16 April 2009
Which pharmaceutical companies are likely to be involved in mega-M&A?
Since the beginning of 2006 a total of seven pharmaceutical M&A deals have been agreed with total transaction fees in excess of US$10 billion. In 2009 six deals involved transaction fees in excess of US$5 billion. It looks like 2009 is set to redefine the structure and dynamics of the pharmaceutical industry in a way not seen since the year 2000.
In hindsight, it was Bayer that kick-started the second wave of 21st century pharmaceutical M&A with its acquisition of Schering AG in July 2006. After the summer holidays, September saw an unprecedented flurry of deal-making with three privately-owned pharmaceutical companies acquired in just one month. The first half of 2007 saw mega-M&A deals for Akzo Nobel’s Organon and vaccine company MedImmune. Daiichi-Sankyo’s completion of the acquired strategic interest in Ranbaxy in November 2008 brought an end to the second wave of M&A. A third wave of mega-M&A began in January 2009 with an agreement for Pfizer’s acquisition of Wyeth.
Recent M&A deal trends have combined many of the characteristics associated with the two earlier waves of 21st century pharmaceutical M&A. While earlier mega-M&A deals involved all stock transactions, the second wave of deals preferred all cash tenders. However, the mega-deals involving Pfizer/Wyeth, Merck/Schering-Plough and Roche/Genentech combine cash and stock balancing a preference for cash with the limited availability of cheap financing. Other trends include Japanese companies making their first major overseas acquisitions and a number of major acquired companies retaining a high degree of post-acquisition independence.
There are still two main categories of M&A combination: those that deliver depth and scale and those that deliver diversification and scope. Historically, larger M&A deals have served to deliver depth and scale, such as Bayer’s acquisition of Schering AG, while smaller acquisitions generate diversification and scope, such as Eli Lilly’s acquisition of ImClone. However, the most recent M&A agreements between Pfizer and Wyeth, Merck and Schering-Plough and Roche and Genentech, are based on delivering a balance of scale and scope. Market share gains and cost efficiencies exist side-by-side with diversification into new technologies, therapy areas and treatment settings.
Pfizer’s M&A strategy has doubled its market share
Over the past ten years, Pfizer has entered into three transformational M&A deals that has seen it almost double its pharmaceutical market share from 4.5% to 8.4% and become the truly dominant company. Pfizer’s rapid growth to become the stand-alone market leader illustrates the key characteristics of a mega-M&A growth strategy. The key challenge associated with a mega-M&A strategy is the disruption caused by completing a combination. Operational changes can take two or three years to complete and subsequent deal activity often has to wait for a return to the status quo. Most critically, shareholders need to be convinced of a mega-combination’s merits in order to buy-in to an M&A growth strategy and accept the shorter-term disruption in earnings that often transpires.
Novartis grew its pharmaceutical market share from 3.43% in 1999 to 4.72% in 2008 almost exclusively through organic growth. The company’s only M&A agreement with another top 50 pharmaceutical company was its 2005 acquisition of Chiron, which added a total market share of just 0.24%. Novartis’ rapid growth over the past decade from the eighth to fourth placed pharmaceutical company illustrates the key characteristics of an incremental growth strategy. The key benefit of an incremental growth strategy is the stability created by an organic growth engine. Smaller acquisitions serve to complement internal growth ambitions and do not create significant disruption to the organisation or to year-on-year earnings growth. However, smaller acquisitions tend to be associated with fewer opportunities for generating cost efficiencies than are usually found with large M&A deals.
