New patterns emerge in pharma M&A

Since the tortuous demise of healthcare giant Johnson & Johnson’s proposed $24 billion acquisition of medical device manufacturer Guidant in January 2006, the era of the mega-merger within the pharmaceutical and biotechnology industries appeared to be at an end. The last such deal took place in August 2004, when the acrimonious marriage between Sanofi-Synthelabo and Aventis was consummated.

While mega-mergers no doubt lead to increased critical mass, as demonstrated by the global rankings of Pfizer (including, for example, Pharmacia, Warner-Lambert), GlaxoSmithKline (Glaxo Wellcome, SmithKline Beecham) and sanofi-aventis, many industry executives now acknowledge that they do not always bring a solution for every problem – particularly poor R&D productivity. Indeed, mergers can actually disrupt the work of researchers as pipelines are reviewed and projects reprioritised. GSK, for one, has since split up its R&D teams into smaller groups based on therapy areas, to encourage the levels of innovation seen in smaller biotechnology rivals.

In the past two years, however, there have been plenty of other types of deal within the healthcare industry. Indeed, in the third week of March 2006 alone, three major transactions were announced, potentially worth more than $20 billion:

Merck KGaA, the German conglomerate, made an audacious €14.6 billion takeover offer for larger (in terms of pharmaceutical sales) compatriot Schering AG. It was against the deal, and a few days later accepted a friendly €16.3 billion offer from larger German rival Bayer, potentially creating a top-15 player that would overtake Boehringer Ingelheim as the country’s largest drugmaker
Californian-based Watson agreed a $1.9 billion all-cash deal with troubled Florida rival Andrx, a specialist in drug delivery and difficult-to-produce generics, saying it would create the US’ third-largest generics company
Actavis of Iceland, which has already swept up the likes of Alpharma’s generics unit and Amide, launched a hostile $1.6 billion bid for Pliva, Central and Eastern Europe’s largest generics manufacturer
The last two deals highlight one of the major trends – consolidation within the generics industry. These different types of transaction, which show no signs of abating, are outlined below.

Generics-generics
While sales of generic drugs are flourishing world-wide in this era of healthcare cost-containment, the large volumes sold do not dispel the fact that generics are low-profit products. Manufacturers in this area really need to achieve a large enough mass to operate competitively, in terms of production, lower prices to increase market share and in particular, to have a healthy flow of ANDAs. Those that potentially have 180 days generic marketing exclusivity in the US are especially valuable, but often bring with them the threat of litigation and thus expensive legal fees.
As such, consolidation within this sector has been hectic over the past couple of years. Firstly, there was the tussle for the top spot, which Novartis’ Sandoz unit briefly held from July 2005 after it bought Germany’s Hexal and its US affiliate Eon Labs. In January 2006, however, Teva of Israel regained the no.1 position after it bought US rival Ivax for $7.4 billion. Secondly, smaller generics producers have been merging, with some deals aimed at geographical expansion (for example, Indian manufacturers buying in Europe and the US, though all-domestic deals in India are also popular).

Mylan, which called off a merger with King, and Barr are now viewed as potential players in the US in light of the deals involving Ivax, Watson and Andrx, and IMS expects consolidation to continue in this sector, not least as all-generics mergers have some of the most guaranteed returns in terms of shareholder value thanks in part to their virtually instant economies of scale (for example, in administrative and manufacturing functions). Some recent transactions:

Leciva + Slovakopharma (= Zentiva)
Par + Kali Labs
Stada + Nizhpharm, Ciclum
Glenmark + TASC Pharma
Aurobindo + Able Labs (pending)
Dr Reddy’s + Betapharm (pending)
Biotech-biotech
At the other end of the healthcare lifecycle, many of the biotechnology companies founded in the 1980s and early 1990s have struggled to survive as pipeline projects failed, IPO windows closed, and venture capital proved hard to come by. Many have sought to cut administrative and other expenses, and to acquire more promising products and technologies, through mergers. Some companies, like Acambis, have expressed an interest in M&A as a way of moving into new areas, while others have done deals to progress their development into commercialisation. There have been fewer mergers between the larger biotechs, with the marriage of Biogen and Idec in 2003 being a noticeable exception. Some recent examples of smaller transactions include:

