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Year of the Big Deals: 2019 Could Set New Limits in Pharma Mergers and Acquisitions

13.09.2019 -

Abbvie takes over Allergan, Pfizer merges its generics business with Mylan, Takeda integrates Shire — the pharmaceutical industry is making a name for itself in 2019 with several billion-dollar acquisitions. This is an attempt to find new active ingredients, but also to develop a remedy against rising costs and increasing price pressure.

In the pharmaceutical and biotech industry, takeovers are part of the business model. If a company‘s own research and development (R&D) department does not produce enough new promising drugs, it may be possible to succeed with the products of a competitor. Conversations and negotiations about cooperations, mergers, and acquisitions therefore constantly take place everywhere in the pharmaceutical and biotech indus­tries. However, such processes become more pronounced on a regular basis when the need for new input raises. In such times, transactions are driven to record values. And 2019 could be another year like this.  In January 2019, industry ­giant Bristol-Myers Squibb (BMS) announced its intention to acquire the cancer specialist Celgene for $74 billion. If the deal is concluded, it would be one of the largest take­overs in the pharmaceutical industry. BMS CEO Giovanni Caforio is flirting with the deal in order to strengthen his company‘s position in the lucrative cancer immunotherapy business. With an estimated sales volume of €20 billion, the US player would thus be ranked number two in the oncology sector behind Swiss market leader Roche.   “The era of billion-dollar blockbusters
is coming 
to an end.”
  However, BMS is currently battling for antitrust approval of the deal. To get the green light, BMS intends to sell Celgene‘s psoriasis drug Otezla. After it was previously planned that the acquisition could be completed in the third quarter of 2019, the BMS management now expects the acquisition to be finished at the end of 2019 or beginning of 2020 due to the antitrust delays. Also at the beginning of the year, Japanese pharmaceutical group Takeda signed a deal to acquire Irish competitor Shire for $62 billion. Shire is the largest foreign acquisition to date by a Japanese company. Takeda is particularly attracted by Shire´s cancer products. The Irish also have medicines for the gastrointestinal tract and the nervous system in their portfolio.

Abbvie Has an Eye on Allergan Finally so far, in June, US pharmaceutical group Abbvie announced its plan to acquire competitor Allergan for around $63 billion. In doing so, Abbvie, headquartered in North Chicago, Illinois, aims to reduce its dependence on the blockbuster drug Humira. The drug, which had its origins in the Ludwigshafen laboratories of the former BASF subsidiary Knoll, has in recent years been the world‘s largest sales driver in the pharmaceuticals business: In 2018 the product reached sales of about $20 billion. This means that the company achieved 60% of its total revenues of almost $33 billion with the rheumatism drug alone. But the days of the almost inexhaustible cash flow for Abbvie are probably over for now. Last fall, ­patent protection for Humira expired in Europe, and since then several bio­similars were launched on the market. In order to compensate for the associated decline in sales, Abbvie urgently needs new promising active ingredients. The management hopes to find them in Allergan‘s product portfolio and pipeline.    “In the pharmaceutical and biotech industry,  takeovers are part of the business model.”   Allergan is best known for Botox. The anti-wrinkle product is used in cosmetic surgery as well as in neuro­medicine. Even though the patent protection for Botox has long since expired, Allergan still generates $2.4 billion per year. Since this product is also coming under increasing competitive pressure, Allergan has been working on the development of new drugs in recent years, and ­Abbvie is now targeting them. If it succeeds in overcoming the antitrust hurdles, the takeover will create a new industry giant with a total turnover of $49 billion, which is placed in the view of industry leader Pfizer ($53.6 billion).

