Pharmaceutical M&A – Invent it, swap it or buy it

From: The Economist, Business: Print Edition

Pharmaceutical M&A

Invent it, swap it or buy it

Why constant dealmaking among drugmakers is inevitable

FEW industries have been shaped more by mergers and takeovers than pharmaceuticals. This is because developing drugs is such a high-risk business. Most potential medicines either fail to reach the market, or fail thereafter to recoup the cost of developing them. If a company does not have enough promising drugs in its research pipeline, its most obvious route to growth is to buy another firm. So, many of the world’s biggest drugmakers, such as Pfizer, Merck and GlaxoSmithKline (GSK), have been built through a succession of deals.

However, something has changed in the nature of drug firms’ dealmaking over the years. It used to be all about achieving sheer scale, and building a broad portfolio of potential treatments for a range of illnesses. Now it is increasingly about drug companies concentrating on what they do best, and getting out of areas in which they are weak. There is evidence that this is a better route to success. A study by Bain & Company, a consulting firm, of the most successful pharma companies over the past 20 years found that the top ten, in terms of shareholder returns, all to some degree used mergers and acquisitions to build strengths in a select number of areas.

In the M&A wave that has risen since the end of the financial crisis, this trend has been clearer. The most notable recent example is GSK’s agreement with Novartis to swap assets so that GSK strengthens its lead in vaccines and Novartis fortifies its position in cancer drugs. Last month Bayer, a firm that made its name selling aspirins, bought the over-the-counter medicines business of Merck, which includes such remedies as Claritin allergy pills.

Besides asset-swapping with another big firm, the other obvious way for a drugmaker to build on its areas of strength is to buy small, innovative companies. For instance, in June Merck said it would buy Idenix, a biotechnology firm, for $3.9 billion, to bolster its research pipeline for hepatitis treatments. One of Merck’s main rivals in this area, Gilead, had paid $11 billion for a smallish company, Pharmasset, in 2012. For some years now, big drugmakers have been disappointed by the performance of their in-house labs, and have increasingly looked outside for small firms with promising ideas. Nils Behnke, a partner at Bain, says that over the period covered by its study, the best-performing drug companies got more than 70% of their revenues from products that were not developed in-house.

The smaller, younger drug firms being bought in such deals can often be better than the pharma giants at thinking up new ways to attack a disease. But they typically lack the expertise to organise clinical trials, deal with regulators and get a drug successfully to market. These are the strengths of the big pharma firms. So combining the two sets of skills makes sense.

Not all of the recent rash of pharmaceuticals deals, however, were driven by the quest for new cures for humankind’s ailments. Many have been motivated by a baser desire to cut tax bills. Under certain conditions an American firm buying a non-American one can switch its tax domicile to the home country of its takeover target, which is why so many drugs firms based in low-tax countries like Ireland have been bought up in the past few years.

In September the US Treasury brought in new rules to make such “inversions” harder. A $43 billion deal in which Medtronic, a medical-device maker, would buy Covidien of Ireland, will still go ahead; but the American buyer has been forced to raise an additional $16 billion in debt to finance the merger. An even bigger deal, in which AbbVie would have paid $54 billion for Shire, a British firm, was scrapped. AbbVie had to pay Shire a break-up fee of $1.6 billion, and criticised the Obama administration for the sudden rule-change.

Another motivation for takeovers is to use them as a cover for slashing research costs. Much of the opposition that made Pfizer halt its $120 billion bid for AstraZeneca, earlier this year, was because of such worries. About $50 billion was spent on R&D in 2013 by members of America’s pharmaceuticals lobby, PhRMA—as a proportion of their combined sales this was a whopping 17.8%. Similar figures are found in Europe and Japan. Some in Wall Street see pharma research as value-destroying and an obvious target for cuts.

Valeant, a Canadian drugs firm, has grown fast by buying other companies and cutting R&D spending in all but their most promising areas. It has been keen to apply this formula to Allergan, the maker of Botox anti-wrinkle treatments. But this week Allergan was said to be trying to evade Valeant’s clutches by agreeing to a bid from Actavis for around $60 billion.

Mergers rarely produce significant advances in innovation or research productivity, or so work by Carmine Ornaghi of the University of Southampton in England suggests. That gives Cassandras grounds for worrying that the current deals portend an innovation-free future. Optimists will counter that innovation is poised to flourish, as scientists with good ideas create startups, encouraged by the prospect of a lucrative buy-out by a larger firm.

From the print edition: Business


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John Macey

I was born, and principally educated, in the fields of biochemistry, and business management in the northeastern USA. However, my world-wide professional career has greatly expanded upon that US base to involve the many different segments of the Biotech / Life Science fields globally. – I have been dressed as a surgeon to view many, many surgical proceedures - The major players in the health care fields that I have worked for include: Johnson & Johnson, DuPont, Abbott Laboratories, and F. Hoffmann-La Roche. – Positions have included selling nuclear materials for both in-vivo & in-vitro (radio-pharmaceutical & radio-immunoassay) medical diagnostic purposes, in the four countries in Scandinavia, based south of Stockholm, to managing Ph. Ds at a global Swiss headquarters location. – At one time I held a position of Strategy Manager for Europe, Middle-East & Africa (EME&A) for a Chicago based company, but living in Germany. – I do speak fluent colloquial German. – In addition to having lived in multiple European countries, my professional career took me to Asia for well over a decade. There I had management control of Oceania, the Pacific Rim, Northern Asia, Japan, out to India. – Occasionally, management assignments have taken me to all of Latin America, and most of South America. – I am extremely culturally aware, a skilled negotiator, and a seasoned manager of men and science. – My one abiding passion has always been computing, data, and analysis. As such, my main computer operating system is Linux, and open-source computer applications. – I do also run Microsoft 7, and Mac OS X (all 3 operating systems on the same H-P Ultrabook). I hope you enjoy your time on the Blog, and should you have any comments / feedback please feel free to email me @ jjmacey@jjmacey.net, or visit my Linux Web Site @ www.jjmacey.net (always evolving) – John J. Macey – AKA Adler, which in German means Eagle – Wildwood, New Jersey - Together, we can expand your global markets - with our partnerships. The partnerships are global utlizing multiple Law, Regulatory, Seasoned Management, Employment, M&A and buidlers of Business. Contact use.