Mergers & Acquisitions in Pharmaceutical Industry

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Title: Mergers & Acquisitions in Pharmaceutical Industry

Industry Overview

The pharmaceutical industry is a part of the healthcare sector which deals with drugs and prescriptions. The industry consist of different subfields involving the development, production, and marketing of medicines. These companies may sell branded or generic drugs and medicines.

The industry has seen great progress in terms of investment, technology development, infrastructure base and a range of products manufactured.

In 2014, total revenue from the sale of pharmaceuticals products globally was 1057 billion US$, which was 550 billion US$ in 2004, showing a CAGR of 6%. North America continues to hold the major share of 45% which has remained almost the same over the past 10 years. Johnson & Johnson is currently the world’s largest drug and biotech company with revenue of 65 billion US$, followed by Pfizer and Novartis. However, with the recent announcement of Pfizer’s merger with Allergan, things may change the following years, since currently Pfizer and Allergan have a combined revenue of 64 billion US$.

Pharmaceuticals, as a sector, has probably seen more mergers than any other industry in the past 20-30 years, at least in terms of the large size of deals which has led to a greater consolidation in the industry. The number of mega-deal and M&A has been highest in the pharmaceutical industry this year. The top ten companies had a total share of only 20% in 1985, which increased to 36% in 1999, and by 2002 had increased to 48%. The number has slightly declined to 41% in 2014, with smaller companies gaining share. Out of the top 10 largest deals in the sector, Pfizer has been involved in 4 of them, with all 4 being in the top six, the largest being the latest one with Allergan. Even the previous largest deal belonged to Pfizer when it acquired Warner-Lambert in 1999, which was followed by Sanofi’s acquisition of Aventis in 2004.

Industry Trends

The success of Pharmaceutical industry depended on R&D and investing in development of a few molecules, endorsing them heavily and converting them into blockbusters. This strategy worked well for many years, but with the decline in R&D productivity and the changing environment, the industry is trying to find new ways of growth.  The major trends that are reshaping the industry:

• With the increase in chronic disease instances there is an increase on already strained healthcare budgets.
• Healthcare policy-makers and customers are gradually directing what doctors can prescribe
• Increasing number of healthcare customers are insisting on outcome based pricing and measuring the economic performance of different medicines by different pharmaceutical companies. Widespread use of electronic medical records will provide the necessary data to achieve this.
• The growth of demand for medicines is higher in the emerging economies than the developed economies
• ‘Prevention is better than treatment’ has become prime focus of Governments and have begun planning investment in this sector, although no investment has taken so far but  taken in pre-emptive measures;
• Regulatory authorities are becoming more watchful about approving the new innovative medicines.
• The global pharma industry is predicted to witness a rise in development and use of apps, wearables and personalized medicine. Big data analysis and use of technology will transform the industry into a digital pharma space.
• With capital available at very low rates and availability of a large amount of free cash, the acquisition is the new trend for the companies looking to strengthen their foothold.

These trends provide some major opportunities for the growth of the pharmaceutical industry.

M&A transactions

Almost all the companies that have been in the top 20 in 1995-2005 have been involved in a megamerger. It is usually believed that megamergers don’t work, since integrating two large companies is not an easy task and it affects the critical programs of the organization due to which R&D suffers. However, post 2010 the scenario of M&A in the sector has slightly changed with very few deals happening in the ‘mega merger’ category.  The following table provides data for the number of deals that took place in 2012 and 2013 in various parts of the world.