Reorganization of the Generics Market Weights are also being rebalanced on the global generics market. At the end of July, the world‘s largest pharmaceutical group Pfizer and its Dutch competitor Mylan agreed to establish a joint group for patent-free drugs. While Pfizer plans to divest its generics business with brands such as Lipitor, Celebrex, and Viagra under the umbrella of Upjohn and take over the majority of the new company, Mylan is to be fully integrated into the new company. This will create a new industry leader with an annual turnover of about ­$20 ­billion and a profit before taxes and depreciation of about $8 billion. Last but not least, the industry is making a name for itself in the current year through “smaller” consolidations and acquisitions. Pfizer has announced its intention to acquire Array Biopharma for $11 billion. Pfizer‘s ambitions may have been driven by good results Array has announced for combined therapy in patients with metastatic colorectal cancer. At an industry meeting at the beginning of June, the company also convinced with new data from a combination against a special advanced form of breast cancer.  Eli Lilly also took money into its hands. For $8 billion, the Indianapolis-based company bought its cancer research partner Loxo Oncology — an indication that the precision oncology research field is in great demand.

Just the Beginning “This is just the beginning of a series of mergers to come,” said Sarat Sethi of investment house Douglas C. Lane on CNBC television. That‘s 47% above the $170.2 billion combined value of the top 10 M&A deals during the first six months of 2018, highlighted in a “Top 10 M&A deals” of Genetic Engineering & Biotechnology News, a specialized information source for the industry. With further deals in the second half of the year, 2019 could close with record volumes after two years of weaker M&A activity.

Patents, Cost Pressure, Competition The reasons for the intensive efforts of large pharmaceutical companies this year can be found in the pipelines and balance sheets of the corporations. Patents are expiring, cost pressure is increasing, the era of billion-dollar blockbusters is coming to an end and is being replaced by highly specialized products developed for smaller patient groups. In addition, there is competition from chemical and biological imitation products and the efforts of politicians and health insur­ance companies to keep prices under control. During the past 1.5 years, for example, the US government took various measures to lower drug prices and limit co-payments by patients. In addition, the financial return on R&D activities at biopharmaceutical companies is declining. This means that per each euro or dollar spent, companies often generate less turnover or profit than before. All in all, these developments are reflected in stagnating or declining sales. On the other hand, as the pharmaceutical companies grow in size by acquisitions, they can achieve efficiency gains, for example in research and development, but also in administration and sales.    “This is just the beginning of a series of mergers to come.” Sarat Sethi, Douglas C. Lane   In addition, US pharmaceutical companies in particular often have plenty of cash at their disposal, due among other things to the reduction in corporate taxes in 2017.

Weak Takeover Activity in 2018 In contrast to the good M&A year 2019 to date, pharmaceutical companies have lagged significantly behind their opportunities on the trans­action market in the past year: Although the acquisition volume increased by 11% to $198 billion compared to 2017, however, the sum was around $90 billion less than the average amount invested between 2014 and 2016. This is the conclusion of the auditing and consulting firm EY (Ernst & Young), that conducted and published a study on the financial data of the largest pharmaceutical, biotech, and specialty pharmaceutical companies earlier this year. EY‘s “Firepower Index” measures the purchasing power of biotech and pharmaceutical companies in M&A transactions on the basis of their market capitalization, cash, and debt capacity. Companies would certainly be able to do more: the firepower — the funds that companies can mobilize for acquisitions — amounted to more than $1.2 trillion. However, only 16% of this was used in 2018. In 2014, companies still invested 27% of the funds available for mergers and acquisitions. The most common reasons for this reluctance were primarily the high prices that were called for takeover candidates and the global geopolitical and trade uncertainties.

German Companies not in First Place By the way, German pharmaceutical companies only play a minor role in the takeover concert of the big players. In terms of sales, they also lag behind the global industry ­leaders, partly because lucrative onco­logical drugs often come from the USA or Switzerland. While the global market leaders from the USA and Switzerland increased their ­sales considerably last year, the local representatives dropped back. In 2018, the 22 companies surveyed by EY increased their pharmaceutical sales by 0.9% to €460.8 billion. However, German pharmaceutical companies can still boast one plus for them­selves: they invest a lot of money on research. Merck and Boehringer ­Ingelheim, for example, spend more than the global average.