Leading pharmaceutical M&A deals, 2000-2009
Aquirer (or senior company) |
Aquired (or junior company) |
Merged entity |
Year |
Value (US$bn) |
|
Glaxo Wellcome |
SmithKline Beecham |
GlaxoSmithKline |
2000 |
76.0 |
|
Pfizer |
Warner-Lambert |
Pfizer |
2000 |
93.4 |
|
Johnson & Johnson |
Alza |
Johnson & Johnson |
2001 |
10.5 |
|
Amgen |
Immunex |
Amgen |
2001 |
16.0 |
|
Pfizer |
Pharmacia |
Pfizer |
2002 |
60.0 |
|
Sanofi-Synthelabo |
Aventis |
Sanofi-Aventis |
2004 |
64.3 |
|
Bayer |
Schering AG |
Bayer Schering |
2006 |
19.6 |
|
Merck KGaA |
Serono |
Merck Serono |
2006 |
13.5 |
|
Schering-Plough |
Organon (part of Akzo Nobel) |
Schering-Plough |
2007 |
14.4 |
|
AstraZeneca |
MedImmune |
AstraZeneca |
2007 |
15.6 |
|
Pfizer |
Wyeth |
Pfizer |
2009 |
68.0 |
|
Merck |
Schering-Plough |
Merck |
2009 |
41.1 |
|
Roche |
Genentech |
Roche |
2009 |
46.8 |
|
As at 31st March 2009 the Pfizer/Wyeth, Merck/Schering-Plough and Roche/Genentech combinations have been agreed but not completed |
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Source:
It appears likely that the mega-M&A wave started by the three deals agreed in the first quarter of 2009 is not yet finished. Two or possibly three more mega-deals will see new movement in the top ten pharmaceutical company list. The two most likely deals appear to be the acquisitions of Bristol-Myers Squibb and Bayer. Currently the best placed acquisitors appear to be Sanofi-Aventis and Novartis, but we shouldn’t rule out Johnson & Johnson or GlaxoSmithKline if its acquisition of Allergan does not come to fruition.
Along with the two mega-deals mentioned above, it is possible that a third deal might see two mid-tier companies combine to join the upper echelons of the top 10 company list. The most likely deals involve Eli Lilly and Amgen, who may choose to combine with each other or a third party in order to compete in a newly consolidated market place.
Smaller M&A deals will continue to deliver incremental growth to leading companies. GlaxoSmithKline, Eli Lilly and Teva are likely to continue to drive growth through the addition of selected pipelines and technologies.
The companies under most pressure to enter into significant M&A growth strategies are Eli Lilly, GlaxoSmithKline and Takeda. Each company must actively review transformational M&A opportunities in order to satisfy investors and continue to compete with those companies who have already merged. The companies least under pressure to find M&A opportunities are Abbott Labs and AstraZeneca, both of which have successfully employed incremental organic growth strategies over the past five years.
Steve Seget, author of the URCH report Mergers and Acquisitions in the Pharmaceuticals Sector 2009 believes that the most attractive targets amongst the top 20 pharmaceutical companies are Eli Lilly and Bayer. “Outside of the top 20 companies the most likely targets are Nycomed, Elan, Actavis, Biogen Idec and Proctor & Gamble’s pharmaceuticals business, all of which are ostensibly up for sale,” says Seget.
Merck’s acquisition of Schering-Plough has reaffirmed the importance of long-standing strategic partnerships as a forerunner to eventual M&A deals. Other major strategic alliances that may lay the tracks for eventual M&A combinations include Johnson & Johnson’s Xarelto (rivaroxaban) alliance with Bayer, Takeda’s Japanese alliance with Amgen, Bristol-Myers Squibb’s long-standing cardiovascular alliance with Sanofi-Aventis and AstraZeneca’s diabetes alliance with Bristol-Myers Squibb.
Evaluation is near impossible
The success or failure of an M&A deal is very difficult to evaluate. “ Trying to measure the value brought about by integration versus that which would have otherwise been generated as an indepent company is not possible to observe in practice and therefore makes evaluation very difficult,” says Edwin Bailey, managing director, of URCH Publishing.
It appears that combinations of all sizes, conducted for reasons of both scale and scope can generate qualified successes. However, recent M&A deals do provide some broader insights:
- Returns are slow to bounce back – net income almost always falls away following a major M&A deal due to the disruption caused in completing the combination before sales growth and cost savings begin to deliver gains (eg Bayer/Schering AG and Merck KGaA/Serono);
- Relative sizes count – a large company acquiring a smaller company is able to deliver a consistent income stream more easily than an M&A agreement amongst similar-sized peers (eg AstraZeneca/MedImmune versus Bayer/Schering AG);
- Over-stretching can destroy combined values – ‘biting off more than you can chew’ can result in costs potentially outweighing benefits and a loss of shareholder confidence (eg Mylan/Merck Serono generics).
