Pharmaceutical Technology’s Faiz Kermani looks at the long history of pharma mergers and finds no sign of the trend slowing down.
It was suggested that in one week of April the total value of various rumored deals was of the order of US$100 billion, illustrating how cash-rich major pharmaceutical companies are. Many of the larger companies looking for deals are themselves the product of a series of M&As that took place over the past two decades. Critics have long argued that previous mergers have not made these companies more efficient, and that their failure to achieve the growth targets promised to investors is why they continue to seek tie ups with other companies possessing lucrative blockbuster products and promising drug pipelines. Nevertheless, companies believe that such deals can add value in the long run for their shareholders. In fact, judging by stock market performance, it would appear that the major companies are performing well financially.
A long history of mergers
Historically, the pharmaceutical industry has seen sequential waves of M&As. In 1985, the 10 largest pharmaceutical companies accounted for approximately 20% of worldwide sales. As consolidation began to occur within the industry, the top 10 companies were able to significantly expand their share of global sales and thus dominate the international market. This trend has continued to the present day. In 2012, the global share of the top 10 pharmaceutical companies reached 42%.
In many cases, the main reason for pursuing a tie-up with another company has been to improve R&D productivity, although it does not always work. By combining R&D programmes, companies believe they will be in a better position to boost new drug output in diverse therapeutic areas. When GlaxoWellcome merged with SmithKline Beecham in 2000, one of the R&D advantages cited for the deal was SmithKline Beecham’s exciting genetics research programmes. For Swiss-based Roche, the 2009 merger with US Genentech enabled access to the Californian company’s strong biotech R&D programme. The post-merger company’s R&D programme was considered such a success, particularly in oncology, that it led to the closure of Roche’s former US research facilities in Nutley, New Jersey. More recently, the 2011 acquisition of Genzyme by Sanofi has enabled the company to benefit from the smaller firm’s rare diseases R&D pipeline.
For pharmaceutical companies evaluating M&As, the increasing costs to develop and launch new drugs is an ongoing concern. Between 1995 to 2000, the cost to successfully launch a new drug was estimated at US$1.1 billion, but by 2002, the associated costs rose to approximately US$1.7 billion. Increased spending on R&D, however, does not guarantee productivity given that attrition rates are considerable.
Worryingly, the failure rate for drugs in Phase III trials that have already shown promise in Phase II trials can be as high as 50%. Because high drug failure rates contribute substantially to R&D costs, only bigger companies can afford to invest in large portfolios, knowing that certain drugs will not make it through to approval.
Another reason to pursue M&As is to increase revenues to help fund larger R&D programmes as well as to compensate for lost sales from products going off patent. Merging with a company that has a different portfolio of products can strengthen one’s presence in a particular therapeutic area or even help gain quick entry into a new therapeutic area. Furthermore, because the other company is likely to be already operating in such areas, a “ready-made” sales force may be available. When Pfizer merged with Pharmacia in 2002, a major attraction was the blockbuster drug Celebrex, but it also enabled the two companies to combine their strong cardiovascular portfolios.
As the pharmaceutical market expands internationally, companies have realised that carefully thought-out M&As can open up new geographical advantages. Although the pharma markets of US, Europe and Japan still represent the majority of global sales, emerging markets are growing at a faster annual rate.
It has been predicted that these markets will account for nearly a third of the global pharma market by 2016; therefore, companies are looking to these markets to drive their long-term growth plans. Between 2008 and 2012, the proportion of major company deals in the emerging markets was approximately 20%, with a high number of targets being sought in Latin America, China and India. Acquiring a domestic company can give a larger company unique insight into the local market as well as specialised infrastructure.
One proposed merger that will shape the Indian market, for example, is that between Sun Pharmaceutical Industries and Ranbaxy, but the deal was initially halted by the High Court of the southern state of Andhra Pradesh. Interestingly, Japan’s Daiichi Sankyo had previously acquired a 64% share of Ranbaxy but the deal proved to be a disappointment and so the company is keen to sell its share. Ranbaxy has been struggling in the US market due to manufacturing-related problems, which have led to action being taken by the FDA. Daiichi Sankyo’s acquisition of a majority stake in Ranbaxy illustrates the importance of the due diligence that outside companies must perform before buying a local company. Despite the serious challenges facing Ranbaxy, Sun Pharmaceutical appears to see potential from a domestic merger. Certainly, if it goes ahead, the merged company will dominate the Indian market.
M&As are taking place all the time in the pharma sector. Over time, the industry has become increasingly consolidated but there is no sign that this trend will slow down. Such deals have been crucial to the success of the top 10 pharmaceutical companies as they continue to seek further targets to drive expansion. A particularly important factor for these M&A plans is expansion into emerging markets, which continue to represent highly promising areas for long-term growth.
For the full version of this article, click here.