Deals Increase in Pharmaceutical Industry, Essay Example

The pharmaceutical industry has experienced declining fortunes over the past few years.  Indeed, although blue-chip pharmaceutical firms previously drove profits through blockbuster drugs, many of those drugs have lost their patent, leading to increased production by generic drug makers and lower profits. At the same time, the pipeline for new blockbuster drugs is at an all-time low; this is not coincidence.  While there certainly is a cyclical element involved with the process of innovation, many in the industry posit that discovering blockbusters is simply becoming more difficult. This factor, coupled with the excessive capital and human resources  needed to discover new drugs, has led pharmaceutical firms to explore new ways to bolster their lagging pipeline.

Many firms have leveraged M&A In order to make up for this lacuna in new product development.  Pharmaceutical firms are primarily purchasing smaller biological firms that have a narrow research focus on a therapeutic modality.  The article mentions another purchase by Astra Zeneca of a smaller company that is essentially a “bolt-on” or addition to their existing cardiovascular business.  While firms are trying to (re) build their business through M&A deals, the sector’s valuation still remains quite low.  This is because, at least in the near term, profits will not be forthcoming from a lot of these ventures.   Even with a torrent of M&A, it will still take time and effort to fold-in these research efforts into the pharmaceutical firms development division. In the mean time with lower valuations, these firms will have to think of ways to either boost short-term profits, or, at least stem the bleeding until something else can be thought of.

Deals are being done, but sector is stalled in the doldrums

Since hitting their pre-patent cliff lows in March 2009, Big Pharma’s valuations have rebounded. Share prices for Merck and Bristol-Myers Squibb have more than doubled; ditto for Sanofi and Merck KGaA in Europe. The laggards are Novartis, AstraZeneca and GlaxoSmithKline, although they too are moving in the right direction: AstraZeneca’s shares are up 16 per cent since new chief executive Pascal Soriot unveiled his turnround strategy in mid-March.

Those re-ratings signal more the better outlook for pipelines than any view that consolidation is quickening. So far in 2013, M&A activity has been among midsized companies (Actavis buying Warner Chilcott for $8.5bn including debt), or in the wider healthcare industry (Valeant buying Bausch & Lomb for $8.7bn), or for specific patents or drugs. Pfizer’s split-off of its Zoetis animal-health business is interesting, but the industry is already streamlined.

Large-cap pharma stocks trade on forward earnings multiples of 14 to 16 times, which are high but are off a low base. At this stage of the re-rating cycle, though, the deal action has yet to reach the big boys.