Pharma M&A – Are You Ready For The Next Round?
Posted: 02/17/2012 12:00:00 AM EST | 0
Pharma merger and acquisition (M&A) activity soared back to pre-recession levels in 2011 as companies began to feel the heat of the patent cliff, new figures show.
International law firm Freshfields Bruckhaus Deringer calculated the value of M&As reached $224 billion (£141 billion) last year, the highest recorded since 2007, when values hit $255 billion.
As with much of what the pharmaceutical industry is doing at the moment, this increase in activity is as a result of the patent cliff, which will see 35 percent of the top 20 prescription medicines going off patent in the next two years.
Following a dip in 2011, the number of drugs falling off patent will peak again this year, with at least one dropping off the cliff each year until 2015.
Julian Long, head of Freshfields' health sector group, said: "Pharma companies continue to face several key restrictors to growth in their core markets, including patent cliffs, growing pressure on healthcare budgets, low innovation productivity and increased regulatory reform.
"Alongside therapy adherence and other initiatives, M&A is a necessary strategic tool for pharma companies seeking to balance the impact of key growth restrictors on revenues and margins."
When it comes to location, it is the emerging BRIC economies that are benefiting most from the growth. Since 2006, the nations have experienced a 196 percent increase in M&As, in comparison with 127 percent across all sectors.
In terms of values, however, the BRIC counties are still lagging far behind established markets, accounting for just 3 percent of deal values in 2011. China is leading the way for the emerging markets, with 200 deals totally $4.3 billion.
In five years, it has jumped from 13th to 4th place on the list. These figures are still dwarfed by the US, with its 809 deals worth $162.6 billion, but the key attraction of these markets is the anticipated future growth.
Pharmaceutical companies that get a foothold now will reap the benefits in the future.
"Large and expanding populations, rising wealth, greater government investment in healthcare and increasing incidence of chronic diseases are all boosting demand for medicines," Long noted.
"Over-the counter pharmaceuticals and domestic generics and manufacturing companies will increasingly be focal targets for diversified players."
China remains the only emerging economy to make it into the top ten list of countries for M&A activity, although this more as a result of the value of deals rather than the volume, suggesting companies are looking for small deals in the country.
Ian Read, chief executive of Pfizer, is among those looking to smaller deals. He signalled a move away from Pfizer's 'megadeal' strategy following a tough year that saw blockbuster Lipitor fall off patent.
Speaking at the 30th Annual J.P. Morgan Global Healthcare Conference in San Francisco, he said: "I’m very disinclined to be looking at the possibility of another mega-acquisition.
"We’re only going to do bolt-on acquisitions or licensing deals that make sense financially."
A shift is also being seen in the number of licensing agreements aimed at drug discovery. Freshfields Bruckhaus Deringer recorded a 14 percent increase in 2010, with an overall rise of 178 percent since 2000.
"Licensing agreements, as opposed to pure M&A, hedge the risk of drug discovery without the significant up-front cash investment needed to develop a product from scratch," Long said, adding the trend is likely to become more pronounced in the future.
This is not the only change being seen in M&A as companies really begin to feel the pressure of patent expirations.
Bristol-Myers Squibb recently gambled a large amount of money on Inhibitex, an oral hepatitis C drug currently in Phase II testing, which realistically may never make it to market, Reuters reported.
Chief financial officer Charles Bancroft said, however, that the competitive nature of the market meant it had little choice but to pay a hefty price tag.
Investment bankers speaking to the news agency suggest companies are now perhaps beginning to panic, and take bigger gambles in the hope drug development will pay off.
One who did not wish to be named said: "Companies are taking bets earlier and earlier to beat competitors to the punch. That brings risk and requires a leap of faith - which is something shareholders tend to frown upon. At the same time, a 'sure bet' is hard to find when you're talking about research and development of drugs."
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