Record number of deals signed in 2008

Despite little evidence that big is necessarily better, recent weeks have seen some in the industry speculating that a number of large pharma companies, with a particular focus on Pfizer, could be looking at a series of mega mergers to stimulate growth and fill pipelines that will be weakened by generic competition in the coming years.

While companies have until now appeared reluctant to indulge in the large scale mergers of the early noughties, smaller scale deals are increasing in frequency. An analysis of deal data from EvaluatePharma reveals that 2008 will be remembered as the year where a record number of mergers and acquisitions were signed. An impressive 134 deals between companies were inked last year, beating the 114 signed in 2007 and eclipsing the 74 struck in 2000 at the height of the biotech boom.

Most of the deals struck in 2008 and 2007 used cash rather than share swops, indicating the falling valuation of stocks that has itself left some big pharma companies with more cash as they suspended long established share-buy-back programmes.

Also interesting is how the different deals demonstrate the different strategies being used by companies to get themselves through what are tough times for the industry. In the biggest deal of the year, Roche’s proposed acquisition of the 44% of Genentech that it does not own, which has still not completed, the Swiss giant's aim was to consolidate profits of Avastin, as well as Rituxan.

For Novartis, its $10.4bn purchase of 25% of Alcon was an effort to diversify from risky drug discovery into the more stable income of eye care products. In a slightly different vein, Takeda’s interest in Millennium Pharmaceuticals was an attempt to branch out of its home market of Japan, where many products are facing generic competition and government imposed price cuts.

But while there may have been more than twice as many deals since 2000, the year that defined the mega merger, the total deal value of $117.9bn in 2008 is still less than half the whopping $347.5bn notched up in 2000. The lack of financial clout is due not only to the credit crunch that has decimated the share prices of companies, but also due to the relative sizes of the companies indulging in M&A.

The reason why 2000 was such a lucrative year for bankers was that it was the year that saw the creation of a number of industry heavyweights including GlaxoSmithKline and the beefing up of Pfizer. In that year Pfizer acquired Warner-Lambert for $90bn and Glaxo merged with SmithKline Beecham in a deal valued at $189bn, a sum that has yet to be beaten and exceeds the annual value of all the deals conducted since that year.

Unsurprisingly, in contrast to the smaller all-cash deals done in 2008, all the mega-mergers in 2000 were conducted using share swops. To date, the biggest all cash deal, with the exception of Roche’s $43.7bn move last year on Genentech, was Bayer’s $21.3bn acquisition of Schering AG in 2006.

The trigger

But while 2000 might have been the year with the biggest deals by value, the urge to merge among large cap pharma groups was started the previous May by Astra and Zeneca with their $67bn deal. This was followed only four days later by the $29.6bn merger of equals between Sanofi and Synthelabo to form Sanofi-Sythelabo, which would eventually become Sanofi-Aventis. Finishing the year was the $47.3bn merger between Hoechst and Rhône-Poulenc, which became Aventis.

All of these deals provided the catalyst for the 2000 mergers as competitors, worried that they would get left behind if they did not increase their scale, found suitable or willing partners.

This indicates that if history does indeed repeat itself then the company that is brave enough to attempt the first mega merger either this year or next, might indeed kick start a wave of other massive deals in the sector, despite their poor record of creating long-term value.

While no one knows whether or not Pfizer will be leading the M&A charge, what is certain is that the looming patent cliff that many companies are facing will increase the number of companies with late stage and marketed products that could be vulnerable to take over from big pharma. Also the continuing low valuations of companies will provide even more incentive for companies to equal if not beat last year’s bumper number of deals.