| April 22
April 22 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 and GlaxoSmithKline agreed to
trade more than $20 billion worth of assets, boosting Novartis'
cancer-drug business and Glaxo's vaccines business. Valeant
Pharmaceuticals made a $47 billion unsolicited offer
for Allergan Inc, the maker of Botox, to boost its skin
care business. Reports that Pfizer Inc was rebuffed
earlier this year in discussions to buy AstraZeneca Inc
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 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, 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
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
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 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, 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
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
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
That unsolicited deal comes after generic company Mylan Inc
tried to buy Sweden's Meda 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 1.8
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
, which also specializes in products for farm animals and
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)