(Bloomberg) -- After almost three years of booming health-care dealmaking in the U.S., 2017 is off to a slow start.
Pharmaceutical and biotech acquisitions totaled $44 billion last quarter, down 13% from a year earlier, and 35% below the first quarter of 2015, according to data compiled by Bloomberg. And ETFs, a good indicator of investors' appetite in a sector because they typically track an index, are seeing about half as much trading volume in health care as three years ago, data show.
Part of the reason is that President Donald Trump dashed hopes for a new biotech boom. Once thought friendlier to the industry than his Democratic campaign opponent, he's since attacked drugmakers and vowed to force down their prices.
"Most people would say they are disappointed with the pace of M&A," said Geoffrey Hsu, a partner at investment firm OrbiMed Advisors in New York. "Frankly, we were expecting more to happen by this time."
Investors and companies are waiting for Washington to take action on several key issues that will impact their decision-making. They include Republican efforts to repeal and replace the Obamacare health law, currently at a stalemate; Trump's promised tax reform, which should make it easier to bring back billions of dollars from overseas; and specifics on how his administration will reduce drug costs.
WAITING FOR CLARITY
"When there is a little bit more clarity on some of the policy issues we could probably see an uptick in M&A," said Jeff Greene, a partner at EY in New York who advises clients on deals in life sciences.
Still, there are bright spots ahead. Large companies, having cut back on research and development, are dependent on deals for innovation, which will spur M&A activity. The incoming Food and Drug Administration commissioner, Scott Gottlieb, supports speeding up drug approvals. And venture capitalists deployed more than $3.4 billion to life-science companies last quarter, according to PricewaterhouseCoopers.
The level was the highest since at least 2002, said Greg Vlahos, a PwC partner. "We're seeing a turnaround for 2017," he said.
Dealmaking started to cool last year following a boom from 2014 through mid-2016, after public and political criticism of skyrocketing drug prices intensified. Trump's election on Nov. 8 initially triggered optimism, but the president sank pharmaceutical and biotech stocks in January when he said drugmakers are "getting away with murder."
To replenish their pipeline, big companies will probably continue to focus on smaller transactions until Washington takes action, said Ashtyn Evans, an analyst with Edward Jones. "These companies are waiting and being a little bit more patient," Evans said.
Although the dollar value of mergers and acquisitions is lumpy throughout the year, the first-quarter data is still a good gauge of the current lull, especially when compared with the frenzy of 2015. M&A this year is at the lowest since 2014, even including the one megadeal of 2017 so far: Johnson & Johnson's $30 billion purchase of Swiss drugmaker Actelion. Excluding that deal and other transactions of more than $29 billion in the previous quarters, 2017 was 4% lower than 2016 in volume, and 79% below 2015.
The same goes for private equity, where the number and value of health-care deals is 10% to 15% lower than expected, said John Martin, managing partner at Antares Capital.
"It just hasn't kicked in," Martin said.
One potential driver would be a so-called repatriation holiday — when the U.S. government temporarily reduces the tax rate to induce companies to bring foreign earnings home — as part of Trump's tax reform. Investors anticipate that companies will use the extra cash to make deals. And foreign drugmakers looking to buy assets could be motivated to pull the trigger sooner, before their U.S. rivals get their hands on the holiday money, according to Ernst & Young's Greene.
Pressure on price may bring more consolidation among markers of generic medicines, too. Germany's Fresenius SE confirmed this month that it was in talks with Akorn, a U.S. generic drugmaker with a market value of about $4 billion. And Japan's Sawai Pharmaceutical Co. agreed to buy a U.S. generic-drug business for $1.05 billion this week.
The return to the frothy times of the recent past may not happen until next year, said Jeff Jonas, a portfolio manager at Gabelli. "It's going to take a while to get back to that peak," he said.
'LACK OF ENTHUSIASM'
There's another sign of the decreasing investors' interest: The momentum in health-care ETF, or ETFs, has dried up. This year through April 20, 1.2 million shares were traded daily on average on the Nasdaq Biotechnology ETF, known as the IBB, down from 2.2 million in the same period in 2014.
There are fewer drug prospects from large companies that attract new investors — compared with a few years ago when giants like Gilead Sciences and Amgen introduced ground-breaking treatments for hepatitis C and cholesterol, respectively.
"There's a lack of enthusiasm from generalists about our whole sector," said Brad Loncar, an independent biotech investor. "The big names that everyone knows don't have anything flashy or exciting going on right now."
Dennis Podlesak, a partner at venture capital firm Domain Associates in Princeton, New Jersey, says deals will pick up again once there's more clarity on the corporate tax overhaul. Big drugmakers need new products and likely buyers have identified potential targets, he said.
"Mark my words: more to come."