What to expect from big pharma mergers and acquisitions

UK pharmaceutical company Shire’s deal to buy US biotech firm NPS Pharmaceuticals for $5.2 bilion (£3.4 billion) is just the latest in a series of deals that indicate a trend in mergers and acquisitions for big pharma.

Last year in October, US pharmaceutical giant Merck finalised the sale of its consumer business to Germany’s Bayer, turning the latter into the world’s second-largest provider of non-prescription medication, behind the combined business of Novartis and GlaxoSmithKline.

In December 2014, Merck bought Cubist Pharmaceuticals, a relatively small antibiotic developer listed on the Nasdaq.

The two transactions seem counter-intuitive but they are part of a trend that is likely to continue and even intensify this year.

Creating more focused business will be a key strategy for big pharma corporations, according to consultancy firm EY.

The Cubist deal solidified Merck’s position in the space of anti-infection medication at a time when the costs associated with drug-resistant infections are increasing, EY noted in a report released on Monday.

“Concurrently, Bayer’s announced intention to divest its material science business in 2015 will move Bayer wholly into the life sciences arena, setting the stage for future M&A,” the report said.

“There is a growing realization that deep expertise in a disease indication buttresses commercial success, particularly as it relates to market access and reimbursement.”

This trend partly originates from the fact that big pharma’s firepower in terms of mergers and acquisitions has been decreasing.

Big pharma M&A firepower

Big pharma corporations’ firepower for M&A has been diminishing. Source: EY

As big pharma companies create focused businesses, they sell off business units or products that no longer fit with their current strategy, while at the same time looking to buy available businesses to create sufficient scale in their specialised field.

Another example of this trend is that of Novartis and GlaxoSmithKline, who sold their vaccines and oncology lines of business to each other.

The trend towards specialisation also has to do with the realisation that this is where growth is.

Big biotechnology and specialty pharmaceutical companies delivered growth that was more than five times higher than that of big pharma over the past five years, the EY report showed.

Total shareholder returns for big biotech over the period were 257% and for specialty pharma 332%, compared to 116% for big pharma.

“This comes as product sales at many of the big pharma companies are not keeping pace with revenue growth for the overall drug market, resulting in a growth gap of $100 billion by 2017,” the report said.

One headwind for mergers and acquisitions in the sector is the fact that the valuations of potential targets jumped by 164% on average between 2011 and 2014.

“Those valuations put many of the most attractive growth targets out of reach for certain big pharma acquirers, even as big pharma companies looked to do more deals to focus on areas of therapeutic strength,” the EY report said.

High valuations for target companies will continue this year, due to greater competition fuelled by the strong buying power of specialty and big biotech companies, so big pharma companies will have to choose their targets carefully.

They may go for smaller targets, such as “bolt-on” acquisitions, to develop or maintain critical mass in key therapeutic areas, while continuing to prune their portfolios.

“Given current deal flow, we estimate that by 2017, prescription drugs will comprise 75% of big pharmas’ portfolios, up from 70% in 2012,” the EY report said.