Background concept wordcloud illustration of merger acquisitionA new round of M&A deals is on going as a response to the increased market pressure and to the need to fill pipelines with promising candidates

Giuliana Miglierini

Mergers and acquisition deals are a periodical characteristic of the pharma business, a mechanism to create new value for big pharma industries in order to keep their leading positions in a narrower market environment. Old blockbusters are already expired or very close to, and there is no sign of new medicinal products able to repeat their performances. Furthermore, economical pressure on markets asks for increasing price control. Under these conditions, the easier way to create value for stakeholders is through M&A operations.

Among big pharma, Novartis and GSK have recently closed a deal for a total value of $ 28,5 bln: Swiss-based Novartis acquired GSK’s oncological business and become GSK preferred partner for the commercialisation of its oncology pipeline. At the same time, it transferred its vaccines division (excluding flu) to GSK. A joint venture for the OTC consumer business was also signed between the two companies.

German leading company Bayer closed a deal with Merck to takeover its over-the-counter business for $ 14,2 bln, while Roche acquired the American company InterMune for $ 8,3 bln. This operation allowed the Swiss-based pharma to reinforce its position in the respiratory market through the incorporation of the know-how of InterMune in pneumology, including pirfenidone, a very promising molecule for the treatment of idiopathic pulmonary fibrosis. Pfizer’s takeover bid of AstraZeneca for $ 118 bln failed, but this story is still waiting for its final end (BOX1).

The expert opinion

aonetti@mindthebridge.orgAlberto Onetti, professor of Economics and Industrial Management at the Insubria University Varese (Italy) and author of “Business Modeling for Life Science and Biotech Companies” (Routdledge), explained the on going M&A trends to PharmaWorld: «Pharma business is suffering for a reduction of market mark ups. The progressive decreasing of prices is due to higher competition on one hand and to increasingly strict cost containment policies on the other. The result is a contraction of both prices and profit margins. As a consequence, companies are looking for new economies of scale».

Big pharma companies are investing their high financial resources in the M&A deals while they appear reluctant to invest in new internal R&D activities, despite the lack of promising new candidate medicines in the pipelines. «The life cycle of a new pharma product is very long and risky – said professor Onetti. – Investments for a new medicine amount to approx. $ 5 bln, compared to the $ 1.1 bln needed in the ‘90s. Success probabilities, on the other hand, are very low. Pharma companies are suffering higher volatility compared to twenty-thirty years ago, when markets were far more stable and there was a widespread growth. It was fairly reasonable to invest in research, as the perceived risk was quite low. Today companies are trying to contain the risk making smaller investments in R&D activities. The way to carry on R&D projects has also changed: outsourcing to smaller companies, often start-up ones, is a very common practice. These companies are then acquired when they are close to achieving the development targets. Big pharma companies are no longer investing in early discovery or phase I studies: they prefer to close deals to acquire products close to validation, in phase II or III. Risk level is lower here. Deals to acquire product portfolios that shall undergo a more efficient distribution is also an option. Phase specialisation is an increasing trend». Phase I companies are easily taken over by phase II-III ones; here, projects undergo a further step of development to be then acquired by big pharma in order to reach market.

Traditional big pharma are no longer existing; multinational companies are now focusing their activities just on production and distribution. The Novartis-GSK deal is just one possible example of the move toward increasing specialisation, while the AbbVie-Shire deal is the example of the integration of complementary portfolios. «Big all-inclusive companies have been replaced by new models of business: specialised product portfolios and distribution skills are becoming the key factors to compete. Companies are not further managing 20 or more therapeutic areas, they are trying to clean their portfolios. This trend is similar to other industrial branches: Unilever and Philip Morris, for example, sold their business areas which no longer fit their strategical core business», commented professor Onetti.

Recent comments from market analysts

McKinsey and EY have recently released analysis on the M&A dynamics. The McKinsey report 1 took under consideration 17 megamergers bigger than $ 10 bln in the period 1995-2011; despite difficulties that might arise in the business integration, and that might represent a negative influence as per internal organisation and strategic development planning, the report indicates a significant increase in stakeholders’ value and a long term sustainability of the new borne company. According to the report, median excess returns for pharma megamergers were 5 percent above the industry index two years after the deal’s announcement, while the trend for other industries showed just marginal or even negative returns. Percentage of revenues coming from the acquired company – after five years from the deal – contributed approx. 37 percent of total pharmaceutical revenue and 10 percent of new product revenue. EBITDA also expanded by 4 percent and ROIC rose 14 percent after two years from the announcement, according to the McKinsey analysis. There would be two typical types of megamergers, said the analyst, aiming respectively to consolidate the business by significant overlapping or to improve growth through the creation of new companies and markets. The first type were a sort of deal typical of mid- to late 1990s; they were able to generate up to 60 percent growth for acquirers. Growth-platform deals are more typical of recent years and by now less profitable.

