Like hospitals and doctors, there's a wave of pharma M&A too

Drugmakers adopt a 'be-first-or-get-out strategy'

A recent flurry of mergers and acquisitions activity in the pharmaceutical industry could launch a wave of deal-making as drugmakers look to stay ahead of the changing landscape.

Rx 'scouts' hunt for the next big breakthrough

The industry overhaul that began in 2011 reached a new high this week with announcements from leading pharmaceutical players:

  • Valeant Pharmaceuticals International announced an offer to buy Botox wrinkle treatment maker Allergan in deal valued at about $46 billion in cash and stock;
  • Novartis AG agreed to purchase GlaxoSmithKline's (GSK) oncology business for up to $16 billion and to sell its vaccines line to GSK for $7.1 billion; and
  • Novartis also opted to sell its animal health business to Eli Lilly & Co. for $5.4 billion.

The transactions represent the busiest period of industry deals since 2009, totaling $141 billion in pharmaceutical company acquisitions or divestments over a year, according to data compiled by Bloomberg. Large drugmakers are looking to rid themselves of drug units that don't make them leaders in a particular market, while smaller players are acquiring competitors to enhance their size.

"Everyone wants to focus on where they can have a leadership position, or at least be in the top few," says Jeff Jonas, a portfolio manager at Gabelli Funds.

Eli Lilly CEO John Lechleiter told Bloomberg that the "be-first-or-get-out strategy" was its justification for taking part in the Novartis-Glaxo deal. While animal health isn't a priority for Novartis, Eli Lilly is seeking to make it theirs.

"It's more important to be in that top tier of global companies," Lechleiter says, adding that in both veterinary and human health, "You're seeing companies strengthening areas where they're already strong and building up critical mass."

A changing strategy

John Boris, an analyst with Atlanta's Suntrust Banks, says drugmakers have adopted the new business philosophy because they can no longer succeed on the market with the third or fourth drug in a class. Companies no longer retain the powerful sales forces they used to, making it difficult to attain blockbuster sales with broadly used treatments, he explains.

New medications emerge, but few are blockbusters

Pfizer is one of several drugmakers struggling to transition from a time when marketing muscle could sell widely used drugs for basic conditions, Bloomberg notes. The company's two potential billion-dollar-plus drugs have waned, and its promising experimental drug—the breast cancer treatment palbociclib—is facing competition from Eli Lilly's bemaciclib.

In an effort to compensate, Pfizer has engaged in deal talks to acquire AstraZeneca's oncology pipeline, which is harnessing new drugs that leverage the body's immune system to attack cancers. Analysts believe the treatments are among the more promising in the market. "The operative word now is innovation," Boris says, adding, "In a world where innovation is scare, AstraZeneca makes sense."

Meanwhile, companies large and small are expanding geographically and consolidating to reduce costs. Generic-drug makers are also playing a greater role, buying up more profitable injectables and brand-name medicines in an attempt to grow faster than rivals. Total sales by generic drugmakers were 23% higher than the top three copycat drugs in 2009, according to Bloomberg data.

"As the industry ages and governments require more and more costs coming out of the system, there's only one way to deal with that and it's through more and more consolidation, even among the big guys," says Actavis CEO Paul Bisaro (Armstrong, Bloomberg, 4/23; Rockoff, "Money Beat," Wall Street Journal, 4/22).

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