Mergers seem to be a prescription for growth for pharmaceuticals
The case for Pfizer's proposed takeover of AstraZeneca (Part 8 of 9)
Big pharma M&A
Consolidation in the big pharmaceutical space has been on the rise. While the market waits for Pfizer (PFE) to up its offer for AstraZeneca (AZN), Merck recently agreed to sell its consumer-care business to Bayer for $14.2 billion. Swiss drugmaker Novartis and Britain’s GlaxoSmithKline entered into an asset swap deal valued at around $16 billion. Novartis is also selling its animal health division to Eli Lilly for approximately $5.4 billion. In April, activist investor Bill Ackman of Pershing Square Capital Management and Canada’s Valeant Pharmaceuticals made a $47 billion bid for Botox maker Allergen. A report in the Financial Times cited data from Dealogic and said global pharma transactions have totaled $140 billion as of April this year and account for around 13% of total M&A (mergers and acquisitions) activity.
Ernst & Young’s “2014 Firepower and Growth Gap report, The shifting balance of firepower“ noted that big pharma remained on the sidelines in the 2013 mergers and acquisitions market although there was a continuing need to close a revenue “growth gap” that’s expected to reach $100 billion by 2015. EY said that in 2013, M&A deal values increased about 30% over 2012, to more than $85 billion. However, big pharma executed only few (less than $5 billion) bolt-on deals with no single transaction greater than $10 billion.
Nerac analysts believe pharma consolidations are driven to deal with the challenges facing the pharmaceutical industry, including spiraling R&D (research and development) costs, gaps in drug development pipelines, patent expirations and generic erosion of compounds, competition from foreign entities, regulatory scrutiny, and costly lawsuits. Industry experts said big pharma companies have been on an acquisition spree to spend cash available from their cost-cutting and restructuring programs and lower spending on R&D.
According to PwC’s “Pharmaceutical and Life Sciences Deals Insights Quarterly” M&A deal activity went up in the fourth quarter of 2013 to end the year on a strong note, with total deal value 45.8% higher than in 2012. For the entire year 2013, the pharmaceutical sector saw 49 deals with a total value of $113.9 billion, compared with $33 billion across 41 deals in 2012. Excluding the IPOs of AbbVie (ABBV) by Abbott Laboratories and Zoetis (ZTS) by Pfizer in the first quarter of 2013, which represented $68.5 billion of deal value, deal value in 2013 represented an increase of 37.6% over 2012. PwC noted that there was an absence of mega deals in 2013 as big pharma companies concentrated on rebuilding its product pipelines through acquisitions of smaller biopharmaceutical players. Plus, pharma companies remained focused on balancing their own product portfolios and tried to unlock value via divestments.
McKinsey analysts believe big mergers and acquisitions among pharmaceutical companies have generally resulted in positive returns to shareholders. An article on the company’s website noted traditional arguments stating that such deals don’t benefit, that the challenges of large-scale integration are disruptive, and that research and development productivity suffers. McKinsey said despite these criticisms having some merit, they ignore larger points that mega-mergers have created significant value for shareholders, and some of these deals have been critical for the longer-term sustainability of acquirers. Their analysis revealed that most of the pharmaceutical companies that have stayed at the top were large-deal acquirers. They added that the acquiring companies emerged from these mergers with a larger revenue base and leaner cost structure, increasing economic profit by an average of more than 50% in the two years following the transaction.
In terms of outlook, IMAP’s “Global Pharma and M&A Report 2013″ said pharma deals in the U.S. will target enhancing the drug pipeline. The focus will also be on partnering and licensing deals as well as divestments of non-core assets. Trends influencing M&A activity include regulatory changes in terms of healthcare reform and patents as well as a shift in relationships with third-party payers, patients, and providers. The report added that drug development models are transforming due to the cost of a new drug being above $1 billion coupled with a lengthy approval process. Early-stage specialty pharma and biotech companies are being targeted for consolidation. Moreover, $200 billion in drug revenue will be subject to expiring patents in 2014, leading to increased generic competition.
AstraZeneca too was an active M&A player in 2013 and completed an acquisition of Pearl Therapeutics $1.15 billion, Omthera Pharma for $443 million, AlphaCore Pharma for an undisclosed amount, Amplimmune for $500 million, and Spirogen for $440 million. The largest of its M&A deals was the acquisition of partner Bristol-Myers Squibb’s (BMY) diabetes franchise.
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