergan merger, Pfizer plans to bolster its oncology sales by acquiring Medivation, a biotech specialising in cancer medication. The US-giant outbid French rival Sanofi, offering $14 billion, a 55% premium to Sanofi’s initial bid. The deal serves Pfizer’s current focus on the acquisition of late-stage drugs in order to complement its portfolio consisting of several early-stage assets. Medivation’s blockbuster cancer drug Xtandi has already been approved by the FDA. Annual sales of $1.3 billion are expected by 2020.

In Q1 2016, AstraZeneca completed the $4.0 billion acquisition of a 55% stake in Acerta Pharma, a leader in covalent binding technology. The deal enables AstraZeneca to complement its immunotherapy approach by adding acalabrutinib, a Bruton’s tyrosine kinase (BTK) inhibitor for blood cancers and multiple solid tumors in late-stage development.

Strong Deal Momentum in Dermatology

In addition to its focus on biotech targets, the pharmaceutical industry also pursued M&A in other therapy areas most notably dermatology, one of the smaller pharma markets with significant upside potential. The dermatology market is expected to double from $12 billion in 2015 to $24 billion by 2022, driven mainly by ageing western societies. Today’s market fragmentation and rising product complexity is also driving market consolidation.

Dermatology is a strong focus area for Mylan’s expansion strategy this year as it targets complementary portfolios to add to its existing assets. The US-based company acquired the dermatology business of Renaissance Acquisition Holdings for $1.0 billion in Q2 2016. Prior to that in Q1 2016, it announced that it would acquire Meda for $7.2 billion.

After terminating its mega-merger with Allergan, Pfizer is exploring options to bolster its drug pipeline. In Q2 2016, the leading US pharma company acquired Anacor Pharmaceuticals for $5.2 billion. The deal provides access to crisaborole, a topical gel for the treatment of eczema currently under review by the FDA and expected to hit the market in 2017. Analysts predict the gel to become a best seller in the dermatology market, thus earning Pfizer a spot among market leaders.

One of Pfizer’s main competitors in the field is Leo Pharma, which ranks among the top 5 dermatology players. Pursuing a strong growth strategy, Leo acquired Astellas Pharma’s dermatology business for $0.7 billion in Q2 2016. The acquisition enabled Leo to enter China and Russia increasing sales by more than 20% to around $1 billion.

Consolidation in Generics Continues with Teva Completing Mega Deal

Generics continues to be a major part of the M&A landscape. UK-based Hikma Pharmaceuticals completed the acquisition of the specialty generics business, Roxane Laboratories, for $2.8 billion from Boehringer. This boosts Hikma’s non-injectable generics business in the US.

Teva Pharmaceutical Industries strives for global leadership in the generics market through strategic acquisitions. Teva bought Rimsa Laboratorios for $2.3 billion in Q1 2016, moving from a small presence to a leading position in Mexico, the second-largest pharma market in Latin America.

At the beginning of Q3 2016, Teva completed the addition of Allergan’s generics portfolio for $40.5 billion, a deal it announced at the end of 2015. The acquisition propels Teva into the top three market position in over 40 markets solidifying its global leadership in generics with an overall market share of 20%. Regulators required certain assets to be divested which were picked up by competitors. For instance, Australia’s Mayne Pharma Group agreed to buy a basket of drugs for $0.7 billion.

Following Teva’s blockbuster deal, the pharmaceutical sector is on track for another year of M&A activity. As the deal momentum remains buoyant, further landmark acquisitions are expected for the remainder of the year.