Could M&A Activity Reshape the Global Pharma Industry?
It began in April when Sweden's Meda rejected a takeover bid from Mylan of the US, with the latter reportedly still on the hunt for a takeover target. This was followed by another unsolicited offer, this time from Canada's Valeant Pharmaceuticals for Botox-maker Allergan, also of Canada. The Allergan board is said to be reviewing the proposal, although its co-founder and former chairman Gavin Herbert has urged the company's directors to throw it out.
Then came the news that Switzerland's Novartis and Britain's GlaxoSmithKline (GSK) had agreed to trade more than $20 billion (€14 billion) worth of assets and form a joint venture in consumer healthcare, which will be majority owned by GSK and will create a new giant in over-the-counter medicines. Novartis has agreed to purchase GSK's cancer drugs in a move that will strengthen its position as the number two cancer specialist behind Roche, while GSK will buy Novartis' vaccines business, excluding its flu vaccines, building on its own expertise in this area. At the same time it was announced that Novartis would be selling its animal health arm to Eli Lilly of the US.
Next came rumours of an even bigger deal, with US company Pfizer reportedly looking to buy Anglo-Swedish business AstraZeneca. The takeover bid has been rejected by Astra's board, but Pfizer is persisting. It has published an infographic hailing the benefits of a tie-up between the two firms and has also written to British prime minister David Cameron to stress Pfizer's commitment to the UK and its life sciences agenda. If it did go ahead, the deal would rival the merger between Glaxo Wellcome and SmithKline Beecham in 2000 as the biggest the pharma industry has ever seen.
Then just recently, it emerged that Germany's Bayer had agreed a deal to purchase the consumer care division of US rival Merck when a bid from the UK's Reckitt Benckiser fell through. As a result of the takeover, Bayer will become the second largest manufacturer of non-prescription medicines after market leader Johnson & Johnson. The two have also signed a global co-development agreement for new cardiovascular disease treatments.
What is prompting these deals?
During the last big pharmaceutical mergers and acquisitions boom companies sought to create economies of scale by merging with their rivals and creating huge pharma giants that could compete in all areas. This time around, the deals appear to be smaller and more targeted. As Marijn Dekkers, chief executive of Bayer, told journalists at a conference call recently, last time it was looming patent expirations that were driving the big deals. Of course patent expirations are still an issue, but now there are other factors at play. "In this case it's driven by companies really wanting to focus on that which they are good at," he explained. "Pharma research is very costly and has risks associated to it, so we are focusing on the sectors that we are strong in and building on this, or tying up with other parties when we have a greater chance of competing together than we would on our own."
This is certainly the case as far as the Novartis and GSK deal is concerned. The latter lacks the scale to properly compete in the area of oncology, whereas the former is already making huge headway here. Selling off its cancer drugs will allow GSK to focus on its other areas of strength, namely vaccines. As for Eli Lilly, the company has previously stated its desire to lead the market in animal health, and the Novartis deal is definitely a step in the right direction.
Similarly, Bayer's purchase of Merck's consumer care division allows the company to focus on what it does best, instead of trying to compete in areas where others are quite clearly winning. These asset swaps allow each firm to focus on their respective strategies for growth and innovation instead of trying to fight one another across the board.
So what is motivating these targeted moves? Well, for the over-the-counter drug makers it is all about scale. If they want to compete aggressively they have to be big enough, especially in a market where patent expirations mean blockbuster drugs are losing market exclusivity. Prescription drug makers, meanwhile, are being hit by healthcare spending cuts as governments around the world trim their budgets in the wake of the global economic downturn. These companies are either having to cut costs, scale back, join with their rivals or focus on their most profitable businesses. Selling off their weaker units to bolster their strongest ones simply makes sense.
What does the future hold?
Is this it for pharmaceutical mergers and acquisitions for the time being, or could we see more activity in the weeks and months ahead? Could this mini boom in pharma M&A deals become a bigger boom? Richard Purkiss, an analyst at Atlantic Equities in London, believes it could. He told the Reuters news agency that rumours of a possible deal between Pfizer and AstraZeneca alone demonstrate that the industry is in fact moving towards another period of consolidation. "Large cap pharmaceutical compared to more mature global industries is still fragmented and so can continue to concentrate," he explained. Mike Felton, manager of the M&G UK Growth Fund, shares this view. "If you are seeing deals the size of AstraZeneca, then there is potential for deals throughout the whole market," he told Britain's Financial Times.
If a new period of consolidation does take place, could it be as big as the last one more than ten years ago, when GSK and AstraZeneca as we know them today were born through mergers? Savvas Neophytou, an analyst at British investment bank Panmure Gordon, thinks not. "From my point of view mega-mergers are a thing of the past," he told the UK's Telegraph newspaper, pointing out that even the potential Pfizer and AstraZeneca deal would not fit into this category, since Pfizer is more than twice the size of Astra by market capitalisation. "I don't think you're going to see Pfizer acquire Novartis or GSL acquire Sanofi," he added.