There is a London saying that anyone from a large city can appreciate,  “You wait ages at a bus stop for a bus then a bunch come along together!” It fits the pharmaceutical business arena, which followed a quiet 2013 with a flurry of big business deals this year.

The beginning of Spring coincided with several M&A announcements revealing what companies like GSK, Novartis, Pfizer, Roche and Bayer have been up to. The involvement of the large pharma in significant M&A consolidations has been expected, as companies continued to face pricing pressure and increased competition. We’ve seen a new wave of consolidation in the industry in order to return shareholder value and accelerate growth.  

A Growing Appetite for Deals
Over the past weeks, a number of prospective pharma deals involving buy outs, mergers, joint ventures and divestitures made headlines. In April, Sun Pharmaceuticals announced plans to buy Ranbaxy Labs for $3.2 billion to form the largest Indian drugmarker. Also, Mallinckrodt, the Ireland based pharmaceutical group, agreed to buy Questcor Pharmaceuticals for $5.6 billion to diversity its business after its March acquisition of Cadence.

Most recently, Valeant Pharmaceuticals offered to buy Allergan in deal valued at $45.7 billion, aiming to add Allergan’s specialty medicines to its portfolio of mainly generic products. Also, Mylan‘s second offer for Meda was rejected on April 28.  This early round of potential deals was significant because of the involvement of generics companies as the consolidators.

The Next Megadeal
As the generic drug industry is undergoing a wave of consolidation, what is happening to the innovators? The Novartis and GSK asset-swap, in which GSK sells its oncology portfolio to Novartis for $16 billion and buys Novartis’ vaccine unit for $7 billion, has been considered an elegant new “template” for pharma companies moving forward. It also confirms that pharma companies are focusing on achieving cost efficiencies through specialization.

However, it’s Pfizer’s unsolicited approach to acquire AstraZeneca that has captured everyone’s attention recently. If the deal materializes, there will be significant synergies between the companies, with significant cost rationalization opportunities for Pfizer. AstraZeneca‘s focus on respiratory, inflammation, autoimmune and oncology portfolio will be a strategic fit for Pfizer. In addition, the transactions will raise Pfizer’s emerging markets business significantly. The merged entity will be headquartered and listed in the U.S. but be domiciled in the UK, which could potentially save billions in tax for Pfizer with the lower UK corporate tax rate. Of the biggest pharma companies, only Roche seems to buck the trend for these cost efficient mergers with a relatively modest bolt-on acquisition of molecular diagnostics innovator Iquum for $450 million to enhance its portfolio.                                                                                         

Post Merger Impact
In all mergers, the goal is to increase shareholder value, ideally by both bringing together businesses that will at least complement each other, and, ideally provide significant synergies. There is also the need to remove duplicated or non-core business activities. As a result, with most M&As there’s always a period of appraisal followed by the identification non-core assets to be divested. Often, these assets can include tail end products and underutilized manufacturing facilities, which may have significant value for other business.

Since innovator pharma companies have generally not succeeded in renewing their portfolios with sufficiently valuable new products, they’re generally facing declining sales. In these situations traditional M&A activity seems to be an attractive business strategy. We believe we’ll see more deals this year, as there are several large pharma companies facing cost pressures (such as Sanofi) which has not yet declared an explicit acquisition. It’s easy to write a check to make the acquisition, if the company has access to cash (or equivalents). However, the overall success of M&As can be the product of a careful executed integration plan on all cost savings and business synergies.  The impact of this hectic round of M&A will be felt for many years as integration plans are implemented.

Finally M&A deals are very time consuming and expensive to initiate, negotiate and close, and there’s a very limited capacity within even the biggest organization to execute these deals. After this round, there will be many exhausted pharma transaction practitioners, some with successful deals under their belts, and many disappointed underbidders. 

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Kevin Bottomley
Results Healthcare

Kevin Bottomley has over 30 years of experience in pharmaceutical, biotechnology and business advisory companies, involving senior positions in research, business development and transactions. He has previously worked for Pharmaventures, Merck, UCB, Sanofi, Roche Qunitiles and Inpharmatica.