The EY study2 focuses on smaller deals ($ 5 to 20 mln), which are far more numerous than megamergers. EY uses the ‘firepower index’ to measure companies’ capacity for conducting M&A deals. The report indicates three different factors able to influence this capacity: pharma’s growth gap, firepower and the relative firepower of big biotech and specialty pharma. According to EY, big pharma’s 2015 growth gap remains essentially unchanged at US $ 100 billion, due to a downward revision of industry forecasts. The firepower growth – nearly US $ 100 billion, or around 15 percent —is mainly the result of higher equity values, while positive cash balances or lower debt levels are not considered to give a significant contribution. Furthermore, in 2013 big biotech and specialty pharma companies showed a significantly higher capacity for closing deals compared to big pharma, whose share of firepower fell from 85% to 70% in the period 2006-2013. Big biotech and specialty pharma might represent targets for acquisition by big pharma, and their market valuation increased in recent years. Between the different strategical options available to big pharma to pursue sustainable growth, EY report indicates three possibilities: large-scale M&A requires high level and difficult-to-find skills with respect to target selection, due diligence, integration and synergy capture. On the other hand, organic growth calls for a solid pipeline in the final phase of development, with high market potential. The third possible option, according to EY, requires the refocusing of the business model in the direction of a reduction of size and complexity, through divesting of non-core businesses and therapeutic areas.


1) M. Cha, T. Lorriman, Why pharma megamergers work, on-line article: (Febbraio 2014)

2) The shifting balance of firepower – Big pharma challenge’s in a competitive M&A environment – EY Firepower Index and Growth Gap Report 2014 (January 2014)



Pfizer and AstraZeneca, a challenging wedding

AstraZeneca rejected the $ 118 bln takeover bid made by Pfizer, but the story is far to be closed. The megamerger between the American and UK’s pharma giants would represent the bigger deal of the history. The operation is so a delicate one that both Goverments at the two sides of Atlantic Ocean had been involved. In the UK, parliament opposition asked Mr Cameron’s Government to better investigate the real national interest of closing the deal. Ian Read, Pfizer’s CEO, reassured UK’s Government as per the maintenance of stable levels of employment and manufacturing facilities for at least five years following the acquisition.

AstraZeneca is also pursuing active lobbying activities in the US, according to WSJ and Fierce Pharma’s analyst Tracy Staton; the company hired Thomas Nides (Morgan Stanley) and Roger Altman (Evercore Partners). The lobbysts should support AZ in its fight against the tax-inversion strategy that would be at the base of Pfizer’s buyout offer. The American company would greatly reduce the taxes due in the US following the merger with AZ and the resulting moving of headquarters to Great Britain. According to Forbes, another driver for the deal would be Pfizer’s interest for the innovative oncology pipeline of AstraZeneca. The British company has meanwhile announced the building of the new Corporate Headquarters and of the new Global Research R&D Centre, which will be located at the Cambridge’s Biomedical Campus.



A new European player in Specialty market

The acquisition of 100 percent share capital of the Italian Rottapharm|Madaus group by Swedish Meda AB shall give rise to the largest Specialty pharma player in Europe. The deal is expected to close by the end of 2014, for a total transaction value of € 2.275 bln; Fidim, the Rovati family’s holding, will become the second largest shareholder of Meda group with a 9 percent stake. The deal did not include the acquisition of Rottapharm Biotech, the research centre specialised in highly innovative drugs that will remain entirely under Fidim’s control.

Meda business involves developing prescription drugs, OTC and Consumer Healthcare products; the company is listed in the Stockholm Stock Exchange. The new company will focus on specific market niches and on products capable of delivering an innovative response to new customers’ needs. The new group will be present in all the main international markets, especially in the most promising emerging ones, where Rottapharm|Madaus already operates.