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May 14 (The following statement was released by the rating agency)
Three main themes have emerged from the recent spate of major pharmaceutical M&A, Fitch Ratings says. These are the quest for scale in consumer healthcare, the need to manage increasing research and development risks and the role of tax optimisation, which can be used to support high asset price tags.
All three themes were reflected in the recent deal between Bayer and Merck , which will create the No. 2 global player in consumer health. This increased scale can improve operating efficiency through leverage in areas such as supply chain logistics. The Bayer/Merck deal may have been in part a reaction to increased competitive pressure from the asset swap between Novartis and GlaxoSmithKline, which combined their consumer healthcare arms creating the new global leader.
An associated cardio-vascular strategic collaboration between Bayer and Merck will also enable joint product development with a view to lowering the risks involved with bringing products to market. As the cost of developing new drugs continues to increase as a result of continuing focus on value-based assessments, R&D productivity will become increasingly important across the sector.
An alternative approach to collaboration will be for companies to narrow the scope of their research on a smaller number of therapeutic areas. This is effectively what happened in the GSK/Novartis deal as Novartis acquired oncology assets, where it is already strong, while handing over its vaccines business to GSK, which is a leader in that field. In some cases reduced diversification could be credit negative, but in the case of GSK and Novartis diversification will remain satisfactory for the current rating.
The potential acquisition of Astra Zeneca by Pfizer would buck this trend towards a targeted R&D consolidation by significantly deepening Pfizer's R&D focus, and it is likely to be followed by a reassessment of the combined group's core business and the potential divestment of operations that were seen as non-core. A deal would be more predicated on the tax benefits for Pfizer and is part of a broader trend of US companies using overseas acquisitions to apply their significant cash reserves held overseas and shift their domicile to a lower-tax country.
This tax benefit is creating political unease in the US and adds to political concerns in the UK around intellectual property and jobs given Pfizer's aggressive focus on costs in past deals. This makes it difficult to predict a possible outcome, even if the potential for direct political intervention is limited.
However, less aggressive attempts to structure deals tax efficiently are likely to continue. In the case of Bayer, for example, the group's overall tax rate will be lowered by structuring the transaction as an 'asset' rather than an 'entity' purchase.