Will That Be Cash or Credit?

Pay attention to the way Big Biopharma pays for its acquisitions — it can tell you a lot

Hasn’t it felt like there’s been a lot of deals this year? We’re only through about half the year and it certainly feels like it. Back in April, the folks at Stifel said we were tracking towards the second most active year in Biopharma M&A and since then it’s looked like it has already picked up quite a bit.

It’s good and healthy for there to be more deal activity. This has been paired with a growth in the number of buyers as well. Some were dormant and became rather active — particularly ex-US specialty pharmas, like UCB, Sun Pharma, Recordati, Ipsen, Otsuka, and Chiesi. Others make up the growing class of BioPharma “middleweights” who fit the criteria of being too big to be acquired easily by Biopharma heavyweights and are of a size and maturity where they too are ready to be buyers. Genmab made that transition this year with the acquisition of Merus. Neurocrine bought Soleno. Revolution Medicines has probably moved into this group as well. They join other names like Alnylam, BioMarin, and Argenx who could be selective buyers.

Still, it’s Big BioPharma that cuts the biggest and most checks. As their appetite goes so does the deal making.

With this year’s deal slew, one thing I found myself paying more attention to is how heavyweights say they intend to pay for these acquisitions. Typically, you’ll find a line or two tucked into the bottom of a press release or a follow-on SEC filing that explains whether a Big BioPharma intends to pay with cold, hard cash or a handful of elegant synonyms—like 'credit facility,' 'senior notes,' or 'commercial paper'—that are really just corporate speak for taking out a loan.

It’s easy to assume that the biggest companies in our sector are so flush with cash that they buy everything with cash. But that isn’t always the case. I started to see more companies take out debt to finance acquisitions. Some were taking out a little bit to supplement their cash. Others, like AbbVie with its recent acquisition of Apogee, just went ahead and financed the entire ~$9B with debt.

I figured if we can map out where, when, how, and who are debt users versus cash users, maybe we’ll get a better understanding of the acquisition “archetypes” of big biopharma players in our space. That’s effectively what I tried to do in this analysis. I looked at every big biopharma company acquisition from 2021 through 2026. I looked at whether they paid for the acquisition with just cash, just debt, or both. I tried to see if we get any interesting groupings that can shed light on particular acquirer archetypes. Who is more willing to take on new debt in order to do a big deal? Which companies are more hesitant to take on debt? And which ones are, for the most part, staying put unless they can acquire a company purely with cash?

Obviously, all of these companies are staffed with very talented financial professionals, and your treasury mix can shift based on a number of factors. It’s not to say that these archetypes are set in stone, but I think, as a supplement to understanding how “firepower,” or how large a company’s “war chest” is, understanding their finance mix as a style point to how they like to do acquisitions can shed light on who is a more realistic acquirer for particular buyout targets.

Why would a Big BioPharma company use debt at all?

So you might be thinking, “Isn’t it just better to pay with cash every single time? Why would a company ever even consider taking on debt to do an acquisition?”. And I think you’re not wrong to ask that question. I asked it to myself as well, and even as I’m writing this, I hear all the old school online personal finance gurus ( the Suze Ormans and Dave Ramseys of the world ) yelling at me for advocating for taking on more debt. But this is corporate finance, and that’s far different than personal finance.

Companies may look to take on debt for a few reasons. Adding debt gives them liquidity optionality, protecting their existing cash to be used for other things. Taking on debt also increases your ability to do a lot of deals very quickly. You don’t need to wait for your cash reserves to restock before you buy your next company. Just call the bank or issue some bonds and boom, there’s your firepower. And if you are a company with incredibly healthy cash flows, say someone like AbbVie, your capacity to take on more debt is a lot higher than someone without those healthy cash flows. All the money you’re bringing in means you have more ability to pay your interest payments. Additionally, debt can sometimes even be cheaper than cash in some respects. By funding an acquisition with low-cost debt, a company can actually lower its overall cost of capital, creating a tax shield that optimizes ROI for the deal. This is similar to how the interest on your mortgage is tax deductible. Debt, when at the right price and for the right acquisition, can be a really smart thing.

The trade-off to deploying debt so readily is that if you take on too much debt, your credit rating can go down, which signals an unhealthy underlying financial foundation for your company. In addition, paying the interest on that debt comes out as an expense, and therefore could suppress your earnings metrics. If you’re a centi-billionaire, this is how you avoid paying personal income taxes, but if you lean too hard into this as a corporation it starts looking like your business hates making money. There’s also a little added pressure for whatever you just bought to start adding to your cash flows and earnings sooner rather than later, because the bond holders of the bonds you issue carry coupon payments that can’t go missed. Miss them or reduce them and it starts to look like there are holes in your ship.

One way isn’t necessarily better than the other. Debt is always going to be available to the healthiest companies in our sector, even if you aren’t a frequent user of it. But by understanding how often a company is willing to take on debt to do small deals, medium-sized deals, large deals, or mega deals, we can get a better understanding of how they view their own buying power in the current environment.

Isn’t this just about size?

The mortgage example might’ve triggered a thought in your mind: the average person doesn’t have a boatload of cash lying around to buy a house, especially in the Bay Area, where I live. I guess unless you work for one of these AI companies, most of the time you’re looking to get a loan (i.e., a mortgage) to make a home purchase. So it stands to reason that Big Pharma would think similarly. Aren’t they just going to use debt more often when the deal size gets bigger? The bigger the deal, the less cash they have available to use, thus they’ll be more in need of tapping into debt.

And to that, I would tell you you are right. In the chart above, if you look at all of the Big BioPharma acquisitions in this analysis, which accounts for 123 total deals, and tier them out based on size, you see a clear pattern that the rate of deals requiring cash plus debt, or just debt alone, tends to increase as the deal size tier increases.

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There are a couple more interesting charts and analyses on each Big BioPharma archetype that you won’t want to miss.