Firms wed in bid to boost research
Mergers and acquisitions still popular

Times are still tough for the pharmaceutical industry. The supply of innovative drugs is sparse, research costs are rising, and dozens of drug patents are expiring or due to expire. An entire industry is connected to a drip fed by the comparatively small but highly productive biotech sector. As a result, there is a lot of wooing going on and anyone who dresses up with a bit of finery is being snapped up there and then.

The consolidation process in the pharmaceutical industry continues apace. Such is the conclusion of a current study by PricewaterhouseCoopers (PwC) entitled “Pharmaceutical Sector Insights 2005/2006”. The insights are not new—for many years now the major players in the sector have been busy merging in order to stem the growing cost of capital investment in research. Novartis, GlaxoSmithKline, Sanofi-Aventis—the names themselves intimate that these companies have been formed by amalgamation. In 2004 the corporate alliances in the pharmaceutical industry were valued at $61 billion—with the amalgamation of Sanofi-Synthelabo and Aventis alone accounting for $60 billion.

In terms of total volume, therefore, the proportion of M&A activity in the pharmaceutical sector fell from just under 70 percent to 41 percent. In 2005, by contrast, the volume of mergers and acquisitions in the health sector as a whole (drug manufacturers, medical aids and services) rose to $152 billion, up from $146 billion in 2004. With 28 transactions worth at least $1 billion there were also more “mega deals” in 2005 than in 2004 (25 transactions) and 2003 (10 transactions). And there is no end in sight.
Bottomless war chests
At present it is the generic drug manufacturers in particular who are on a shopping spree. Three of the ten biggest pharmaceutical transactions in 2005 were in the generic segment. Novartis was the first to take to the dance floor last year when it bought out the German company Hexal and 67.7 percent of Eon Labs for s5.65 billion in a move which dethroned Teva for a time. The Israelis fought back, however, buying their American rival Ivax for $7.4 billion to resume top ranking in the generic drugs market. And recently the German company Stada, itself tipped as a candidate for takeover by analysts, took the industry by surprise by making an offer for the Serbian pharmaceutical group Hemofarm. The Bad Vilbel-based company is willing to stump up s485 million for the venture which would propel Stada from ninth to seventh place.
The scramble for top rankings is not unpremeditated—the long-term market prospects are bright, with analysts putting a figure of $318 billion on the total revenue from drugs which will go off patent by 2015. The only dismal news is that the average price of generic prescription drugs fell by three percent in 2005 while ten percent was added to the price of brand name products. Commenting on the consequences of the pricing pressure, Volker Fitzner, Chemicals Advisory Partner at PwC, offered the following perspective: “The growing pressure of competition ought to offer generic drug manufacturers from newly industrializing countries more opportunities to enter the market. This is especially true of some of the larger Indian companies.” This year the Indian manufacturer Dr. Reddy’s has already bought out the German generic drug maker Betapharm for over $570 million. This will give Dr. Reddy’s access to the German and European market via Betapharm’s distribution network while keeping costs down by continuing drug manufacture in India.
Biotechnology reaps the benefit
The biggest problem facing all the research-based pharmaceutical companies is that there is far less in the development pipeline than there was even five years ago. The supply of innovative, genuinely new drugs is slowing, not to mention candidates for development which have blockbuster potential. In 2005 the number of pharmaceuticals newly approved by the Federal Drug Agency (FDA) was down 40 percent on the previous year. At present the main beneficiary of this trend is the biotech industry, as purported by Volker Booten, Partner at PwC for the Chemicals & Pharmaceuticals division: “In addition to licensing agreements with biotech firms, more pharmaceutical companies are again opting for the buyout route in the hope of getting results more quickly in the quest for new active agents and innovative products.”
As a result, the volume of the ten biggest biotech transactions increased in 2005 to $15 billion, a leap from just under $7billion on the previous year. If 2004 was still heavily characterized by biotechnology companies merging with each other, it was more often the pharmaceutical groups which were emerging as buyers, with Pfizer, GlaxoSmithKline and Novartis leading the field. Novartis landed the latest coup when it offered s443 million in June for biotechnology company Neutec in a bid to secure its promising antibody pipeline. Only last year Roche bought the biotech firm Glycart which is developing a new generation of antibodies.
Last year bird flu fuelled the interest in biotech companies producing vaccines. GlaxoSmithKline bought the Canadian vaccine manufacturer ID Biomedical for $1.4 billion, and for the same reason Novartis invested $5.6 billion in buying up the majority of shares at US company Chiron last year. Chairman of the Group Daniel Vasella has thereby bagged access to the worldwide vaccine market and secured an anticipated doubling of sales for the expert in the next five years.