A series of agreed or proposed drug company deals may herald a new era of acquisitions not seen since last decade as pharmaceutical companies improve their best businesses and exit weaker ones.
Novartis NOVN.VX and GlaxoSmithKline (GSK.L) agreed to trade more than $20 billion worth of assets, boosting Novartis' cancer-drug business and Glaxo's vaccines business. Valeant Pharmaceuticals (VRX.TO) made a $47 billion unsolicited offer for Allergan Inc (AGN.N), the maker of Botox, to boost its skin care business. Reports that Pfizer Inc (PFE.N) was rebuffed earlier this year in discussions to buy AstraZeneca Inc (AZN.L) for more than $100 billion only fed anticipation that more mergers are ahead.
Linking this activity together is a combination of economic conditions and industry- specific developments including low interest rates, a desire by U.S. firms to make overseas acquisitions to shield foreign profits from U.S. taxes, and the realization that deals can be made to focus on a drugmaker's specific strengths, investors, analysts and investment bankers said on Tuesday.
"The rumor about Pfizer's possible deal with Astra demonstrates the industry is moving perhaps into another period of consolidation," said Richard Purkiss, an analyst with Atlantic Equities in London. "Large cap pharmaceutical compared to more mature global industries is still fragmented and so can continue to concentrate."
Tuesday's deals also included a transaction in which Novartis is selling its animal health arm to Indianapolis-based Eli Lilly (LLY.N) for about $5.4 billion in cash. That would make Lilly's Elanco unit the world's second-largest animal health business when that deal closes early next year.
Large drug companies are focusing on a small number of leading businesses, while smaller specialty and generic producers seek greater scale. Deal values have almost doubled since the start of 2014 to $77.9 billion from a year earlier, according to Thomson Reuters data.
Healthcare companies are looking carefully at their competitive businesses and deciding which businesses they want to lead in, investors said. Merck Inc (MRK.N), for instance, is working on the sale of its consumer business and even after all of its Tuesday deals, Novartis still plans to sell its flu vaccine business.
In the Novartis transaction, each company got exactly the business it wanted, without having to do the type of mega-mergers that consumed big pharma in the 1990s and early 2000s, said Sam Isaly, a managing partner of OrbiMed Advisors, which has $10 billion in healthcare assets under management.
Those deals did not work out well for the acquiring companies as they became mired in cumbersome integrations that cut into drugs research, and in the last decade, the largest deal has been Pfizer's 2009 purchase of Wyeth.
"It's very interesting that Glaxo and Novartis didn't combine and then spin stuff off. They just shuffled their decks, like shuffling a deck of cards," Isaly said.
Isaly expects more of these targeted deals, as well as more link-ups and purchases among smaller companies. Other analysts and investors said that companies could still do this type of deal, and then trim back their assets to areas they want to strategically target.
Other reasons for deal-making include a desire by companies to change their headquarters to countries with lower tax rates as they consider how to spend cash they have built up overseas. Pfizer, for instance, has tens of billions of dollars overseas, analysts said. Pfizer declined to comment.
There is also the stock prices of big pharma compared with biotechnology companies to consider. The Nasdaq Biotechnology Index .NBI of more than 100 companies -- many with market values of less than $500 million -- has risen almost 126 percent since the beginning of 2012, even with this year's declines. By contrast, the Standard & Poor's 500 index of pharmaceutical stocks .SPLRCCARG, which contains just 12 members, is up 55 percent in that time.
"At this point in market history, with small caps as overvalued relative to large caps as they've been anytime in the last 30 or 35 years, it would be a natural that M&A activity would move to large because of small being so picked over," said Bill Smead, Chief Investment Officer of Smead Capital Management, which holds Pfizer and Merck shares among other pharmaceutical companies.
A flow of patent expirations that has plagued many large pharmaceutical companies over the past few years as generic products cut into revenue has begun to subside as new drugs start to come further into development and investors are taking notice, Smead said.
Valeant's $47 billion bid for Allergan, in which it's being aided by Pershing Square Capital investor Bill Ackman, represents another strategy. Ackman had already acquired almost 10 percent of Allergan, and the Allergan board will consider the offer.
Valeant has been on a buying spree since 2010 and last year acquired contact lens maker Bausch & Lomb Holdings. Chief Executive Michael Pearson said in January the drugmaker wants to become one of the world's top five pharmaceutical companies by market capitalization by the end of 2016, largely through acquisitions.
That unsolicited deal comes after generic company Mylan Inc (MYL.O) tried to buy Sweden's Meda MEDAa.ST for about $24 billion, which Meda rebuffed.
The transactions, and their hint of more deals ahead for the drug sector, lifted the ARCA Pharmaceuticals Index .DRG 1.8 percent.
Lilly's Elanco animal health unit will acquire about 600 animal health brands from Novartis, including vaccines and anti-parasite medicines that will allow it to enter the aquaculture, or fish farming, market.
This would be the eighth and largest acquisition since 2007 for Elanco, which by global sales would trail only Zoetis Inc (ZTS.N), which also specializes in products for farm animals and pets.
Last year Elanco had sales of $2.15 billion, compared with $1.1 billion for Novartis Animal Health.
"Novartis has agreed (to) an elegant set of transactions that either removes or strengthens its underperforming assets, while boosting its oncology portfolio," Jefferies analysts said.
(Reporting by Caroline Humer, Ransdell Pierson, Olivia Oran, Rod Nickel, Caroline Copley and Paul Sandle and in London, Anjuli Davies and Pamela Barbaglia, editing by John Pickering)