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What's next for pharmaceutical M&A activity?

15 April 2015 Praful Mehta

Mergers and Acquisitions have been a common part of the pharmaceutical industry for the last three decades. Since 2013, however, the concentration in the industry has been its main source of growth. In 2013, there was $174 billion spent on M&A. In April 2014, $118 billion was spent in just one month. The numbers for Q1 2015 are just as impressive, reaching over $95 billion for the year already.

The greatest example of M&A consolidation is happening in the United States. Over the last two decades or so, many different players have merged their capabilities to increase economies of scale.

Who is leading the investments into pharmaceutical M&A today? And what will that mean for the drugs that come from these consolidated pharmaceutical companies in the future?

Breakthrough research is leading the way for pharmaceutical M&A
In March 2015, Pharmacyclics was a hot commodity in the lifesciences arena. Three major companies, including Pfizer, made pitches to purchase the organization. What is notable about this incident of pharmaceutical M&A? Pharmacyclics had only few products that were under development. This cancer drugmaker was able to secure a $21 billion bid in shares and cash, a 60% premium, for just one major marketed asset.

Pfizer, Johnson & Johnson, and the other larger pharmaceutical companies are facing a conundrum. Do they lose billions of dollars now so they can secure new products to distribute? Or do they lose billions of dollars later because their patents are set to expire?

The strategy is simple: secure strategic assets backed by solid science now so that there is still hope for the future. Pfizer has led this M&A bandwagon with over $200 billion in activity since 1994. Large drugmakers are taking big gambles on biotech companies that face regulatory approval because their products are still in the experimental stage.

Just how dry is the antibiotic pipeline?
In 2014, the World Health Organization [WHO] predicted that antibiotic resistance would continue to increase because there has been a discovery void in this sector. Since the 1960's, much of the focus in this part of the pharmaceutical industry has been in soil-related studies. There have been successes in the last 60 years, such as streptomycin, but there have also been many failures.

Thanks to deal-making in the pharmaceutical industry activity, the industry has been able to take a more creative approach to R&D in this particular area in an effort to close the discovery void. Those efforts have paid off with the identification of teixobactin, which has successfully cured animals from blood and staph infections, along with pneumonia. It has yet to be tested on people.

There is a huge demand on next generation of antibiotics and deal making will pave the way to move forward in this segment.

Big name diseases bring big pharmaceutical M&A opportunities
It isn't just mergers and acquisitions that are fueling growth in the lifesciences sector. Johnson & Johnson recently signed a licensing deal with a Swiss agency, AC Immune, that is reportedly worth over $500 million. The deal allows Johnson & Johnson to collaborate on research into new Alzheimer's disease treatments that have potential, including the anti-tau vaccines that have shown initial promise.

If their collaboration brings results, then Johnson & Johnson has an exclusive license to market the product. If not, Johnson & Johnson just wasted a half billion dollars.

Elsewhere, Roche just paid a little over $1 billion to gain a controlling stake in Foundation Medicine for the privilege of investing an additional $150 million to advance their personalized cancer therapy research.

And separately, Merck has formed an alliance with Novartis to help develop more cancer immunotherapies, despite having approval for their drug Keytruda, a drug whose price has increased two-fold this year. We have seen this in our POLI data, but haven't heard it mentioned anywhere else.

What is the future of pharmaceutical M&A?
Whether privately or publicly held, the industry is consolidating because of the immense research and development costs that exist today to bring a new drug to the market. Only the largest companies have the resources in-house that is required to take a new concept like teixobactin and turn it into an approved, effective treatment.

Additionally, market access is becoming a major driver for commercial success. Products which are backed by solid science and a clearly defined patient pool will continue to generate momentum for deal making and M&A activity.

As biotech firms and genome research advances, look for pharmaceutical M&A to continue, especially in the fields of antibiotics, cancer therapies, and diseases like Alzheimer's disease. Not only do drugs in these areas have the chance to save many lives, there is also the best chance for the deal-making in the pharmaceutical industry to finally pay off one day.

Praful Mehta is a senior life sciences analyst for IHS
Published 15 April 2015



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