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Activity Surge

Back in November 2015, a record $160 billion merger between Pfizer and Allergan was announced. Unlike many previous company mergers, the primary motivation for this particular transaction appears to have been financial, rather than commercial. It is understood that the plan was to move the headquarters of the merged businesses to Ireland, where corporation taxes would have been significantly lower than in the US, and allow the company to ‘repatriate’ billions of dollars of offshore funds. Recent legislation passed by the US Congress seems to have dealt a significant blow to this financial engineering – to such an extent that the merger has been called off.

In 1990, the number one ranked organisation in the pharma industry was Merck & Co, followed by Bristol-Myers Squibb and other companies, as listed in Table 1 (see full PDF).

By 2000, mergers had changed the ranking list quite significantly, as you can see from Table 2 (see full PDF), and the latest listing that I have been able to find is shown in Table 3 (see full PDF).

The extent of mergers and acquisitions (M&A) in pharma can be judged by the fact that, of the top 10 companies in 1990, only three now rank in the top 10. The other organisations have generally been acquired or merged, while several new companies have surfaced – including Gilead Sciences and Takeda. The motivation for acquisitions in the past seems to have been for businesses to move into therapeutic areas in which they were weak, or into new geographical regions.

Many of these acquisitions, of course, have been followed by disposals of less profitable divisions of the merged company such as consumer products, vaccines or generics and, in some cases, even creating spin-off CROs based on part of the R&D of the merged company – which was regarded as being superfluous to the needs of the company going forward. Some of these spun-off CROs have, in turn, been acquired or merged with some of the major contract houses.

All this M&A activity and the considerable re-alignment of the industry prompts a few questions: has it been profitable for the stakeholders in global healthcare? Are more drugs being developed at a faster rate? Is the average price of healthcare diminishing, or increasing? The record of the pharma industry over the past 25 years has been at best patchy in terms of new chemical entities being developed on a year-on-year basis.

Looking at the figures for the registration of new drugs, one would doubt whether M&A activity has had any major positive effect on these numbers. It seems unlikely that bigger is better and faster is appropriate. The same is probably also true for speed of development. The development time for a new drug has stuck at around the 11-year time period from discovery to first marketing, and shows little prospect of improving. Has the cost of healthcare – the drug’s budget – gone up or down, you may well ask? Certainly, as drugs have come off patent, the price of these has, in many cases, dropped like a stone. But as I have mentioned in previous End Points, the cost of new drugs – especially those derived from biotechnology – seems to be rising dramatically.

All this would suggest that M&A has produced little benefit for consumers, but may well have delivered significant benefits for shareholders, if not the stakeholders in healthcare. Now that financial engineering routes – such as those sought by Pfizer and Allergan – seem to be closing down, perhaps the incentive to merge companies may dissolve and the industry can enter a period of relative calm.

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