MorphoSys + Biogenesis
Antisoma + Aptamera
GPC Biotech + Axxima
IDM + Epimmune
EpiCept + Maxim
EntreMed + Miikana
Specialty-specialty
As the huge detailing teams of Big Pharma have come to dominate the primary care market, more small firms have evolved that focus on the specialty area. In these niche markets, older products coming towards the end of their lifespan are often acquired from larger manufacturers, or drug delivery technologies are applied to create new formulations with their own periods of exclusivity. Some biotechnology firms have also moved in this direction, buying already marketed drugs that can bring in immediate revenue to fund the development of innovative new therapies. Examples of these types of transaction include:
Bradley + Bioglan
QLT + Atrix
Protein Design Labs + ESP Pharma
Jazz + Orphan Medical
MGI Pharma + Guilford
OSI + Eyetech
Japan-Japan
The business operating environment in Japan has historically made mergers difficult, and it is not unusual for them to be cancelled at a relatively late stage. As Western firms have moved into their domestic market, however, Japanese pharmaceutical manufacturers have had to look elsewhere for revenue growth. Larger players, led by Takeda, have been successful, and in the past few years there have been a number of all-Japan deals, some involving companies ranked in the top 30:
Kowa + Nikken Chemicals
Yamanouchi + Fujisawa (= Astellas)
Nichiiko + Nippon Galen
Daiichi + Sankyo
Dainippon + Sumitomo Pharma
Teikoku Hormone + Grelan (= Aska Pharma)
IMS does not expect to see many Western companies buy out Japanese manufacturers, though they have been taking over full control of former joint venture subsidiaries in the country (e.g. Merck & Co with Banyu), and many multinationals are keen on expanding their presence in the world’s second-largest single market for pharmaceuticals. Most observers view Roche’s buying of a 50.1% stake in Chugai in late 2002 as unusual. A more common occurrence has been for Japanese firms to expand their geographical presence and technology bases through the acquisition of overseas companies. Examples include:

Kyorin + ActivX Biosciences (USA)
Takeda + Syrrx (USA)
Sosei + Arakis (UK)
Big-small
One of the most common type of deal recently has been a larger firm filling a gap in its pipeline or technology base with the targeted acquisition of a smaller company. Some of these transactions occur after a licensing deal, and others have replaced them:
J&J: OraPharma, 3D Pharma, Scios, Transform, Peninsula
Pfizer: Esperion, Angiosyn, Idun, Bioren, Vicuron
Genyzme: SangStat, Ilex Oncology, Verigen, Bone Care International
GSK: Corixa, ID Biomedical
Amgen: Tularik, Abgenix (pending)
AstraZeneca: KuDOS (pending)
Large firms have also been rearranging their portfolios, with deals in the over-the-counter sector growing; in early 2006, Pfizer was the latest to announce its intention of a “strategic” development for its consumer health unit. Previously, Reckitt Benckiser had bought Boots’ Healthcare International unit, Bayer Roche’s OTC division, and Novartis BMS’ North American consumer health business. Overall, geographical targets are likely to remain popular, while some regional players may also combine with each other to become a more dominant force in a particular country.

As seen by the announcements in March, the pace of consolidation in 2006 shows no sign of slowing. Serono is looking for a buyer, SkyePharma received a takeover offer, Altana is seeking a partner for its pharmaceutical unit, and Novartis is buying out the remaining 58% of its US affiliate Chiron, thereby entering the growing vaccine market. Other companies, such as Pfizer and Amgen have said they are looking for suitable deals, and a number of US firms have had a windfall thanks to the repatriation of overseas profits. There are continuing rumours and speculation about mega-mergers, involving the likes of AstraZeneca, GSK, Merck & Co, Novartis, Schering-Plough and Wyeth, but even if these fail to materialise, bankers in the life sciences sector look set to have plenty of business coming their way in the near future.

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